2005
Insurance Reference Manual
Personal Insurance Federation of California Insurance Reference Book
PROPOSITION 103
An Overview...
Since the turn of the 20th century, U.S. property and casualty insurers have been regulated by state insurance departments headed by an elected or appointed insurance commissioner. California's insurance commissioner was appointed by the governor until passage of Proposition 103 in 1988.
Prior to 1988, California had an "open competition system" of regulation under which rates were set by insurers without prior approval or subsequent approval by the insurance commissioner. Under that system, California had less regulation of insurance rates than any other state.
Proposition 103 was authored and placed on the November 1988 ballot by Harvey Rosenfield, a self-proclaimed consumer advocate who headed a group called Voter Revolt. The initiative was narrowly approved by a vote of 51 percent to 49 percent. Proposition 103 changed California from an "open competition system" to a "prior approval" state which provides that each rate change proposed by an insurer - increase or decrease - must be approved by the California Department of Insurance (CDI) before it can be implemented in the marketplace. Proposition 103 changed forever the way insurance business is conducted in California.
The changes made by Proposition 103 include:
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making the insurance commissioner of California an elected, rather than appointed official;
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giving the insurance commissioner authority to approve rate changes before they can take effect;
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requiring insurers to reduce private passenger auto insurance rates by 20 percent for two years from their levels on November 8, 1987;
- requiring insurance companies to offer a 20 percent "good driver discount." Persons who qualify as "good drivers" under the statute are entitled to preferred rates. " Every person who (A) has been licensed to drive a motor vehicle for the previous three years and (B) has had, during that period, not more than one conviction for a moving violation shall be qualified to purchase a Good Driver Discount Policy from the insurer of his or her choice." [Section 1861.02 (b) (1)];
- requiring auto insurance rates to be determined primarily by four factors, in " decreasing order of importance :"
- a driver's safety record;
- the number of miles driven annually;
- the number of years of driving experience; and
- any other factors which the commissioner adopts by way of a regulation; the other factors must have a " substantial relationship to the risk of loss" [Section 1861.02 (a)];
- allowing for payment of "intervenor fees" to outside groups which intervene in hearings conducted by CDI.
- requiring that rates not be excessive, inadequate or unfairly discriminatory.
The following major lines of insurance are included in Proposition 103: personal auto, dwelling fire, earthquake, homeowners, inland marine, and umbrella. In addition, commercial insurance lines included in Proposition 103 are: commercial aircraft, commercial automobile, boiler and machinery, burglary and theft, business owners, commercial farm owners, some fidelity, commercial fire and glass, medical malpractice, commercial miscellaneous, commercial multi-peril, professional liability, special multi-peril, and coverage under the United States Longshoremen's & Harbor Workers' Compensation Act.
Other provisions in Proposition 103 include limitations on non-renewals and cancellations, and making insurers subject to numerous and complex provisions of the state's unfair business practice laws. The initiative was poorly written and millions of policyholders' dollars have been spent on interpreting sections of Proposition 103 that are unclear, ambiguous, or contradictory.
Proposition 103 has made the California insurance industry the most regulated in the country. It has increased CDI's budget more than 200 percent and increased its staff by almost 75 percent. CDI had approximately 600 employees before John Garamendi became the first elected regulator under Proposition 103. Mr. Garamendi served as insurance commissioner from 1991-1994. During his term, CDI's staff grew to more than 1,100 employees. In 2004, CDI employees number nearly 1,700. The growth of CDI's personnel to handle the extra workload has added more than $80 million to CDI's budget, bringing its total annual funding to over $170 million (FY-2004 proposed budget). Under Section 1861 of the Insurance Code, costs to implement Proposition 103 are financed out of CDI's Insurance Fund which is funded entirely by fees and assessments paid by insurance companies.
While Proposition 103 increased the regulatory bureaucracy and associated costs, it has done nothing to reduce insurance fraud. According to the National Insurance Crime Bureau (NICB), California leads the nation in insurance fraud. Proposition 103 has done nothing to reduce the number of uninsured drivers on California streets or directly reduce costs that compound insurance rates.
ROYAL GLOBE
Insurance rates rose drastically from 1979 to 1988 because of a California Supreme Court ruling known as the Royal Globe doctrine. Royal Globe allowed third-party lawsuits in all homeowners, auto and small business claims and remained in effect for ten years. It let accident victims, with the involvement of a personal injury lawyer, to sue not only the person responsible for the accident, but also sue that person's insurance company for punitive damages. Lawsuits doubled from 1979 through 1988 according to the California Judicial Council. It caused insurance costs to soar upward and insurance rates followed suit.
Royal Globe became a "winning lottery ticket" for personal injury lawyers. The gravy train, however, came to a grinding halt in 1988 when a reconstituted California Supreme Court repealed the doctrine in a case known as Moradi Shalal v. Fireman's Fund. The Court wrote that Royal Globe was causing hardship on the state's court system, was unfair because it raised insurance rates unnecessarily, and frivolous lawsuits were allowed.
In 1992 Harvey Rosenfield split from Voter Revolt and founded a new group known as the Proposition 103 Enforcement Project which soon began touting that auto insurance rates were coming down because of Proposition 103. Mr. Rosenfield failed to tell insurance consumers that these reductions were due to the repeal of Royal Globe, not Proposition 103, and that Commissioner Garamendi actually froze insurance rates when he became Commissioner in 1990. Proposition 103 had nothing to do with rate reductions.
Over the next six years, auto insurance rates continued to decline as the remaining Royal Globe lawsuits wound their way through the courts and were settled. Other factors that have contributed to insurance rate reductions include: safer cars and roads; increased curtailment of lawsuit awards to drunk drivers due to passage of Proposition 213 in 1996; stiffer insurance fraud penalties; the state's recovery from a recession; and baby boomers who left the dangerous driving years of their youth and moved into safe and careful middle-aged driving habits. Again, none of this had anything to do with Proposition 103.
INTERVENORS
Another significant provision buried in Proposition 103 provides that "any person may initiate or intervene in any proceeding permitted or established in this chapter, challenge any action of the commissioner under this article," and (b) 'The commissioner or court shall award reasonable advocacy and witness fees and expenses to any person who demonstrates that (1) the person represents the interest of consumers, and (2) that he or she has made a substantial contribution to the adoption of any order, regulation or decision by the commissioner or a court. Where such advocacy occurs in response to a rate application, the award shall be paid by the applicant (insurer) (Statute 1861.10A).
Basically, intervenors are individuals or groups who choose to participate in various hearings before CDI and who are reimbursed by CDI through individual insurance companies. The costs for these interventions are eventually paid by insurance consumers through their insurance rates. Linda Seebach, editorial-page editor of The Valley Times in Pleasanton, California and The San Ramon Valley Times in Danville, California wrote: "INTERVENORS, OUTSIDERS who participate in the decision-making of public bodies, may be entitled to compensation if their suggestions are eventually incorporated in the policies that are adopted. There's an obvious potential for abuse by grievance-chasers who subsist on intervening in cases that nobody would hire them to take, and it would be a worthwhile project for an investigative reporter to find out who gets the money and how much. We know where the money comes from."
As of January 1, 2003, CDI has paid out more than $8.5 million in direct intervenor fees, plus an additional $2.8 million in start-up and administrative fees, for a total of over $11.3 million. This does not take into account any pending intervenor fees paid in 2003 or requests pending in 2004.
Let's look at where the intervenor, start-up, administrative dollars and ongoing intervenor payouts have gone since Proposition 103 was enacted in 1989 through 2002. Harvey Rosenfield split with the co-founders of Voter Revolt four years after its founding and after Proposition 103 was passed. However, from 1990-91 Voter Revolt collected $50,412.00 in intervenor fees from CDI's Insurance Fund. Through 1994 the organization collected $1,485,639.07.
In 1992, after leaving Voter Revolt, Harvey founded the Proposition 103 Enforcement Project, a consumer group which is substantially funded by California personal injury lawyers. Harvey charges $295 an hour for his "expertise" as an intervenor. Here is a look at intervenor fees paid to the Proposition 103 Enforcement Project through 2002.
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In 1994, the Proposition 103 Enforcement Project collected $3,672.42 for intervening in the matter of the investigative hearing of telephone quote accuracy and availability.
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The Proposition 103 Enforcement Project collected $295,556.41 in 1995 for intervening in four rate filings, two on insurance companies, two on CDI's investigation of earthquake rate filings, plus several exploratory hearings which did not involve an individual insurer.
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In 1996 the Proposition 103 Enforcement Project collected $344,766.79 from the CDI Insurance Fund in non-individual and individual insurance company matters. In addition, the group intervened in 15 other filings.
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In 1997, the Proposition 103 Enforcement Project collected $278,716.79 from two companies on rulemaking and ratemaking intervention, and five Proposition 103 Fund interventions.
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In 1998 the Proposition 103 Enforcement Project collected $121,042.64 from the Proposition 103 Fund for serving on a task force and intervening in a rulemaking procedure.
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In 1999, the Proposition 103 Enforcement Project collected $300,946.72 from the three insurance companies and the Proposition 103 Fund for work on the task force and three interventions in rollback liability, ratemaking and a prior approval matter.
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In 2000, the Proposition 103 Enforcement Project collected $59,678.35 from the Proposition 103 Fund for a Writ of Mandate offering.
The Proposition 103 Enforcement Project has collected $1,327,201.67 from the Intervenor process through 2000. (None reported in 2001 or 2002).
Next, California's Consumers Union (CU), collected $218,248.99 in 1991 by intervening in hearings on automobile rating methodology and good driver discounts under Insurance Code Section 1861.02.
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CU also collected an additional $46,869.24 in 1991 from two filings dealing with rate calculations under Proposition 103.
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In 1995, CU collected $10,582.87.
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In 1996, CU collected $31,314.32.
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In 1997, CU collected $14,574 for three Proposition 103 interventions.
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In 1998, CU collected $14,689.50 from two Proposition 103 interventions.
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In 1999, CU and Southern Christian Leadership Conference collected $78,141.11 from the Proposition 103 Fund.
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In 2000, CU collected $132,177.40 in a company ratemaking hearing.
Since 1991 CU collected a grand total of $414,480.03
Economic Empowerment Foundation (EEF) submitted filings from 1993-95, and has collected $243,145.31. It is interesting to note that EEF has filed and received dollars from many of the same hearings for which CU and Harvey Rosenfield's Proposition 103 Enforcement Project have also filed and received dollars.
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In 1997, EEF received $115,255.16 for two ratemaking interventions.
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In 1998, EEF received $165,202.13 from an insurance company rate filing intervention.
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In 2000, EEF received $348,805.84 for an insurance company rate filing intervention.
Since 1993, EEF has collected a grand total of $872,408.44.
The Consumers Coalition of California (CCC) collected $10,045 in intervenor fees from 1991-2002. Again, repetition among consumer groups occurred as this group joined other groups in some of the same filings.
United Policyholders received $3,450 from a filing in 1994 in which three other consumer groups intervened and collected. The hearing was on the investigation of earthquake rate filings (Monoline Earthquake Policy).
The Greenlining Institute, in a joint filing with the Latino Issues Forum, received $32,495.60 from the Proposition 103 Fund in 1997.
Since 1997, the Greenlining Institute has collected a grand total of $182,495.60 from interventions.
The Minority Low-Income Consumers Coalition (MLICC) received $1,187,442.73 in intervenor fees from 1989-2002.
MLICC has intervened in 12 hearings ranging from the California Automobile Assigned Risk Plan (CAARP) rate hearings, insurer hearings, and adoption of regulations dealing with Proposition 103. Virtually every other consumer group has intervened and received dollars from every intervention made by MLICC.
The Public Advocates Group received $108,582.72 in intervenor fees from 1994-1997. However, the Group asked CDI for a total of $150,101.47. This group too, has intervened in many hearings covered by other consumer groups -- of course, all collecting varying amounts for the same information. The Public Advocates Group has not received any intervenor fees from 1997 to 2002.
Policyholders for Auto Insurance Reform collected $24,036.00 from 1993-1997. The Policyholders have not received any funds from 1998-2002.
The Utility Consumers' Action Network (UCAN) received $57,447.94 in intervenor fees from seven filings from 1989-1997. UCAN has not received any funds from1998-2002.
Tom Aceituno, an individual intervenor, collected $3,531.44 in 1996.
START-UP AND OTHER FEES PAID SINCE 1990
Administrative and start-up costs from 1990 to 1993 include two attorney groups, Strumwasser and Woocher, and Rubenstein and Perry, who collected a total of $2,383,680. In addition, Robert Hunter, an actuary from Texas, collected $203,874; J.W. Wilson & Associates, economic advisers, collected $207,188; and the Udinsky Group, business and labor appraisers, collected $38,831.
The intervenor process leaves open serious questions regarding who the intervenors are, who they represent, and whether the contribution they add to the process is worth the cost to taxpayers and policyholders.
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