California insurance chief mustn’t cave in to industry

You would never know it by watching the almost ubiquitous television commercials advertising State Farm Insurance to viewers on a wide variety of telecasts.

State Farm has fired the first shot in what might become a war against California home and apartment owners, though, one with eventual costs amounting to billions of dollars. Allstate Insurance one week later admitted that it has already joined in.

The State Farm strike came on May 26, when it announced to little fanfare that it had stopped taking applications for new property and casualty insurance in California because of extreme risks from wildfires.

Take note: the company did not stop writing new car insurance policies, thus ensuring continual growth in the total premium dollars it takes out of California. Also, neither State Farm nor Allstate asked permission from Insurance Commissioner Ricardo Lara, which appears to be required under the 1988 Proposition 103.

“They cannot legally just do this on their own,” said Harvey Rosenfield, the author of that proposition, the law that governs insurance rates in California. He also founded the Consumer Watchdog advocacy group. “Any refusal to write new policies will affect rates people pay, and the commissioner must approve anything affecting rates.”

Giving a hint that this is really a pressure tactic, State Farm did say it would work with the California Insurance Department to eventually resume business as usual. Translation: State Farm wants Lara to approve the $700 million in property insurance premium increases it currently seeks. Allstate has similar aims.

However, Lara is constrained by Proposition 103, which limits what companies can charge. The measure has saved consumers well more than $100 billion in premiums over its 35 years.

Insurance companies hate this, even with State Farm the largest operator in California, taking in about $7 billion in property insurance premiums here each year and controlling almost 9% of the market. Several other companies also are pushing for insurance rate increases, all claiming that risks from wildfires justify almost any price.

At the same time, Lara has said he wants companies to discount policies for property owners who mitigate wildfire risks via measures such as fire-resistant roofs and enclosed eaves. In a partial response, State Farm is boycotting the entire state, not merely wildfire-prone areas.

If other big operators like Farmers, GEICO and Mercury follow the lead of State Farm and Allstate, it won’t be the first time this industry boycotted California when companies felt profits were in peril.

That also happened in the mid-1990s, when then-Insurance Commissioner Chuck Quackenbush, a former Republican Assemblymember, acquiesced as the industry blacklisted California. The dispute then was over a rule requiring companies selling homeowner insurance also to offer earthquake coverage.

The companies refused, wounded by payouts after the 1994 Northridge earthquake and stopped selling new property insurance. Some outfits (like the former 20th Century Insurance) canceled all property policies as they expired. Several firms recently resumed this practice in areas prone to wildfires.

Quackenbush, whose elections in 1994 and 1998 were financed largely by insurance companies, could have responded by shutting down ultra-profitable car insurance sales from any company refusing to sell property and quake insurance.

His failure to act caused the Legislature in 1996 to create the California Earthquake Authority (CEA), now the state’s pre-eminent quake insurer. To the CEA’s immense good fortune, a lull in very large quakes since 1994 has allowed a buildup of many billions of dollars in reserves to pay claims if and when large new temblors occur.

The reality was that Quackenbush caved in to the companies, though. In 2000, he was forced to resign over an unrelated scandal. Eventually, he became a sheriff’s deputy in Florida, where he served until 2016 but was again forced to resign, this time after posting alleged racially controversial comments on social media.

The shameful Quackenbush precedent should guide Lara as he decides how much to grant insurance companies in their current rate-increase cases. Rosenfield insists that Lara must approve few or none of those premium increases.

“It’s excessive,” he said. “They don’t want to comply with Prop. 103. They’re pressuring Lara to go along with them despite the law. There can be no doubt this is a pressure tactic, and Lara must not do their bidding.”

Thomas Elias can be reached at tdelias@aol.com, and more of his columns are online at californiafocus.net.