Live by Prop 103, Die by Prop 103

Wildfires have hit Assemblymember Damon Connolly’s (D-San Rafael) Northern California district in recent years, including the devastating Glass and LNU Lightning Complex fires in 2020, Nuns and Tubbs in 2017, and the Valley fire in 2015.

In the wake of that devastation came the predictable insurance-market dislocation: massive rate hikes for homeowners’ policies, many non-renewals, and many applications to join the already burdened California FAIR Plan.

Noting specifically its increased burden for seniors in his district, especially those in more rural and fire-prone areas, Connolly is proposing a legislative vehicle to offer relief. AB 478, which is expected to be heard soon by the Assembly Insurance Committee, would prohibit nonrenewals of homeowners’ policies held by named insureds 65 or older for homes located in areas considered to be of “high” or “very high” fire risk. It would also cap premium increases for insureds at 25%, only allow such increases once every five years, and give the insured three years to pay any increased premiums.

Many concerns could (and would) be raised with the content of the bill, while still acknowledging the validity of the issue Connolly wanted to address. But there’s just one problem: under the terms of California’s 35-year-old Proposition 103, the proposal is facially unconstitutional.

Connolly acknowledged that the proposal seeks to amend Prop 103, so its text states it would require a two-thirds vote in both chambers of the California State Legislature to pass. But that’s really not all that’s needed to make changes to a California voter-passed measure. To be effective, the bill must also be deemed “to further its purposes.”

What exactly does this mean? Well, number 2n.d The District Court of Appeal of California wrote the decision in 1998 Proposition 103 Enforcement v. Quackenbush:

Any doubts must be resolved in favor of the initiative and the power of the referendum, and the changes that may conflict with the subject of the initiative measures must be carried out by popular vote, as opposed to ordinances adopted by the legislature, if where the original initiative does not provide otherwise.

The stated goals of Prop 103 are “to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace.” To accomplish these goals, the law limits a limited (I would argue, far too limited) set of risk-based variables that insurers can consider in underwriting and rate-setting. Some of those factors are mandatory and their set should be considered complete; insurers cannot add any new variables to the list, although they can make an actuarial justification for their use.

Age of an insured is not a permitted variable under Prop 103 for homeowners insurance policies. There is also no reason to suspect that the use of age is actually justified. In fact, prescribing mandatory home owners insurance discounts based on age is precisely the type of “arbitrary practice” that Prop 103 was passed to prohibit.

Moreover, granting favorable rates and underwriting standards to certain insureds based solely on their age, without any justification for their underlying risk profile, would appear to violate not only the purposes of Prop 103, but also also in California Civil Code Section 5. Also known as the Unruh Civil Rights Actthat law provides “protection from discrimination by all California businesses … on the basis of age, ancestry, color, disability, national origin, race, religion, sex and sexual orientation.”

It would be understandable if Connolly, a duly elected representative of the people of California, felt frustrated that even a bill receiving a two-thirds majority in both houses of the legislature would be held hostage to results of a ballot measure passed 35 years ago by a bare 51% majority of the public. In fact, I have written here before about how California’s initiative process in general, and Prop 103 in particular, is distorting the democratic process.

But he won’t be the first. If there’s anyone who knows the pain of accepting this paralyzing immutable law, it’s George Joseph, the 101-year-old chairman (and former longtime CEO) of Mercury General.

An insurance industry legend, the man who basically invented risk-based auto insurance rates in the 1960s, Joseph began the more than 20-year battle to amend Prop 103 in a small but simple way. All he wants is to be able to offer “perseverance” discounts—which Prop 103 allows insurers to give to their own long-term insureds as a loyalty reward—to customers who maintain continuous coverage with other insurer.

Given the evidence that insurance customers tend to suffer from “lock in” and don’t shop for alternatives once they choose a carrier, Joseph’s approach is unmistakably pro-consumer. In fact, in recent years, the industry has came under fire for controversial pricing practices that exploit consumer apathy itself and charge higher rates to insureds deemed less likely to shop. Mercury’s plan was the cure for all that.

Or, at least, it would be, if they were allowed to keep it. For a time in the 1990s, then-California Insurance Commissioner Harry Low allowed the company to offer a modified version of the discount, but the courts disagreed. In the early 2000s, with Mercury’s strong endorsement and the necessary two-thirds majority, the legislature and then Gov. Gray Davis signed SB 841, which would have amended Prop 103 to explicitly allow persistence discounts. Again, the courts struck it down.

Despite the good intentions, on the off chance that AB 478 also receives the necessary two-thirds support in both chambers, it will no doubt meet the same fate.

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