Insurance agents, consumer advocates clash over auto insurance proposal in California

Richard A. Koreto

Two groups in California — including one connected with Mercury Insurance Group — are claiming to be a car owner’s true friend in a battle over the state’s auto insurance regulations. Which group actually is on your side? The answer rests with how you define “consumer friendly” and how you interpret proposed and existing regulations.

The battle centers on a still-unnamed ballot proposition that would change the way insurance companies set rates for auto insurance in California. Naturally, all car owners in California would like to know what this means for them: Will rates go up or down? The answer: It depends.

If you have a consistent history with one insurance company, you might see your rates drop under this proposal. Also, you’d likely be able to transfer the loyalty discount you have with your current insurer to another insurer. However, if you haven’t owned a car for several years, you could find yourself paying a lot more for auto insurance once you buy a car.

Mercury Insurance Group, a California-based insurer, and Consumer Watchdog, a California-based consumer advocacy group, are sparring over a proposed change in how auto insurance rates are set in California.

The birth of Proposition 103

To understand all of this, you need a little history.

In 1988, California voters approved Proposition 103. Among other things, the proposition set strict guidelines for auto insurance rates and listed factors that insurers could use in setting them. The ballot measure was viewed as pro-consumer; for example, it forced insurers to roll back rates and made it harder for them to raise rates later.

Proposition 103 also ended the transfer of loyalty discounts. That is, if Company A gave you a discount for being a long-term customer, Company B was not allowed to say, “Come to us and we’ll give you that same discount.”

Insurers thought the transfer clause dampened competitiveness. That is, an insurer couldn’t grab easily grab customers by offering lower rates than a competitor’s. So in 2010, insurers — particularly Los Angeles-based Mercury — fought back with Proposition 17. Although this would make the market more fair, its supporters said, some argued that these discounts would be made up by merely imposing rate increases on other customers. Opponents claimed the proposition also would financially punish Californians who were in the market for auto insurance but who had gone without it for a period of time.

Mercury and its allies spent millions of dollars to pass Proposition 17, but voters narrowly defeated it in 2010. Neither company representatives nor state officials were able to say how many policyholders Mercury has in California.

Giving it another try

Mercury hasn’t given up on the issue, though. Mercury and other insurers have drafted another plan, similar to Proposition 17, that would modify Proposition 103. As in the past, tempers are at a boiling point over this issue.

Consumer Watchdog, the California group that led the fight against Proposition 17, says the new initiative is more of the same. “It would lead to surcharges of more than 40 percent for millions of Californians who had a prior lapse in insurance coverage or simply had not been driving for a time,” the consumer advocacy group says.

Consumer Watchdog says the proposed change would take advantage of people who have sold their cars because, for instance, they were unemployed or were trying to save money.

Agents’ group behind new initiative

The group spearheading the latest proposition is the American Agents Alliance, a California-based association of independent insurance agents and brokers, with Mercury taking more of a backseat this time around. The alliance is gathering signatures for the new proposition. If enough signatures are obtained and approved, the measure will appear on the California ballot in June 2012.

In a statement, Mike D’Arelli, the alliance’s executive director, says: “The proposal will allow consumers to receive a discount for their years of continuous automobile coverage regardless of the company where they seek insurance.”

D’Arelli tells InsuranceQuotes.com that California’s current law discourages competition, as consumers won’t leave their existing auto insurers if they know they’ll lose a loyalty discount by making the switch. He insists the proposal is consumer-friendly — “a great improvement over the way the law works today.” Furthermore, D’Arelli says, consumers whose auto insurance has lapsed for three years out of a five-year span could qualify for 60 percent of a loyalty discount by returning to a previous insurer or signing up with another insurer that will match the pro-rated discount.

The proposed ballot language carves out exemptions to the “continuous coverage” rule. Drivers who let insurance lapse because of military service still would be considered to have continuous coverage and, therefore, qualify for a loyalty discount. Drivers whose insurance has lapsed for 18 months because of a layoff or furlough or for three months for any other reason wouldn’t fall under the rule.

D’Arelli emphasizes that Proposition 17 failed in 2010 by only a few percentage points. Opponents claim the failure stemmed from dissatisfaction with Mercury’s well-funded campaign more than anything else. Figures weren’t available regarding how many auto insurance policyholders Mercury has in California.

“Mercury Insurance is back with another costly ballot initiative which attempts to trick voters into giving insurance companies new power to increase premiums and punish consumers,” Brian Stedge, a consumer advocate with Consumer Watchdog, says in a statement.

Punches and counterpunches

Mercury may be keeping a lower profile in this particular fight, letting the alliance take the lead, because it has encountered problems aside from those at the ballot box. Back in 2010, the California Department of Insurance alleged 25 categories of violations and noted the “insurer failed to cease illegal acts despite previous agreements to do so.”

Mercury shot back that the violations arose from a difference in opinion over interpretation of various regulations and hinted that Insurance Commissioner Steve Poizner, then a candidate for governor, was politically motivated.

Although Mercury may not be as visible in this fight, Consumer Watchdog is doing its best to keep the insurance company in the spotlight. For instance, Consumer Watchdog has noted that Mercury’s founder and chairman, George Joseph, is the sole donor to the signature-gathering campaign for the latest ballot initiative. Furthermore, the watchdog group claims 70 percent of the board members of the alliance are Mercury agents.

Inquiries about Mercury’s stance on the issue were forwarded to the alliance.

Meanwhile, the alliance is casting doubt on Consumer Watchdog. D’Arelli characterizes the group as a bunch of class-action lawyers motivated by the prospect of payouts from lawsuit settlements. “For them, this is a gravy train with biscuit wheels,” he says.