Court Bans Using Discounts to Lure Longtime Auto Policy Customers

A California state appeals court has struck down a law that could have resulted in higher auto insurance rates for many low-income motorists and discouraged uninsured drivers from getting coverage.

A three-judge panel of the 2nd District Court of Appeals in Los Angeles ruled in Foundation for Taxpayer and Consumer Rights v. John Garamendi that the statute violated Proposition 103, the insurance regulation initiative adopted by California voters in 1988.

The law, approved by the Legislature and signed by former Gov. Gray Davis in 2003, allowed auto insurers to give persistency discounts to try to lure longtime customers away from competitors.

Opponents said that law violated a provision of Prop 103 that said the absence of prior insurance coverage could not be used as a factor in setting rates and granting discounts, and the appeals court agreed.

Justices said the law, written by Senate President Pro Tem Don Perata, D-Oakland, was invalid because “it does not further the purposes of, and undermines one of the major purposes of, Proposition 103.”

“One of the fundamental purposes of Proposition 103 was the … promotion of ‘fair, available and affordable’ automobile insurance so that the previously uninsured could enter the ranks of the insured,” the court said.

The justices also said the legislation infringed on the state insurance commissioner’s powers to regulate insurance rates.

Consumer groups said that if insurers were allowed to offer discounts to drivers who had maintained insurance with another company, it would result in higher rates for motorists, many of them poor, who were seeking to re-establish coverage or were buying insurance for the first time.

Supporters said the legislation would have spurred competition and allowed motorists to shop for the lowest insurance rates. George Joseph, CEO of Mercury General Corp., the main supporter of the bill, said the ruling denied a discount that was “warranted by all of the statistics we have.”

“You will find that people who come to you already insured will have less losses than people who come to us who are not insured.”

The justices cited a 1998 Department of Insurance study that found that 87 percent of uninsured motorists would qualify for good-driver discounts.

Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, said the ruling would still allow insurers to offer discounts to their own customers.

Regulations adopted by Insurance Commissioner John Garamendi in 2002 allowed those discounts but barred insurers from offering persistency discounts to try to attract new clients.

Garamendi was a defendant in the lawsuit because of his role in enforcing insurance laws, but he agreed with the plaintiffs that the law was invalid.