Live by Pillar 103, Die by Pillar 103

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Wildfire has been hitting Assemblyman Damon Connolly (D-San Rafael)’s Northern California region hard in recent years, including the Glass Complex and LNU Lightning Complex fires in 2020, the Nuns and Tubbs fires in 2017, and the Valley fires in 2015.

In the wake of that devastation came the expected turmoil in the insurance market: huge increases in rates for homeowners’ policies, dozens of non-renewals, and a flood of applications to join the already overburdened California FAIR plan.

Noting in particular the growing burden on the elderly in his district, especially those who live in rural and fire-prone areas, Connolly proposes a legislative means of providing relief. AB 478, expected to be heard soon by the association’s insurance committee, prohibits renewals of homeowner policies held by insureds age 65 or older for homes located in areas deemed to be at “high” or “high” risk. “Extremely high” from wildfires. It would also set premium hikes for the insured at 25%, and would only allow such hikes once every five years, and give the insured three years to pay off any excess premiums.

There are plenty of concerns one could (and I would raise) have with the substance of the bill, while acknowledging the validity of the problem Connolly wishes to address. But there’s just one problem: According to the terms of California’s 35-year-old Proposition 103, the measure is ostensibly unconstitutional.

Connolly acknowledges that the measure seeks to amend Proposition 103, which is why his text indicates that it requires a two-thirds vote in both houses of the California legislature to pass. But that’s not actually the only requirement to make changes to California voters’ proposal. For the Bill to enter into force, it must also be considered to “further its purposes”.

Exactly what does that mean? Well, like 2Abbreviation II The California Court of Appeals wrote in the 1998 decision Proposition 103 Enforcement v. Quackenbush:

Any doubts in favor of the initiative and the authority of the referendum shall be resolved, and amendments which may conflict with the subject matter of the initiative measures shall be made by popular vote, rather than by legislative decrees, where the original initiative did not provide otherwise.

The stated purposes of Prop 103 were to “protect consumers from unfair insurance rates and practices, to encourage a competitive insurance market”. To achieve these purposes, the law imposes limited restrictions (I would argue, yet also A limited set) of risk-based variables that insurers may consider when underwriting and pricing. Some of these factors are mandatory and a combination of them should be considered exhaustive; Insurers may not add any new variables to the list, even if they can provide an actuarial justification for their use.

The age of the insured is not a variable allowed under Proposition 103 for homeowners insurance policies. Nor is there reason to doubt that the use of age would be actuarially justified. In fact, setting mandatory insurance deductions for homeowners based on age is exactly the kind of “arbitrary practice” that Statute 103 was passed to prohibit.

Further, the granting of favorable rates and underwriting criteria to certain insureds based solely on their age, without any justification in their underlying risk profile, appears to violate not only the purposes of Proposition 103, but also of California Civil Code Section 5. AKA Named Unruh’s Civil Rights Act, this law provides “protection from discrimination by all California businesses… because of age, ancestry, color, disability, national origin, race, religion, sex, or sexual orientation.”

It would be entirely understandable for Connolly, the duly elected representative of the people of California, to feel frustrated that even a measure that commands a two-thirds majority in both houses of Parliament would still be held hostage to the results of a ballot measure passed 35 years ago with a slim 51% majority of the public. In fact, I’ve written here before about how the California Initiative process in general, and the 103rd Proposition in particular, has corrupted the democratic process.

But he wouldn’t be the first. If there’s anyone who knows the pain of getting to grips with this inflexible law, it’s George Joseph, the 101-year-old chairman (and former CEO) of Mercury General.

An insurance industry legend, the man who essentially invented risk-based auto insurance rates in the 1960s, Joseph embarked on a 20-plus-year battle to amend Prop 103 in one small but simple way. All he wanted was to be able to offer “perseverance” discounts—which Proposition 103 allows insurers to give to their long-term insurers as a loyalty bonus—to customers who maintained ongoing coverage with other insurers.

Given the evidence that insurance customers tend to suffer from “lockdown” and not shop around for alternatives once they choose a carrier, Joseph’s strategy was undoubtedly pro-consumer. In fact, in recent years, the industry has come under fire for controversial pricing practices that exploit this consumer apathy and charge higher rates to insureds deemed least likely to shop around. The Mercury Plan was the antidote to all of that.

Or, at least, they might have, had they been allowed to keep it. For a time in the 1990s, then-California Insurance Commissioner Harry Law allowed the company to offer a modified version of the discount, but the courts did not agree. In the early 2000s, with Mercury’s strong support and the required two-thirds majority, it passed the legislature and then the government. Gray Davis signed SB 841, which would have amended the 103rd bid to explicitly allow perseverance discounts. Again, the courts struck it down.

Good intentions notwithstanding, should AB 478 also not obtain the required two-thirds support in both Houses, there can be no doubt that it will meet the same fate.

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