Nader Measure on Insurance Stirs Anxiety and Plaudits

Proposition 103, the Nov. 8 ballot initiative supported by consumer advocate Ralph Nader, is so sweeping a measure that some insurance company executives say it could put them out of business in California.

Affecting not only auto but homeowners, commercial liability, municipal liability and other forms of property casualty insurance, the measure includes such sizable rate rollbacks and such stringent future rate regulation that the thought of its passage has sent shivers of alarm through not only insurers but also the state insurance commissioner.

Insurance Commissioner Roxani Gillespie--who was once an insurance company executive--expressed amazement in an interview last week that any sensible person would consider Proposition 103 to be feasible. She stuck by earlier assertions that it would bankrupt at least half the state’s biggest insurance sellers within two years if its rollbacks were allowed to go into effect.

Also admonishing all who will listen about the alleged evils of Nader’s initiative is Clint Reilly, coordinator of the insurance industry’s campaign for the rival Propositions 104 and 106. He says that it calls on insurers to make impossible sacrifices.

Such negative comment did not faze Nader, who proclaimed: “The California consumer showdown with the insurance industry is coming to a climax. . . . Proposition 103 is the only proposition that will deliver an automatic insurance premium rate reduction of 20% off the base of the November, 1987, level to all motorists, all homeowners, all businesses and municipalities in the state of California.”

There is some question, however, how automatic it would be.

The initiative states that the rollbacks would go into effect the day of the election but could be reversed on a case-by-case basis if the insurance commissioner found that specific companies were “substantially threatened with insolvency.”

Although Proposition 103 calls for 20% rollbacks, the actual cuts would be 30% or more for many individuals and businesses because many companies have raised their rates since November, 1987.

If the Nader measure passes, insurance industry attorneys plan to be in court the day after the election asking for a stay of the rollback provisions on grounds that they violate prohibitions against laws that force companies to lose money.

‘Going to End Up in Court’

Nader has said that Gillespie is using industry financial figures “without any review or verification by independent actuaries.” But he readily acknowledges, “It’s all going to end up in the courts.”

Another backer of Proposition 103, Los Angeles City Atty. James K. Hahn, amplifying on what might happen, declared:

“If they (the insurers) can truly show that this kind of rollback is impossible for them to meet, then we’ve allowed for that. . . . We must be reasonable. (But) they’re going to have to be reasonable in opening their books to Californians so that we can really see what kind of money they’re making. . . . They use a lot of accounting gimmicks that insurance commissioners have just winked at over the years.”

Gillespie is apt to be a key figure if Proposition 103 passes, because its provision for the popular election of the state’s insurance commissioner would not take effect until the 1990 election. Meanwhile, Gillespie will probably remain commissioner and under Proposition 103, she would have authority to decide which companies actually would face insolvency and thus qualify for exemption from the rollbacks.

State Commissioner Hostile

Her outspoken hostility to the measure resulted last week in a demand from the 103 campaign chairman, Harvey Rosenfield, that Gov. George Deukmejian fire her. Instead, the governor’s press secretary declared that Gillespie “enjoys the full confidence of the governor.”

Proposition 103 was primarily drafted by Rosenfield, a former lobbyist for Nader who subsequently went to work for California Trial Lawyers Assn. campaigns, but later broke with the lawyers over what he regarded as their willingness to compromise too much with the insurance industry.

Rosenfield’s Voter Revolt to Cut Insurance Rates is a grass-roots organization that says it has virtually no funds at this point to confront the $43-million insurance industry campaign. Nonetheless, almost without paid advertising it leads the insurance industry’s no-fault initiative in some polls, including ones done by the industry.

Formal Backing

Nader, who had advised Rosenfield during the drafting of the measure, gave his formal backing to the group last January and has become highly active on its behalf, touring California several times and consulting frequently with coordinators over the telephone. He has also criticized his old allies, the trial lawyers, saying that their initiative, Proposition 100, “doesn’t go far enough.”

Rosenfield has repeatedly said the campaign will not accept trial lawyer money. Proposition 103, however, does go along with the basic trial lawyer view on how to cut insurance rates. Like the trial lawyer-backed Proposition 100, it would put the entire burden for financial sacrifices on the insurance industry, keeping pay-outs to victims at present levels and preserving current rights to sue insurance companies. And Nader’s measure would require no sacrifices on the part of the trial lawyers, whose litigation, the insurers contend, is the root cause of soaring insurance rates.

Proposition 103 is written in blunt language, and is little more than three pages long. This contrasts with Proposition 104, the insurers’ 122-page-long no-fault initiative, some details of which even experts find difficult to understand.

Nonetheless, Proposition 103 contains a number of serious ambiguities.

One concerns the “emergency authority” clause, which gives the insurance commissioner power to intervene in the event insurance companies withdraw from the California market. The commissioner could then establish a joint underwriting authority, which would assign people seeking to buy insurance to those companies that do not leave.

The question is whether this provision could lead, under some circumstances, to creation of a state insurance company, as has been charged in campaign ads paid for by the insurers. Gillespie has said it could, arguing that if the rate rollbacks called for in Proposition 103 went into effect, so many companies might leave the state that there would not be enough left in the market to share all the business. Under these circumstances, she has said, the state would have no option but to create its own company.

Debate on State Company

Rosenfield has denied that there is anything in the clause that would allow a state company, although he readily acknowledges, “This gives the commissioner the right to act in an emergency in which insurance companies were leaving.” Nader, by contrast, has agreed there is an implication of a state company. He says the initiative sponsors do not want to allow a situation to arise in which Californians would be stripped of insurance.

Some confusion has also arisen about a clause under which the insurance commissioner would decide if auto insurers could continue using the territorial rating system, under which, the insurers say, rates are based heavily on the accident rate in the policyholder’s neighborhood.

Under Proposition 103, territorial rating would remain in effect if the insurance commissioner decides there is “a substantial relationship” between what policyholders pay and the “risk of loss” in their neighborhoods. Even then, the initiative would require that where a policyholder lives be given less weight in determining prices than the driver’s record, the number of miles driven and the number of years of driving experience.

Political Pressure

But the insurance industry campaign argues that, if Proposition 103 passes, political pressure from areas where rates are higher could force the insurance commissioner to end the territorial rating system. That, the insurers say, would mean big rate decreases for policyholders in Los Angeles and some other areas but big increases for two-thirds of all California policyholders.

Confronted with this, Rosenfield says it is unlikely there will be a complete abolition of the territorial rating system if Proposition 103 passes, and he might be right, since Gillespie has already said she regards territorial rating as justified.

The rate regulation clauses of the measure also raise questions.

Citing a requirement that all rate changes for auto, homeowner, commercial and municipal insurance would have to be approved by the insurance commissioner after hearings in which consumer organizations could intervene at insurance company expense, the insurance industry charges Proposition 103 will create “an enormous new layer of bureaucracy.”

Exercise Discretion

But Rosenfield says the measure would give the commissioner ample authority to consolidate hearings and exercise discretion on approvals.

Such ambiguities have led to charges that one of Proposition 103’s most serious flaws is that it is sloppily drafted. Both supporters of the trial lawyers’ initiative and the insurance industry’s initiatives have pointed out, for example, that even convicted drunk drivers would get the rollbacks called for under Proposition 103, as long as they did not have more than one violation.

Rosenfield, while denying the sloppy draftsmanship charge, defended including drunk drivers in the rollback provisions, pointing out that since drunk drivers pay far more for insurance than good drivers now, equal rollbacks for everyone would still leave them paying far more. “It’s a phony issue,” he asserted.

PROVISIONS OF THE INSURANCE MEASURES

Proposition 103

INSURANCE RATE ROLLBACK

PROPOSITION 103

Main Sponsor: Consumer advocate Ralph Nader

Other Supporters: AFL-CIO, Common Cause, Consumers Union, California Democratic Council, California State Employees Assn., American Assn. of University Women, Women For, Access to Justice, Coalition for Economic Survival, Los Angeles City Atty. James K. Hahn.

Opponents: Insurance companies and their various lobbying associations, insurance agents associations, California State Chamber of Commerce.

Key Provisions of Proposition 103:

Rollback of Rates. Effective Nov. 8, 1988, insurers would reduce charges on every auto, homeowner and commercial or municipal liability insurance policy to 20% less than the rate in effect a year earlier, Nov. 8, 1987, for the same coverage. In the next year, the state insurance commissioner could allow increases from the new levels only after finding that an insurer was “substantially threatened with insolvency.”

Rate Regulation. Beginning Nov. 8, 1989, all new rates would have to be approved in advance by the commissioner. At hearings on such increases, the burden of proof would be on the insurance company to justify a proposed increase.

Good Driver Discounts. Beginning Nov. 8, 1989, any driver licensed for three years who did not have more than one conviction for a moving violation during that period could purchase from any company he or she chose an auto insurance policy at a 20% discount from regular rates.

Elected Commissioner. Beginning in the 1990 election, the state insurance commissioner would be elected by popular vote instead of appointed by the governor.

Emergency Authority. If insurance companies left the state or quit selling certain kinds of policies, the commissioner would be empowered to establish a joint underwriting authority to assign policies to companies remaining in the market.

Territorial Ratings. Auto insurance rates would be determined, in decreasing order of importance, by (1) the policyholder’s driving record, (2) the number of miles driven annually, (3) the number of years of driving experience, and (4) other factors adopted by the commissioner “that have a substantial relationship to the risk of loss.” The last category would allow the commissioner to preserve to some extent the territorial rating system, under which rates are based on where customers live.

Antitrust Exemptions. The insurance industry’s California exemptions would be repealed.

Banks. Banks would be allowed to sell insurance.

Rebates. The present ban on insurance agents giving rebates to customers out of their commissions would be repealed.

Group Plans. Group auto and homeowners insurance, similar to group medical plans, would be legalized.

Consumer Assistance. The state Department of Insurance would, at a reasonable cost, provide consumers with comparisons of the rates charged by every insurer.

Consumer Organizations. Insurance company billings would contain notices telling policyholders of their right to join an independent, non-profit corporation that would advocate “the interests of insurance consumers” in any applicable proceeding. The organization would be operated by individuals elected by the total membership.

Intervenor Funding. Persons representing the interests of consumers at any rate hearing or appeal who make a “substantial contribution” to the proceedings would be reimbursed for their expenses by the insurance companies.

Premium Taxes. The state tax paid by insurance companies on their premiums would be adjusted to ensure the state would get the same revenue as now, even if the companies took in less premium money as a result of the rollbacks or took in more as a result of more people buying lower-priced insurance.

Amendments. Provisions of the initiative could be amended only by popular vote, unless the amendment was construed as furthering the measure’s purposes, in which case a two-thirds vote of each house of the Legislature would suffice.