14 Insurance Firms Told to Refund $1.5 Billion : Rebates: Industry to appeal Garamendi’s order, issued under Prop. 103. No payments are expected soon.

Nearly three years after voters approved Proposition 103 to reform the insurance industry and lower premiums, state Insurance Commissioner John Garamendi on Wednesday issued the first orders requiring 14 major companies to refund $1.5 billion to consumers.

The orders, which tell the companies to refund a percentage of each customer’s 1989 auto, home and business insurance premiums, provide Californians their first chance to calculate how much rebate they are entitled to under Proposition 103.

Refunds are expected to average about $100 per policyholder, but don’t count on the money to supplement your Christmas spending.

Garamendi demanded Wednesday that insurance companies “end their disgraceful stall game” and immediately issue rebate checks, but industry spokesmen vowed to appeal his orders through administrative hearings and lawsuits.

The state Supreme Court has upheld Proposition 103’s constitutionality, but the insurers contend that the formula Garamendi used to calculate the rebates violates the court’s order and illegally deprives them of a fair profit.

At a Los Angeles news conference Wednesday, Garamendi called his rebate orders “a turning point in the fight to implement Proposition 103--a point from which there will be no retreat.”

He called on consumers to launch a frenzy of telephone calls to their insurance agents and to the presidents of their insurance companies demanding the rebates, which will vary by company and customer. Most consumers can calculate their potential refund by multiplying their 1989 bill by the rebate percentage on Garamendi’s list.

For example, a State Farm policyholder who paid a premium of $1,750 in 1989 would multiply that premium by 7.7% to arrive at a rebate of $134.75. (Technically, Proposition 103 counts premiums paid between November, 1988, and November, 1989).

“Now that you know how much you are owed, let them know how fast you want it,” Garamendi said.

But spokesmen for the insurance industry and for Voter Revolt, which drew up and sponsored Proposition 103 as a landmark challenge to the industry, held out little hope that policyholders will soon see a dime.

“The final battle is just beginning,” said Harvey Rosenfield, the head of Voter Revolt. “It will be a tremendous fight in the courts.”

“Everything that has gone on so far has been dress rehearsal for this battle,” added industry attorney Kent Keller. “We are now going to find out whether Commissioner Garamendi’s plan will withstand legal scrutiny or not. Consumers should not anticipate and should not go spending rebates in the near term.”

The rebates announced by Garamendi Wednesday were authorized under a key section of Proposition 103, which was approved by voters in November, 1988. The measure required insurers to roll back rates to November, 1987, levels and cut premiums by another 20% in 1989.

A subsequent state Supreme Court decision held that the initiative could not interfere with an insurance company’s right to a fair rate of return. Legal action by insurers delayed enforcing the measure, and as time passed the promised rate rollbacks became rebates of money overpaid by customers.

Because insurance companies did not comply with Proposition 103, but chose to challenge it in court, Wednesday’s rebate orders included 10% annual penalties for the past three years, Garamendi said. Accrued interest is also included.

The rebate orders apply to six of the 10 biggest insurance companies that do business in California. These firms hold nearly two-thirds of the state’s automobile insurance market and nearly half of the state’s total property and casualty insurance business. Garamendi said a second series of orders covering other companies will be issued by year’s end.

State Farm, which holds nearly 13% of the state’s insurance business, was ordered to rebate $234 million, or 7.7% of its 1989 premiums. Allstate, which has nearly 8% of the market, was ordered to give back $243 million, or 13.1% of its 1989 premiums. On a percentage basis, the biggest rebate was to be paid by GEICO, at 39.4%.

Jerry Parsons, a spokesman at State Farm’s national headquarters in Indiana, said the company contends that it lost $50 million in California during 1989 and is not obligated to issue rebates.

“We believe the (rebate) formula is in error,” Parsons said.

Other Top 10 insurance companies sent refund orders included California State Automobile Assn. ($157 million), Aetna ($137.3 million), Automobile Club of Southern California ($117.9 million) and 20th Century ($106.5 million).

Greg Smith, vice president of California State Automobile Assn., said in San Francisco that Garamendi’s order “may seriously jeopardize the financial stability” of the association’s insurance operation. The association insures nearly 2 million cars and 230,000 homes.

Neither Garamendi’s rebate order nor the insurance companies’ reaction was a surprise.

The industry has opposed Proposition 103 with legal action and administrative appeals. The fight has grown hotter since Garamendi, a Democrat who took office this year as the state’s first elected insurance commissioner, began taking a tougher approach on behalf of Proposition 103 than his predecessor in the Deukmejian Administration, Roxani Gillespie.

The rebate orders became possible when Gov. Pete Wilson on Oct. 6 overruled his own chief at the Office of Administrative Law and approved emergency regulations sought by Garamendi. The agency chief, Marz Garcia, had said the regulations did not meet state guidelines.

Garamendi said Wednesday that in future rate setting, the state will not allow insurance companies to count their 1989 rebate payments as financial losses to justify additional revenue.

Insurance Rebates

Insurance Commissioner John Garamendi ordered 14 major insurers to refund a percentage of consumers’ 1989 premiums on auto, home and business policies. This list shows the companies, the percentage of their premiums that must be rebated for each type of policy, and the cost to the company of all its rebates. + Figures represent statewide rebate totals and are in millions of dollars

TOTAL AMOUNT COMPANY % OF PREMIUM TO BE REBATED *Allstate 13.1% $243.6 *State Farm 7.7% $234.6 *CSAA 12.5% $156.9 *Aetna 25.2% $137.3 *Auto Club So. Cal. 15.1% $117.9 *USAA 24.7% $111.7 *SAFECO 32.3% $110.2 *20th Century 16.6% $106.4 *Progressive 24.3% $73.0 *Nationwide 18.0% $71.8 *Mercury 13.7% $65.1 *GEICO 39.4% $56.2 *CIGNA 10.1% $42.5 *Transamerica 13.2% $40.0 *TOTAL 14.3% $1,567.7

SOURCE: Department of Insurance, Sacramento