California Insurance and Prop 103
Prof. Bill Long 1/31/05
The "Background" and "Foreground" to Deukmejian (1989)
California is a state where issues are writ large. Having a population at least 50% larger than any other state, with an economy that is the 6th or 7th largest in the world (when compared with other countries), and being the home of nice weather and the entertainment industry makes CA a land of strident voices, social experimentation and beautiful people. One of the most hotly contested issues over the past 15 or so years in CA has been "insurance rate rollback" through the initiative petition system. The issue came to a head in Nov. 1988 when voters narrowly approved Proposition 103, whose constitutionality the CA Supreme Court considered in Deukmejian (Deukmejian was the Republican Governor of CA at the time). This mini-essay puts the issue of CA insurance rates into historical context and then discusses briefly what has occurred since 1988.
Two Words of History
As you know by now, the insurance industry is primarily regulated by the state and not federal government. In 1951 the US Sup Ct spoke of a "special relationship" between government and the insurance industry that justified extensive regulation of that industry. After all, if companies from which people buy life and health insurance regularly go insolvent, peoples' lives and families are considerably threatened. In this regard, you ought to look at the insurance industry more like a public utility or a common carrier than a private business. It is imbued with a public character, and regulators see themselves as protecting the public interest by regulating them.
This having been said, there were different theories of the way that insurance companies were to be regulated. Beginning about 1900 states began to have insurance commissioners and staffs. The big question was whether a state would be a "prior approval" or "open competition" state. The former meant that any rate increase had to be first approved by the commissioner; the latter let the "market" determine rates. A second issue is whether the commissioner should be appointed or elected. The latter was thought to provide a greater degree of independence from the insurance industry.
California's Pre-Proposition 103 Experience
California had been an open competition state with an appointed commissioner since the beginning of the office. During the "insurance crisis" of the mid 1980s, automobile insurance premiums skyrocketed in CA to become the highest in the nation. The insurance industry likes to point to the growth in rates as a result of a liberal California Supreme Court, which in the Royal Globe decision in 1979 made it possible for third parties to sue insurers in various kinds of accidents. This would mean that if you were a passenger in a car driven by someone and were injured in an accident caused by the driver, you could not only sue the driver but his/her insurance company too. No state had previously permitted this. The insurance industry argued that this led to "frivolous lawsuits" and "runaway jury verdicts" and "exploding rates." [You can hear echoes of the current debate over "tort reform" in the 1980s CA debate over insurance rates]. Consumer groups on the other hand just excoriated the insurance industry for manufacturing an insurance crisis to pad their bottom lines.
And, what did the people of CA do? They were so fed up that for the first time in American history they decided to throw not one but three Justices off the CA Supreme Court in their Nov. 1986 retention elections (Chief Justice Rose Bird was the lightning rod for a lot of the criticism). A newly reconstituted CA Sup Ct duly overturned Royal Globe in 1988. Thus, as I argued above, CA was "writing large" again.
It was in this context that consumer groups got Prop. 103 put on the Nov. 1988 ballot. As the case explains, it would, among other things, roll back insurance rates in a number of lines of insurance (primarily auto, commercial general and property/casualty. Note that health insurance premiums were unaffected by Prop. 103) 20% below what the rate was one year before the election, with the proviso that unless an insurer could demonstrate the likelihood of its insolvency, the rates could not be increased before Nov. 1989. This was the big provision. Other provisions of note were the limitations on underwriters from cutting off insurance coverage (prior to 1988 they could discontinue coverage for any reason); the election rather than appointment of an insurance commissioner; and the change from an open competition to prior approval state. The vote passed by a 51%-49% margin.
As might be expected, the insurance industry screamed and decided to challenge the constitutionality of the recently passed initiative. Deukmejian is the result of that challenge. As you see in the case, the CA Sup Ct only agreed with the insurers on one particular--the "insolvency" provision was "confiscatory [i.e., bit into the constitutionally-protected profit margins of insurers]. Yet, once that provision was severed from the whole, the rest of Prop. 103 was declared constitutional.
CA in the Intervening 15 Years
Space only permits brief mention of CA automobile insurance rates since then. Apart from health insurance premiums, auto insurance is the most "visible" insurance premium that people normally pay. All admit that rates have plummeted since 1988. I cut and paste a chart from a 2003 report written by a consumer rights group (no one disagrees with the numbers).
Table 1. Comparison of Average Annual Auto Liability Premiums,1989-2000
Year California Premium California Premium (2001 dollars)
1989 $519.39 $741.81
1990 $501.34 $679.32
1991 $522.95 $679.99
1992 $510.71 $644.67
1993 $512.52 $628.15
1994 $502.76 $600.80
1995 $514.53 $597.92
1996 $508.71 $574.20
1997 $492.31 $543.23
1998 $447.51 $486.22
1999 $405.85 $431.43
2000 $391.24 $402.37
2001 $404.48 $404.48
The first number column shows that the average CA automobile insurance rates have fallen 22% in absolute dollars since 1989. When calculated based on 1989 dollars it has fallen 45%. The insurance companies have not fled CA. It seems like the consumers have a good argument that the "open competition" system in CA in the 1980s did not actually result in what we normally would consider open market-driven competition. Arguments rage, of course, about the significance of the numbers, but most agree today that this decline would not have happened without Prop. 103.
California's auto insurance rates are now (at the end of 2001) about 20th or 21st in the nation.
Placing a case like Deukmejian in its larger historical context helps show the deeply political dimensions of insurance law. One final note. The first elected insurance commissioner was John Garamendi, a "consumer oriented" commissioner (About a dozen states now elect the insurance commissioner). Garamendi tried to run for Governor while serving his first term as insurance commissioner. He was not nominated by the Democratic Party and was defeated by Katherin Brown (Jerry Brown's sister). After he left the CDI, Garamendi was appointed by President Clinton to be Undersecretary of the Interior Department. Republican Chuck Quakenbush, an "industry-friendly" candidate, defeated Art Torres in 1994 for Insurance Commissioner and was re-elected in 1998. But he was forced out before his term expired...Garamendi was elected again in 2002 to the office. Now, if you look at the press releases put out by the California Deparment of Insurance, do you notice that all of them begin with "Insurance Commissioner John Garamendi..."? California. Issues writ large, once again.*
[*Thanks to reader George Yen for clarifying some of the details of the CA elections].
Copyright © 2004-2007 William R. Long