Insurance industry lawyers on Monday accused Insurance Commissioner John Garamendi of exceeding his authority under Proposition 103 by trying to use the rate-rollback initiative to limit insurers to profit levels below those allowed low-risk public utilities.
A lawyer for Garamendi countered that his rules for implementing the measure approved by voters four years ago would let the industry as a whole achieve the same 10% return on equity that it earned throughout the 1980s.
So went six hours of arguments in the opening day of 20th Century Insurance Co.'s challenge to Garamendi's implementation scheme for Prop. 103, which imposed a 20% across-the-board rate rollback for auto and homeowners insurance.
Fourteen large insurers so far have been ordered to pay rebates on their 1989 premiums. To date, only three companies have settled with Garamendi and returned money to consumers.
All told, Garamendi says Californians are owed about $2.5 billion in rebates.
Woodland Hills-based 20th Century is the first company to get to trial after rejecting a rebate order. It filed suit after being ordered to rebate to policyholders $102 million in what the state termed excess 1989 insurance premiums.
Other insurers, believing that they will be affected by issues decided in the 20th Century case, sent their own lawyers to participate. The non-jury case is being heard by Judge Dzintra I. Janavs in Los Angeles Superior Court.
Twentieth Century argued that as a highly efficient, low-cost company, it should be entitled to higher profit than Garamendi's maximum 10% return on equity.
The company pointed out that it has maintained a high profit level while at the same time offering the lowest auto-insurance premiums of any large insurer in California.
"No matter how you define excessive, you can't say my rates are excessive if I have lower rates," said Gary Fontana, an attorney for 20th Century. He noted that Janavs, Garamendi attorney Frederic Woocher and Deputy Insurance Commissioner Steven Miller all have identified themselves as 20th Century customers.
Michael Carlson, a lawyer for Allstate Insurance Co., said that the 13% to 14% average return for public utility companies in 1989 ought to be a "floor" for figuring reasonable insurance profit, since the insurance business is intrinsically riskier and thus demands higher returns.
Woocher replied that the state Constitution entitles insurers to only the "minimum non-confiscatory" return. While it would be confiscatory to deny a company the right to recover its costs, he said, a 10% rate of return strikes a "reasonable balance" between the needs of investors and those of consumers.
Janavs reserved her sharpest questioning for Woocher, asking whether the commissioner's rebate formula artificially pumped up the insurance companies' liability by ignoring federal taxes they paid in 1989.
She also noted that Woocher was unable to cite any precedent for a regulator using a formula such as the one imposed by Garamendi.
Woocher replied that because Prop. 103 offered the first instance in which a regulator has had to deal with rebates, Garamendi was forced to break new ground.