Prop. 103 in Effect Except for Rollbacks : High Court Extends Stay on 20% Premium Cuts; Will Hear Challenge by Insurers

SAN FRANCISCO —  The California Supreme Court agreed Wednesday to review the insurance industry’s challenge to the constitutionality of Proposition 103, temporarily blocking its sweeping, 20% premium rollbacks but allowing all other major parts of the landmark measure to take effect immediately.

The action, taken by a vote of 6 to 1, permits implementation of provisions removing the industry’s exemption from state antitrust laws, allowing banks to sell insurance, sharply limiting auto insurance cancellations and letting voters choose the state’s insurance commissioner.

It also gives the present insurance commissioner, Roxani Gillespie, the go-ahead to make plans to institute rate regulation on Nov. 8, 1989, and to establish criteria by that date for downgrading the present system of territorial ratings, under which people in accident-prone urban areas pay far more for auto insurance than those in many suburban and rural areas.

‘Tomorrow Morning’

Gillespie said Wednesday night: “We’ve gone down the statute to see what is in effect. . . . We will start applying those sections of the law that the Supreme Court tells us can now be applied tomorrow morning. . . . We will be reading the statutes literally.”

Meanwhile, a top official of the California Bankers Assn., Blair Reynolds, said a number of banks will quickly seek licenses from the commissioner to start selling insurance as soon as possible.

The widely awaited court action set the stage for a ruling by early next year in what may be the most politically charged case to come before the justices since a new, conservative majority emerged following the defeat of Chief Justice Rose Elizabeth Bird and two other liberal justices in the November, 1986, election.

At stake are an estimated $4 billion in premium revenues insurers say they stand to lose under the initiative’s across-the-board rate rollback, reduction and freeze provisions.

Nationwide Attention

The bitter campaign fight over the measure, sponsored by consumer advocate Ralph Nader and others, drew nationwide attention. Following its narrow passage by voters Nov. 8, moves have been initiated to promote similar rate-cutting measures in dozens of other states.

Wednesday’s action came as a qualified victory for industry lawyers who had asked the court to hear claims that the measure was unconstitutional, focusing their attack on the rate rollback provisions.

But the court refused the insurers’ request to prevent the entire initiative from taking effect in the interim. Only the measure’s rate-rollback provisions and a section calling for the mailing of notices to announce formation of a nonprofit consumer organization will be held in abeyance while the case is before the court, the justices said.

The decision was greeted more enthusiastically by the advocates for Proposition 103 than by its industry opponents.

Nader, expressing confidence that the court will ultimately allow all of the measure to be implemented, including the rollbacks, said that Wednesday’s decision allows many immediate changes. “All kinds of doors are open now,” he said.

“For the first time in California, there will be a free market in insurance,” said Harvey Rosenfield, chairman of the 103 campaign. “The antitrust exemption is repealed. Brokers for the first time are permitted to rebate part of their commissions to their customers. California’s consumer protection laws apply for the first time to the insurance industry. Rate regulation and the changes in ratings will be implemented within a year.”

Van de Kamp ‘Delighted’

Atty. Gen. John K. Van de Kamp, who had argued for lifting the entire stay, nonetheless said he was “delighted” with the high court’s action.

“This is a great victory for consumers, the first step toward full implementation of Proposition 103,” he said. “Most of Proposition 103 can now take effect immediately. . . . Now, we will proceed to argue the merits of Proposition 103. And I expect to convince the court that there is nothing unconstitutional about lower insurance rates for consumers and full accountability for insurance companies. Both are long overdue.”

Joseph Cotchett, attorney for the Proposition 103 campaign, called the decision “fabulous.”

“It’s clear in my mind they’re going to uphold a major portion of the law,” he said of the Supreme Court.

But Allen Katz, lead attorney for the industry in the case, challenged this assumption.

Hope for Ruling

“We are hopeful that when they hear the case on its merits, they will rule the entire initiative unconstitutional,” he said. In the meantime, he said, it is by no means clear how the insurance commissioner might choose to implement the provisions now allowed to go into effect.

Stanley Zax, president of the Assn. of California Insurance Companies, the industry’s chief lobbying arm in the state, would say of the justices’ decision only:

“I’m delighted that they’re willing to take the case. I’m delighted that they’re proceeding with dispatch. I don’t want to say anything else.”

None of several insurance companies contacted Wednesday said they were taking immediate action as a result of the ruling.

But a spokesman for State Farm, the state’s largest seller of auto and homeowner insurance, said, “I can say our options are narrowed by this ruling. We’ve had very large losses in the state for five years now.”

Joseph Annotti, a spokesman for the Independent Insurance Agents and Brokers of California, the leading agents’ association in the state, said that in keeping the stay in force relating to the rollback provisions in Proposition 103, the Supreme Court had done enough to “keep the insurance companies in the market and not leave the consumers in the lurch.”

Mandate Reduction

Specifically, the rollback provisions mandate a 20% reduction in automobile, casualty and property insurance rates from November, 1987, levels. Rates then would be frozen until November, 1989. Insurers could obtain a rate adjustment only by showing the state insurance commissioner that they face a “substantial threat of insolvency.”

The court’s order prevents any of those provisions from taking effect pending a ruling on the initiative.

One legislator suggested Wednesday that the court’s actions might force the Legislature to adopt stopgap measures to prevent consumers from being exploited.

Assemblyman Patrick Johnston (D-Stockton), chairman of the Assembly’s insurance committee, said he feared that without the rollback provisions, many insurance companies would feel free to raise their rates exorbitantly between now and November, 1989, and he said the Legislature might move to prohibit this.

Both Gov. George Deukmejian and Atty. Gen. Van de Kamp had urged the court to hear the case and rule promptly on the measure’s constitutionality.

Division of Opinion

However, Deukmejian had asked that the court leave intact a stay order issued Nov. 10 that temporarily prevented the entire initiative from taking effect. Van de Kamp had urged that the stay be dissolved--in whole or in part--while the challenge was under review.

Wednesday’s action came in a two-page order signed by Chief Justice Malcolm M. Lucas and Justices Allen E. Broussard, Edward A. Panelli, John A. Arguelles, David N. Eagleson and Marcus M. Kaufman.

Justice Stanley Mosk was the only court member who did not sign the order, saying he thought the court should have refused to hear the insurers’ challenge and allowed the initiative to take full effect.

In its order, the court set forth a schedule for the filing of briefs in the case that will end Jan. 23. While the court did not say when it will hear argument, the schedule would permit arguments during its regular monthly hearings as early as the second week in February.

It is widely expected that because of the importance of the issue, the court will expedite the case so that a decision could be issued within weeks after arguments are heard.

The morning after the election, attorneys for dozens of insurance companies filed four suits in the state Supreme Court, contending that there was no way Proposition 103 could be implemented without denying their constitutional right to due process of law.

Among other things, the insurers argued that the initiative’s rate-setting process was arbitrary and confiscatory, unjustly preventing them from earning a fair return and barring them from obtaining rate relief until they approached insolvency. Provisions prohibiting insurers from canceling auto insurance, with narrow exceptions, improperly force firms to stay in business even while operating at a loss, they said.

The insurance companies also asked the court to block the measure from taking effect while the justices reviewed its legality. Otherwise, the companies said, they would have no way of recovering revenue lost from rate cuts if the measure eventually was declared unconstitutional. On Nov. 10, the court issued an across-the-board stay order, preventing any provisions of the initiative from taking effect while it was under court review.

Asks Limit to Stay

In the days that followed, a split emerged among Deukmejian, Van de Kamp and other officials and groups that were to defend the measure in court.

Van de Kamp and the state Board of Equalization, who were among the defendants named in the insurers’ lawsuits, urged the court to take direct jurisdiction of the case and resolve its legality immediately.

In the interim, the attorney general said, the court should lift its stay order, allowing the initiative to take effect. Alternatively, he said, the justices should block only the measure’s rate rollback provisions, permitting other provisions to take effect, such as the removal of the insurance industry’s exemption from state antitrust laws.

Sponsors of Proposition 103, who were not named in the suits but who filed briefs at the request of the justices, agreed that the court should dissolve the stay, in whole or in part. But they contended that the justices should not review the initiative now but instead should require the insurers to bring suits in the lower court to test its validity as applied in individual cases or to seek rate relief before the state insurance commissioner.

Deukmejian and Commissioner Gillespie, the two other defendants in the suits, joined Van de Kamp in urging prompt review by the court. But they split with the attorney general on the stay order, arguing instead that the order should remain in effect until the initiative’s validity is decided by the court.

The Republican governor had opposed Proposition 103 before the election but said afterward he would join in its defense in court and, if it were upheld, support its implementation.

Van de Kamp, often mentioned as a potential Democratic candidate for governor in 1990, expressed disappointment that Deukmejian had urged that the stay remain in effect. The attorney general said he had hoped that the governor and Gillespie would have provided immediate support for the rate rollback and other provisions of the initiative.

Times staff writer Fredrick M. Muir contributed to this story.