Insurers’ Rebates to Top $2.5 Billion : Prop. 103: Garamendi says checks averaging $100 per car could be in the mail by next month. But insurance companies may go to court to block refund order.

Insurance Commissioner John Garamendi said Thursday he will order insurance companies to rebate more than $2.5 billion in 1989 premiums and accrued interest to California policyholders.

Almost three years after Proposition 103 was passed, Garamendi told a news conference that rebate amounts, on a company-by-company basis, will be revealed within a month. Checks averaging “something over $100 per car,” could be in the mail by late September, he said.

The rebates to as many as 20 million Californians would be sent to buyers of auto, homeowners, earthquake, commercial, medical malpractice and other property-casualty lines of insurance. It does not cover health and life insurance.

The commissioner said that he expects many of the 700 or so affected insurance companies to fight his orders in court.

“When the insurance companies see my decisions, I fully expect them to cry that the sky is falling,” Garamendi said. “You will hear a well-rehearsed chorus: ‘We’re already losing money. We’ll go broke. We’re leave the state. Nobody will be able to get insurance.’

“Don’t you believe it,” he said. “The property/casualty insurance industry is fundamentally sound and profitable, with adequate resources to honor their obligations. All we’re doing is making them refund excessive profits and trim the fat.”

Insurers and their lawyers indicated that there is a strong possibility that they will sue, although most companies contacted said they will wait to see how much Garamendi wants each of them to rebate before they make up their minds.

“So far, we’ve only had the dress rehearsal for the legal battle,” said Kent Keller, a leading lawyer for insurers. “Now, we’re going to enter the battle.”

But Keller conceded that some companies, particularly those told to make only small rebates, may decide to pay rather than fight.

Garamendi said that “fewer than 10” companies have told him they might be willing to accept his rebate orders, although by his formulas, some companies will not be profitable enough to have to make rebates.

Garamendi’s action, after many long legal battles against companies determined not to make rebates, implements Proposition 103’s 20% one-year premium rollback provision as altered by the state Supreme Court. Because 1989 has passed, the rollbacks have become rebates, and 10% annual interest has been added to them.

The high court ruled on May 4, 1989, that companies could be compelled to make rollbacks only if they were deemed to have received a “fair rate of return,” or profit margin, in that year.

On Thursday, Garamendi, a Democrat, set that rate of return at 10%, less than the 11.2% favored by his Republican predecessor, Roxani Gillespie, and less than the 11% favored by the hearing judge Garamendi asked to look into the matter.

The 10%, along with other figures announced by the commissioner Thursday, are subject to approval in the next 10 days by the state Office of Administrative Law, and would not become official until then.

Garamendi’s calculations for deciding the rate of return will be affected by:

* Industrywide “efficiency standards” for insurers’ allowable expenditures.

* Disallowance of various kinds of expenses from the calculations, such as political contributions, lobbying, fines and penalties.

* Limits on the salaries of insurance company executives.

* Standards for company reserves, a ratio of premiums paid to the surplus the companies hold. That ratio is intended to guarantee that insurers hold adequate but not excessive reserves to pay claims.

Garamendi said the ratio of premiums collected to surplus retained will be set at an average of 2 to 1. Companies such as State Farm, which hold more reserves per dollar of premiums, could be forced to rebate more.

The insurance commissioner’s calculations come to an average of a little more than a 10% rebate on all 1989 premiums, rather than the 20% originally called for under Proposition 103.

But while some companies will be required to rebate considerably more than 10%, others that show less than the 10% rate of return will not be required to give back anything to policyholders.

Garamendi said that the rebates would be based on the amount of business a company did in each type of insurance covered by the rebate order, not on the profitability of those insurance lines.

For example: If a company did 65% of its business in auto insurance, 65% of the rebates would go to its auto policyholders, regardless of whether the company made any money on auto insurance.

“I am . . . adopting the toughest regulations the insurance industry has ever faced,” Garamendi said. “These regulations will give California consumers every dollar of refund they are entitled to under Proposition 103.”

Garamendi repeated his vow not to authorize any more rate increases until the companies stop litigating and start paying the rebates.

Most companies and their lawyers were reserved in their reactions.

“It’s a little difficult to make any judgment at this time until we know how he would apply these rollback standards to us,” said Alan Morris of the Automobile Club of Southern California.

“The year called for (to set standards by) is 1989, and we did have a $50-million operating loss for California that year, after investment income,” said Pete Ingham, general counsel of State Farm. “What it really gets down to, if we are ordered to send a refund, we would have to challenge that in court. But we can’t decide that until we see how his numbers come out.”

Jeffrey Beyer of the Farmers Group of Companies said its 1989 rates were “fair and reasonable” and accordingly, “We do not believe we should be subjected to rollbacks.”

Deputy Insurance Commissioner Steven Miller, in charge of implementing Proposition 103, said he believes both State Farm and Farmers are likely to be told to make rebates.

The only big company that really assailed Garamendi on Thursday was Allstate.

Cheryl Lewis, Allstate’s Southern California spokeswoman, told The Times that Garamendi had “squandered the opportunity” to set a reasonable rate of return, and “chose instead to take a course which will guarantee years of delay by virtue of the fact that the (rollback) regulations are invalid as a matter of law and insupportable as a matter of fact.”

The author and the prime sponsor of Proposition 103 pronounced themselves fairly pleased with Garamendi’s announcements.

Harvey Rosenfield expressed “exuberance and satisfaction,” but he said that the legal battle is not over and the rebate checks are not likely to come soon.

“I see the industry going down for the count,” he said, and “today’s announcement is certainly a body blow. But this is just round 38 of a 50-round match.”

Ralph Nader said the Garamendi calculations, while not bringing as big a rebate as he would like, “certainly is a very significant improvement over (the) Gillespie (figures).”

“The insurance companies would do well to refund and put this matter behind them, rather than attempt another long, drawn-out litigation path,” Nader said.

Highlights of the Garamendi Plan

BACKGROUND: California voters passed Proposition 103 in 1988, mandating a 20% rollback of auto, homeowner, commercial and many other property-casualty insurance premiums for one year. Insurance companies challenged the rollback as unconstitutional. In May, 1989, the state Supreme Court ruled that any rollbacks would be subject to a determination by the state insurance commissioner that individual companies were still able to get a “fair rate of return” on their business.

THE PLAN: Garamendi said he will order that a little more than $2.5 billion be rebated, including interest.

HOW IT WOULD WORK: Depending on their profits and certain other factors, such as allowable expenses and amount of reserves, companies would be assessed different amounts to rebate. Each customer of a company would then get a pro-rated share of the company’s total rebate, depending on what policies that customer holds.

THE BOTTOM LINE: Garamendi said that in auto insurance, customers might get an average rebate of “something over $100 a car.” There would also be rebates on homeowners earthquake and other policies. But health and life insurance premiums are not included under the terms of Proposition 103. Some customers would get no rebate if their companies did not make sufficient profit in 1989 on certain kinds of premiums; other customers could get more than the average rebate.

THE NEXT STEP: Insurance companies directed to make rebates may sue to invalidate Garamendi’s orders. A few have indicated that if the rebate orders affecting them are small, they may pay the rebate. Garamendi said the checks from these could arrive by late September.