At the November 8, 1988, General Election, the voters approved an initiative statute that was designated on the ballot as Proposition 103. The measure made numerous fundamental changes in the regulation of automobile and other forms of insurance in California.
Formerly, the so-called “open competition” system of regulation, rates were set by insurers without prior or subsequent approval by the Insurance Commissioner . Under that system, California had less regulation of insurance than any other state, and in California automobile liability insurance was less regulated than most other forms of insurance.
Proposition 103 instituted a permanent regulatory regime comprising the “prior approval” system, under which the Insurance Commissioner must approve a rate applied for by an insurer before its use, looking to whether the rate in question is excessive, inadequate, unfairly discriminatory or otherwise in violation of’ specified law — considering the investment income of the individual insurer and not considering the degree of competition in the insurance industry generally.
The California Supreme court reviewed and approved Proposition 103 against challenges under the United States and California Constitutions in a series of cases filed by insurance carriers.
In 2009, Mercury Casualty Co. filed an application with the California Insurance Commissioner to increase its homeowners’ insurance rates. Originally, Mercury sought an overall rate increase of either 8.8 percent or 6.9 percent.
In denying the increase Mercury requested, the California Insurance Commissioner made two decisions that are at issue on appeal.
First, the commissioner determined that Mercury’s entire advertising budget had to be excluded from the calculation of the maximum permitted earned premium because “Mercury aims its entire advertising budget at promoting the Mercury Group as whole” rather than seeking to obtain business for a specific insurer and also providing customers with pertinent information about that specific insurer. Second, the commissioner determined that Mercury did not qualify for a variance from the maximum permitted earned premium because Mercury failed to demonstrate the rate decrease that resulted from application of the regulatory formula results in deep financial hardship.
In June 2014, the superior court issued its ruling denying Mercury’s petition for writ of mandate and complaint for declaratory relief in the superior court seeking review of the commissioner’s decision. The judgment was affirmed in the published case of Mercury Casualty Company v Dave Jones, as Insurance Commissioner.
On appeal, Mercury contends the commissioner erred in disallowing all of Mercury’s advertising expenses in the rate calculation. In 2008, 2009 and 2010, Mercury General Corporation’s advertising expenses totaled $26 million, $27 million and $30 million respectively. The Personal Insurance Federation of California intervened in the action on behalf of other industry stakeholders.
Section 2644.10(f) provides that institutional advertising expenses shall not be allowed for ratemaking purposes, Institutional advertising means advertising not aimed at obtaining business for a specific insurer and not providing consumers with information pertinent to the decision whether to buy the insurer’s product.”
The Court of Appeal concluded “Finding no merit in these arguments, or any of the other arguments offered to overturn the judgment, we affirm.”