Prop. 103 Assault : Insurers Pull Out All the Stops

SAN FRANCISCO — In their legal attack on Proposition 103, the insurance companies facing the loss of billions of dollars in annual revenue under the measure have spared few superlatives, describing it, among other things, as “the most oppressive rate regulation enacted in modern times.”

What happens to the insurers’ far-ranging constitutional challenge, now before the state Supreme Court, could have repercussions across the country as consumer advocates, flush with their California victory, savor the prospect of spreading their grass-roots war against insurance companies nationwide.

At the heart of the insurers’ challenge is a series of fundamental claims.

Constitutional Question

The companies, citing their constitutional right to due process, say the initiative sets up a rate-setting system that unfairly prevents them from earning a fair return and bars them from rate relief until they face insolvency. They say further that their constitutional right to make contracts is impaired by the measure’s prohibition against refusing to renew auto insurance policies even if the companies are operating at a loss.

And the insurers’ contentions draw some support among legal experts.

“I really think there are constitutional limits on what government can do to a private business,” says UC Berkeley law professor Stephen R. Barnett. “Some of the provisions seem clearly excessive and an abuse of governmental authority. . . . Requiring someone to operate a business, for example, is almost unbelievable.”

However, authorities note, the insurers also face substantial obstacles in their drive to have the new law overturned by the justices.

Called Confiscatory

The companies assert that the across-the-board rate rollback and 20% rate cut are “confiscatory” and prevent them making a fair profit. But the court has received little factual data from the insurers to show the actual financial condition of the industry. It may be then that the justices will decide to send the case to a trial court for such a factual determination and rule on the insurers’ constitutional challenge later.

“As a matter of law, in the absence of a factual setting, I don’t see how the insurers can say a 20% cutback is confiscatory,” said Joseph Remcho, a San Francisco attorney who represented the California Trial Lawyers Assn. in defending Proposition 100, a rival insurance initiative that was defeated in the Nov. 8 election.

“It wouldn’t surprise me if the court, at some point, sent the case down for factual findings on what impact a 20% reduction would have and whether insurance companies actually would go under, as they say.”

Julian Eule, professor of constitutional law at UCLA, expresses some skepticism of the insurers’ contention that their revenues will be unfairly confiscated under the measure. It may well be, he says, that the ordinary competitive pressures of the marketplace have failed to keep insurance rates at reasonably low levels and that action is legally justified.

“If that’s the case, the government, in behalf of the people, has a very strong argument for coming in to curb the profits of insurance companies,” Eule said.

There are other problems for the insurers as well. Courts, as a general rule, are reluctant to strike down laws as unconstitutional, and there is no reason to think the justices will be eager to overturn Proposition 103 and its sweeping cutbacks in the insurance premiums being paid by millions of Californians.

While some ballot measures have been invalidated--such as Proposition 14, a repeal of state fair housing laws that was struck down in 1966--more often than not, laws passed by the voters have withstood attacks before the high court.

Eule of UCLA points out that although a court may give more deference to a law passed in the more deliberative process of a legislature, there are practical considerations at stake in the review of a widely publicized initiative approved by the electorate.

Political Realities Cited

“You have to recognize the reality that members of the court come up for retention elections periodically,” Eule said. “Striking down a voter initiative and thus thwarting the will of the majority is a highly visible decision . . . and a very risky proposition for the court.”

Proposition 103, backed by consumer advocate Ralph Nader and others, calls for a rollback to the insurance rates in effect in November, 1987; a 20% reduction in those rates and a freeze at that level until November, 1989, when auto insurance rates would be decreased another 20% for good drivers. An exception to the rollback could be obtained from the state insurance commissioner by insurers who could demonstrate a “substantial threat of insolvency.”

In four separate challenges to Proposition 103 that now are before the court, lawyers representing dozens of insurance companies make the following contentions:

- The measure’s rollback and reduction provisions are arbitrary and deny insurers the opportunity to receive a fair return. In the first year, an insurance company must continue to lose money until it faces insolvency in order to qualify for rate relief. It is unclear whether a company must be nearing insolvency nationwide or only in California.

- The initiative allows no opportunity for a hearing before the cutback and insurers who refuse to reduce rates are subject to civil and criminal penalties. The procedure for seeking rate relief is a cumbersome case-by-case process, with no time limits for a decision and no way to prevent a loss of premium income during the interim.

- Insurance companies, under Proposition 103, are forbidden from canceling or refusing to renew auto insurance except for non-payment of premiums, fraud or substantially increased risk. Thus, insurers are effectively prohibited from withdrawing from the auto insurance market, violating their rights under millions of existing policies not to renew. Such polices become “perpetual contracts,” even if the insurer operates at a loss.

- By giving the state Board of Equalization power to increase tax rates on insurers to make up for lost tax revenue, the measure violates a state constitutional provision granting such authority solely to the Legislature.

- By creating an independent nonprofit corporation to serve as a consumer insurance advocate, the initiative violates a state constitutional provision barring formation of a private corporation, accountable to no governmental body, to carry on lobbying activity.

- The initiative, by containing provisions for a private corporation and other “functionally unrelated” matters, infringes on state constitutional requirements that ballot measures be limited to a single subject, to avoid confusion and deception of the voters.

While some of the initiative’s provisions were not directly attacked--such as removal of the industry’s antitrust exemption and a requirement that the state insurance commissioner be elected starting in 1990--lawyers for the companies maintain that the measure must be struck down “in its entirety.” The rate regulation defects and unlawful tax provisions cannot be “severed” from the initiative to allow other provisions to be upheld, the companies say.

The insurers rest a substantial portion of their claims on a 1976 ruling by the state high court that struck down a rent control ordinance enacted by Berkeley.

The justices, while allowing municipalities to impose reasonable controls, invalidated the Berkeley measure because they said its cumbersome case-by-case procedures would result in costly and “confiscatory” delays in obtaining rent increases.

The insurance rate adjustment process of Proposition 103, the industry’s lawyers say, would result in the same kind of “procedural straitjacket” that the justices struck down in 1976.

For their part, state Atty. Gen. John K. Van de Kamp and other state lawyers defending the measure in the four suits before the justices have not yet issued a detailed legal response to the attack by insurers.

But in a brief filed Monday, Van de Kamp and Deputy Atty. Gen. Timothy G. Laddish argued that the insurance companies were “not likely to succeed” in their constitutional assault on Proposition 103.

A temporary restriction on revenues is permissible even if it amounts to an “interim denial” of such funds, Van de Kamp said. He noted that in its 1976 ruling and a 1984 case upholding a new Berkeley rent control ordinance, the court had indicated that it was permissible to roll back prices to a period before enactment and then require government approval of any upward adjustments.

The attorney general also seeks to refute the contention that under the initiative it would take too long for an insurance company to obtain rate relief and thus is unconstitutional.

In their 1984 decision, the justices said that 120 days was a sufficient period for rate adjustment action--and it cannot be presumed that the insurance commissioner “is incapable of resolving exemption applications within a similar period,” the attorney general said.

Turning to another issue raised by the insurers, the attorney general rejects as “without merit” the claim that the initiative improperly infringes on the right to cancel or refuse to renew auto insurance policies.