Insurers May Quit State, Court Rules : Proposition 103: California justices overrule insurance commissioner. A company may withdraw without finding another firm to serve its customers.

SAN FRANCISCO —  In a major victory for insurers, the California Supreme Court ruled Monday that, under Proposition 103, an auto insurance company may refuse to renew policies and withdraw from California without finding another firm to serve its abandoned customers.

The justices, in a 4-3 decision, rejected contentions by state Insurance Commissioner Roxani M. Gillespie that four Travelers insurance companies must ensure “continuous coverage” for customers by reinsurers before the companies could cease doing business.

The court, in a majority opinion by Justice Marcus M. Kaufman, said that provisions of the sweeping, rate-cutting, November, 1988, initiative that limit non-renewals and cancellations may not be applied to firms such as the Travelers companies that simply want to leave the market.

The measure, the court said, was not intended to provide “complete or absolute” protection against termination by an insurer’s failure to renew.

Attorneys for both Travelers and the backers of Proposition 103 cautioned that the ruling was not likely to start a rush by auto insurers to leave California.

Despite early warnings to the contrary, only a handful of companies have indicated they want to withdraw. Nor, said the attorneys, was there any reason to believe that policyholders for firms that do leave will have difficulty finding other coverage.

But the ruling will give insurance companies additional leverage in hearings that Gillespie is holding on insurance rate-setting, and it provides insurers with an escape route if they are unsatisfied with Gillespie’s findings on what constitutes fair rates. And, the ruling means companies also could pull out of the state if they grow impatient with the temporary freeze on auto rates that Gillespie has imposed while the hearings are being held.

The decision in the widely watched test case was the first by the justices involving the initiative since last May, when the state high court upheld the bulk of the initiative but provided insurers with important protections by requiring that they still be afforded a fair profit.

The initiative mandated a 20% rollback in insurance rates and a wide-ranging series of regulatory changes in the industry. Under the measure, insurers were prohibited from canceling or failing to renew auto policies except for fraud, refusal to pay premiums or a “substantial increase” in the insured risk. But the obligations of a withdrawing company remained unclear.

In its ruling Monday, the court majority noted that the measure itself envisioned that, upon its passage, some auto insurers might want to pull out of the state. The initiative, the court pointed out, allows the insurance commissioner to establish a joint underwriting authority to provide coverage when the commissioner finds insurers have “substantially withdrawn” from the market.

But Gillespie’s contention that a reinsurer must “step into the shoes” of a withdrawing insurer and assume all policy obligations represents a “completely mistaken understanding” of state insurance statutes, Kaufman wrote.

“Proposition 103 does not prevent an insurer from discontinuing its California business, and since non-renewal and cancellation are the only methods by which a withdrawing insurer can terminate its existing automobile policies, the conclusion is inescapable that the mandatory renewal provision does not apply to insurers who withdraw from the California market,” Kaufman wrote.

In dissent, Justice Allen E. Broussard argued that the Travelers firms should be forced to obtain the commissioner’s approval before withdrawing. A reinsurer must be available to meet the obligations of a withdrawing firm’s customers, he said. The commissioner’s opposition to the firms’ plan to withdraw fit the “spirit, as well as the letter, of Proposition 103,” he said in an opinion joined by Justice Stanley Mosk.

“That initiative was not enacted to make it easy for insurers to terminate coverage, but to make insurance more available to Californians and to protect them against loss of coverage,” he wrote.

Chief Justice Malcolm M. Lucas and Justices Edward A. Panelli and David N. Eagleson joined Kaufman’s majority opinion. Mosk joined Broussard, and Justice Joyce L. Kennard dissented separately.

Ruling Hailed

Kent Keller of Los Angeles, an attorney for the Travelers firms, hailed the ruling, saying it correctly upheld the fundamental right to cease doing business. “That right has to continue in a democratic society,” he said.

Keller said, however, that its long-range impact would depend largely on whether a “balance” was struck during the current fair-rate-of-return hearings now under way in San Bruno. “This is a huge insurance market and insurers want to be here,” he said. “But if that balance is not struck, you may find them leaving.”

The attorney emphasized that under the initiative itself, if there is a major withdrawal of firms, the commissioner is empowered to create a state agency to fill the gap. “The public is protected,” he said. “No one is going to be left out in the cold.”

James W. Wheaton of the Center for Public Interest Law, an attorney for the sponsors of the initiative, lamented as “bad news for consumers” the high court’s limit on the renewal obligation of withdrawing insurers.

But Wheaton said that in view of California’s massive insurance market, it was unlikely “there will be a stampede to the door” by insurance companies. “California has the largest insurance market in the world, and there are plenty of firms that will want to write policies,” he said. “If Travelers doesn’t want to do business under fair and open provisions of 103, then good riddance.”

Four subsidiaries of the Travelers Corp. announced the day before the election that they were withdrawing from the auto insurance business in California and began notifying their 22,000 customers that their policies would not be renewed.

Later, however, Gillespie barred the actions unless the companies could get other firms to reinsure the policyholders. Travelers then agreed to continue the policies pending a court test of Gillespie’s order.

Meanwhile, the state high court, ruling in a separate case last May, upheld the legality of Proposition 103 while holding that insurers must be allowed a “fair rate of return” on their investment.

In its May ruling, the justices held that the non-renewal provisions of the initiative must apply to policies existing before the November, 1988, election--but indicated that insurers could cease to offer auto insurance in the state. It was undetermined, however, what insurance firms must do before legally withdrawing.