Consumer Federation of California

Mercury Casualty Company must implement an 8% rate decrease to its homeowners insurance rates as required by California Insurance Commissioner Dave Jones, according to a ruling issued by Sacramento Superior Court Judge Eugene L. Balonon on Tuesday, denying Mercury’s request to delay the decrease from taking effect. The decision will affect approximately 270,000 Mercury policyholders.

The Court denied Mercury’s request to delay the $16.5 million rate decrease while the insurance giant’s lawsuit challenging Commissioner Jones’ rate order is pending.  Commissioner Jones approved the price cut in February 2013 after an extensive hearing was held in 2012 before a state Administrative Law Judge, who issued a 130-page decision supporting the rate decrease adopted by the Commissioner.  That hearing was initiated by a formal petition filed with the Department of Insurance by the nonprofit Consumer Watchdog, challenging Mercury’s request to hike its homeowners insurance rates by 7.3%.

‘Mercury was given ample opportunity to explain why it needed to raise rates on consumers but their claims did not stand up to scrutiny and, after a full-blown hearing process, they were ordered to lower rates for customers,’ said Consumer Watchdog Litigation Director Pamela Pressley.  ‘On Tuesday the Judge recognized that Mercury’s customers deserve relief now when he refused to allow Mercury to further delay the rate cut ordered by the Commissioner.’

Mercury’s lawsuit, which has been joined by a variety of insurance industry trade groups, attacks California’s consumer protection rules that have allowed the Department of Insurance to lower home, auto and business insurance rates by billions of dollars over the past two decades. In particular, Mercury is challenging the determination by the Administrative Law Judge that the company would still receive a fair rate of return after lowering rates and that the company cannot pass certain advertising costs (such as sporting event sponsorships) onto its policyholders.

In the regulatory decision that Mercury has challenged, the Administrative Law Judge faulted the insurer for submitting incomplete and inconsistent information, noting that some of Mercury’s data were of ‘questionable accuracy’ and its admissions were ‘evidence of its substandard recordkeeping and careless supervision’ and a violation of state regulations.  The decision also noted that in their legal briefs, Mercury’s lawyers ‘repeatedly misquote’ California Supreme Court decisions in ‘what can only be interpreted as a desperate attempt to support [their arguments]’.

Contrary to the rosy picture Mercury routinely paints for Wall Street analysts, Mercury had insisted it was in ‘deep financial hardship’ and entitled to a special exemption from the state formula that limits excessive profits and expenses. But this was contrary to the evidence, which showed that in 2009 and 2010 alone, Mercury Casualty Company and its affiliated companies reported net income of $339 million, while from 2006 to 2010, Mercury paid shareholder dividends totaling almost one billion dollars.  The decision adopted by the Commissioner also found that Mercury had tried to make its customers pay for nearly a million dollars worth of political contributions to Mercury’s ballot propositions (including over $300,000 in 2010 to its failed Prop. 17 campaign) and payments to Sacramento lobbyists, plus $83 million in general advertising of the Mercury logo, including its sponsorship of a Mercury Open tennis tournament ‘ all of which under state law are the responsibility of Mercury’s stockholders, not customers.

Consumer Watchdog challenged Mercury’s proposed rate hike under the rules of Proposition 103, the insurance reform initiative passed by voters in 1988.

Proposition 103:
    ‘ Allows the Insurance Commissioner to ensure that the premiums Californians pay for home, auto and business insurance are appropriate and justified and to deny rate plans that are excessive;
    ‘ Requires insurance companies to open up their books to public review; and
    ‘ Gives consumers and consumer groups the power to challenge insurance companies that try to keep rates too high.

Consumer Watchdog has used the public participation process under Proposition 103 to save auto, home and medical malpractice insurance policyholders $2.3 billion since 2003.