Bid to Overturn Rate Rollbacks Heads to Court : Insurance: Trial begins in 20th Century Insurance Co.’s challenge to Proposition 103.

Four years ago, California voters poured sugar in the insurance industry’s gas tank.

Fed up with rising premiums and what they saw as the industry’s indifference to their pain, they voted themselves a 20% rate rollback and other reforms under Proposition 103.

The vote sparked similar legislation across the country and prompted much soul-searching in the industry.

In California, there has been constant legal thunder and lightning since the 1988 initiative, but just a relative drizzle of rebates.

That could change with a high-stakes court challenge that opens today, pitting one of California’s biggest auto insurers, 20th Century Insurance Co. of Woodland Hills, against state Insurance Commissioner John Garamendi.

“This is the case,” said Harvey Rosenfield, who as head of the Voter Revolt organization was Prop. 103’s midwife and has been its vehement advocate ever since.

If 20th Century loses on most of the issues at trial, Rosenfield believes, most other insurers will drop their resistance and start mailing out rebate checks.

If, on the other hand, the court hands Garamendi a setback, Garamendi said he may appeal or pursue one of several unspecified “backup plans.” He said he will not stop short of his goal of obtaining “the maximum rebates allowable under law.”

The trial in Los Angeles County Superior Court offers another highly visible political forum for Garamendi, who became California’s first elected insurance commissioner in 1990 largely on the strength of his promise to forcefully implement Prop. 103.

Garamendi, a Democrat who says “there is no secret of my interest in becoming governor,” has painted his rollback fight as a lonely struggle against greedy insurance Goliaths and their ally, Republican Gov. Pete Wilson.

Insurers say Garamendi is cynically exploiting the issue for political advantage.

Wilson in August refused to implement regulations that Garamendi said he needed to complete rebate hearings with several major insurers. Noting the upcoming trial, the governor said Garamendi “must fight this out in court with the insurers he is responsible for regulating.”

At the center of the legal test is 20th Century, one of the state’s most profitable auto insurers.

After Department of Insurance hearings last spring, 20th Century was ordered to pay $102 million in rebates and interest. It refused and filed suit, contending that Garamendi’s plan for implementing Prop. 103 violates the state Constitution by being confiscatory and denying the company due process.

Twentieth Century is the first insurer to get this far in the legal process, and its challenge is thus seen as a bellwether. Although the trial directly involves only 20th Century, other insurers believe that the outcome could affect their attempts to fight the rebates and have poured legal resources into the case.

The state Supreme Court has upheld the initiative as constitutional but has also ruled that insurance companies cannot be denied a fair rate of return. Garamendi defines a fair return on equity as 10%.

As one of the country’s most efficient insurers, 20th Century argues that it is unfairly penalized by a regulatory approach that caps its return at 10%, less than half its average profitability ratio over the last decade. Its peak return, in 1989, was 32.5%. A company should be rewarded, not punished, for keeping costs down, 20th Century says.

“To try to regulate profit as opposed to price--we feel that’s anti-competitive,” said Wynne S. Carvill, a lawyer for 20th Century. “It helps protect the less efficient.”

Twentieth Century’s founder and chairman, Louis W. Foster, declined to be interviewed for this article, but in a September interview with The Times he vowed never to settle and predicted that the dispute would ultimately reach the California Supreme Court.

“God, there’s been a lot of money wasted on this project,” Foster said.

Garamendi estimates that his office has spent $6 million to $7 million in legal fees pushing for the rebates. He said the insurance companies see the fight as “their Waterloo” and have spent “well over $100 million in legal fees.”

From the standpoint of rebates alone, Prop. 103 has thus far been a bust.

Only six insurers out of the hundreds covered by the initiative have returned any money to policyholders. The $220 million in rebates to date isn’t peanuts, certainly, but it’s well short of the $2 billion-plus bonanza that voters believed they’d won.

And that $220-million total arguably overstates the rebates, since more than half have come from such not-for-profit insurers as the Automobile Club of Southern California, which distributes surplus revenue to members as a normal practice.

Viewed more broadly, however, the initiative has had nearly as much impact as even the hyperbolic Rosenfield might claim.

After its passage, a torrent of legislation inspired by Prop. 103 swept into state houses across the country.

While most of the bills were rejected, some important ones passed. Pennsylvania, South Carolina and Hawaii, for example, enacted rate freezes. New Jersey and Texas repealed auto insurers’ state antitrust exemptions. Florida and Nevada gave consumer advocates legal standing in rate-setting and other regulatory procedures. Georgia cut auto premiums and required prior regulatory approval of any new rate increases.

All reflected the less-publicized reforms embedded in what was popularly referred to as California’s rollback initiative.

State oversight has stiffened enough that some insurance executives are talking seriously about federal regulation--unthinkable before Prop. 103, said J. Robert Hunter, president of the National Insurance Consumers Organization. Hunter calls Prop. 103 the most significant piece of insurance legislation since World War II.

Others believe the initiative has been a disaster.

“As a document, (Prop. 103) is a fraud perpetrated on the public that has done nothing to reform the auto insurance industry,” said Robert E. Vagley, president of the American Insurance Assn., a trade group for property/casualty insurers.

California voters, Vagley said, “shot the messenger” and missed the underlying causes of auto insurance rate increases--fraud, theft and excessive legal costs.

Independent insurance agents in California have complained that insurance companies have used Prop. 103 as an excuse to drive commissions down, squeezing agents’ income and forcing many out of business.

They say the initiative had the perverse effect of limiting access to auto insurance by causing some firms to limit the number of new policies they write or to withdraw from California entirely.

Even though rates have been frozen while the rebates are under legal attack, some drivers have had to pay higher premiums after getting dropped by their insurers.

Toby Haynes, who runs a Pasadena insurance firm that his great-grandfather founded in 1918, says his experience is typical of many of his independent-agent colleagues. Shortly after Prop. 103 passed, Commercial Union Insurance Co. pulled out of California, stranding scores of Haynes’ auto insurance customers.

When he couldn’t find another carrier willing to write the coverage through his agency, Haynes reluctantly referred his clients to large insurers that deal directly with policyholders.

Retired Pasadena psychiatrist Carmer Hadley, who had bought all his insurance through the Haynes firm for more than 25 years, said he resented having to go elsewhere for auto insurance.

“I think Prop. 103 reduced everybody’s options a lot, and I’m not convinced my coverage is any better,” Hadley said.

The initiative--and the emotional statement it made--prompted some insurance executives to reconsider the industry’s relationship with its customers.

“I saw it as a manifestation of consumer frustration deriving out of the fact that consumers neither trust--nor like--their auto insurance carriers,” said Peter B. Lewis, chief executive of Cleveland-based Progressive Insurance Co.

Lewis stands apart from his fellow insurance executives in a couple of ways. First, his is one of the three large auto insurers that have bowed to Prop. 103 and provided rebates. Second, he admires and is admired by his Princeton University classmate Ralph Nader, consumer advocate and one of the architects of Prop. 103.

But Lewis shares his colleagues’ view that the initiative represented “a breakdown of the democratic system.”

After the California vote, he said, “My first impulse was that it was my patriotic duty to go down with this, to fight it to the end.”

His second impulse was to try to figure out how to make money by reacting to the voters’ grievances.

Realizing that slow or callous response to claims was as much a source of consumer resentment as high prices, Lewis set a corporate goal of responding to claims “in minutes or hours instead of days or weeks.” Progressive touts fast service as a selling point now.

Progressive also trimmed overhead, although Lewis insists that the costs insurance companies can control amount to only about 6% or 7% of the premium dollar. Fraud and legal costs, he said, amount to 25% or more.

Lewis’ latest idea is based on the theory that consumers only benefit from price competition when they are able to compare prices. Progressive’s answer is a computerized pricing service called Express Quote, now being tested in San Diego only.

For a fee of $25, consumers call a toll-free hot line, answer a list of questions about their car, driving record and type of coverage desired and receive a customized list of prices from the eight largest insurers in the market area.

If the service succeeds, Progressive plans to offer it more widely and expand the number of insurers quoted.

But at least for the time being, Progressive itself won’t appear on the list. The company has cut back its private-passenger auto writing in California because of Prop. 103.

“The theory that a regulator can set the profit margin . . . is crazy,” Lewis said. “Everybody loses--everybody. It’s absolutely crazy, and it’s crazy that the courts could support that kind of law.”

Lewis said he will be watching the 20th Century case closely.

“I hope they win,” he said. “I hope nobody pays because that will mean a return to sanity.”

Proposition 103 in Brief Proposition 103, the insurance rollback initiative, was approved by California voters Nov. 8, 1988, by about 200,000 votes out of 9 million cast--a 51% to 49% margin. Here are some of the measure’s key provisions: Rollbacks: Insurers were ordered to cut their rates to 20% below their November, 1987, levels and rebate any “excess premiums” to consumers. Rate regulation: New rates must be approved in advance by the insurance commissioner. Elected commissioner: Starting in 1990, the insurance commissioner was elected by voters instead of appointed by the governor. Antitrust: Insurers’ state antitrust exemption was repealed, prohibiting price-fixing. Intervenor funding: Consumer advocates who make a “substantial contribution” in rate hearings are to be reimbursed for their expenses by insurers.