Insurance Reform Stymied by Hearings, Lobbyists and Lawsuits

More than in most states, and more than in most other areas of government, the regulation of insurance in California appears to be reaching a state of near paralysis.

Hearings lasting months, seemingly endless litigation, a legislative standoff on the key issues, powerful opposing lobbies that cancel each other out are all impeding resolution of serious matters.

Ironically, much of the problem appears to be an unintended consequence of the state’s efforts at insurance reform. By proposing large changes, the reform efforts have given powerful players in the state’s insurance wars large incentives to stall. New Jersey and a few other states where there have been strong attempts at reform have experienced similar quagmires.

In California, the impasse is intensified by the huge financial stakes.

“In other areas of California government, you have tough issues, but the decision makers can hide accountability,” said Steven Miller, a former deputy state insurance commissioner.

“In insurance, the issues translate immediately to the consumer pocketbook. It’s a check someone writes nearly every month. And every proposed decision, every reform, quickly goes to the bottom line.

“Even the most trivial-appearing issue generates litigation because, multiplied by the number of ratepayers in California, every issue is a multimillion dollar issue.”

Or, as Bill Packer, a spokesman for a leading insurance lobby in Sacramento, the Assn. of California Insurance Companies, said: “People on every side realize they can buy time by litigating.”

“Litigation is a sump hole of delay,” he said, quoting Barry Carmody, the head of his association.

The loser often is the ratepayer.

In four key areas of California property and casualty insurance, there has been little movement for at least months, and sometimes for years.

* A new state mandatory auto insurance law has been impeded since Jan. 1 by the insistence of many insurance companies that formerly uninsured drivers buying coverage must pay a a surcharge of up to 30% over regular rates.

Insurance Commissioner Chuck Quackenbush says he wants to end the surcharges. But after months of hearings, a San Francisco Superior Court judge has held that Quackenbush cannot do so without formally adopting new rating plans.

Quackenbush’s latest deadline for doing away with the surcharges is October, but consumer groups, which support doing away with the surcharges, have challenged the proposed rating plans over other issues. The result could be further long delay.

* Interim earthquake insurance rates went into effect when the state earthquake authority was inaugurated Dec. 1. But the new rates were quickly challenged. Critics argued that the rates were based on inaccurate assessments of the comparative risks of quakes in different parts of the state.

Public hearings on that issue did not get underway until the first week in May. The latest estimate is that the hearing process may last until about Oct. 1. In the meantime, the high rates and low levels of coverage have caused sales of the policies to lag behind expectations. Many people who have bought the policies say they are being overcharged.

* Political infighting has gone on for nine years over a somewhat ambiguous requirement in Proposition 103 that ZIP codes be downgraded as a factor in pricing auto insurance.

Reducing the influence of those “territorial ratings” would mean that people in central city areas would pay less, but a majority of those living outside those areas would pay more.

That shift of costs has elevated the political stakes. Insurance companies generally want to keep territorial ratings. Two elected insurance commissioners, Quackenbush and his predecessor, John Garamendi, have waffled on the issue.

* Rebates called for under Proposition 103 have been paid, on a scaled-down basis after court orders and rates negotiated by the commissioner’s office.

But nine years after the ballot measure passed, the largest seller in California, State Farm, continues to resist paying anything. Litigation continues over the Quackenbush order a year ago that the company pay back $172 million to ratepayers, including $68 million in interest. About $29 million in interest has since accumulated.

Quackenbush, in an interview, said that he has had to adjust to the slow pace.

“You become accustomed to it,” he said. “I came in with a business mind, where you identify problems and come up with solutions quickly. It’s different here. Everything is set up in government for status quo maintenance. Sooner or later, you have to move forward, but that’s where controversy erupts.”

Tens of millions of dollars have been spent on litigation, most of it by resistant companies, Quackenbush estimated. Consumer groups have been reimbursed at least $2.5 million out of Insurance Department fees for their costs as intervenors in the lawsuits and hearings.

“If you’re going to make a major change in government policy, people feel it’s worth going to court and fighting over,” the commissioner said.

“It just takes an incredible amount of patience and very thick skin.”

Insurance lobbyist Dan Dunmoyer of the Personal Insurance Federation conceded that litigation costs have been “in excess of $10 million.”

“Why do we sue?”

“Any time there’s a regulation that exceeds the statutory law, by our definition, we have a right to sue,” he said.

In general, movement on insurance issues is most difficult in states with elected commissioners, Dunmoyer said.

The lobbyist also pointed to the intervenor fees paid under Proposition 103 to the Consumers Union and Harvey Rosenfield’s Project 103 Enforcement Project as a cause of long public hearings and litigation.

But Rosenfield, whose organizations have received at least $1.9 million in such fees, defended them as essential to bringing about a more level playing field between consumers and the insurance industry.

“We calculate that overall we have won, in exchange for our intervenor fees, $15 billion in rate savings and refunds” for consumers, he declared--a claim that Dunmoyer disputes as having “no basis in reality.”

Beyond the issues within the Insurance Department and the courts, the Legislature and the governor’s office remain at fundamental odds on major policy issues such as legal reform and rate regulation.

Generally speaking, Gov. Pete Wilson, a Republican, has long sided with the insurance industry and against the trial lawyers, while the Democratic-controlled Legislature is close to the lawyers.

The perennial issue between the two are changes in the legal system, with the insurers wanting to restrict lawsuits through some variety of no-fault insurance and the lawyers resisting that idea.

The deadlock on legal reform and other issues has lasted literally for decades, and both sides privately say they expect it to continue.