Court Rejects Insurance Industry Sleight-of-Hand

“Hocus pocus.”  “Smoke and mirrors.”
 
These words appeared late Friday afternoon in a published decision of the California Court of Appeal in Sacramento describing the insurance industry’s latest failed attack on the consumer protections of insurance reform Proposition 103.
 
The Court upheld Prop 103 rules that prevent insurance companies from earning excessive profits and prohibit them from passing on excessive costs – like sports sponsorships – to consumers.
 
In 2013, Insurance Commissioner Dave Jones ordered Mercury to lower its overall homeowner's insurance rates by 5.4%, a savings of $16 million in annual premiums to consumers. Mercury was prevented from passing on the cost of sponsoring a golf tournament, political contributions and excessive profits to its policyholders. Mercury, and industry trade associations representing State Farm, Allstate, Farmers, and other insurers sued, claiming that the order violated their constitutional right to a fair profit and freedom of speech. The Sacramento District Court dismissed the suit, and Mercury and the industry appealed.
 
The Court of Appeal was clearly not impressed: 
 
The Trades’ attempt to explain how the Calfarm court, “ruling on the state and federal due process clauses, conducted an analysis in line with Lingle’s pronouncement of the Due Process standard,” and how the 20th Century court can be understood to have “equated ‘deep financial hardship,’ as used in the opinion, with more traditional notions of confiscation centered on the absence of a fair rate of return,” amounts to little more than hocus pocus.
 
Nothing in the Supreme Court’s extended discussion of the “deep financial hardship” standard suggests that it would apply only to a retrospective price control rather than a prospective price control. Again, the Trades’ argument is smoke and mirrors -- nothing more.
 
Having found that Mercury aims its entire advertising budget at promoting the Mercury Insurance Group as a whole and having concluded that the Mercury Insurance Group is not a specific insurer within the meaning of section 2644.10(f), the commissioner properly excluded all of Mercury’s advertising expenses from the rate calculation pursuant to the regulation because Mercury’s advertising was not aimed at obtaining business for a specific insurer and did not provide consumers with information pertinent to the decision whether to buy that insurer’s product. Accordingly, all of Mercury’s challenges to the commissioner’s rulings with respect to Mercury’s advertising expenses are without merit.
 
State Farm is likely doubly sorry about the outcome, given that the arguments shot down here are central to another lawsuit it just filed. That suit seeks to overturn an order by the insurance commissioner for a State Farm homeowner's, renter's and condo insurance rate decrease worth $78 million and another $100 million-plus in refunds.  Friday's decision doesn't bode well for the insurer.
 
While the insurance industry continues its permanent campaign against Prop 103, the insurance reform law continues to save drivers, homeowners and business owners billions. According to a 2013 Consumer Federation of America report, the law has saved drivers alone $100 billion since 1988. That's not hocus pocus or smoke and mirrors, but the fair and justified insurance rates required by the voters when they passed Proposition 103.
 

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