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A California consumer group is challenging a rate hike bid by Mercury Insurance because the group claims the company is trying to pass along the costs of its political campaigning.

But the insurer says those costs are not included in the rate hike.

Santa Monica-based Consumer Watchdog says the costs involve millions of dollars in political contributions for a 2010 campaign the group viewed an “anti-consumer” proposition on the California ballot.

Mercury Insurance is seeking permission from the California Department of Insurance to raise automobile insurance rates by 6 percent.

Consumer Watchdog has filed a formal challenge to Mercury’s rate increase request, claiming that Mercury is attempting to “illegally include campaign expenses for the failed 2010 ballot measure, Prop 17, in its proposed rate hike.” The group noted the 6 percent hike totals roughly $89 million in increases.

But Mercury says the requested hike is to cover increased expenses, and that political expenses are being passed along not to consumers, but to Mercury shareholders.

This is the latest in a battle that is likely to intensify as the Nov. 6, 2012 election nears, as both Consumer Watch Dog and Mercury Chairman George Joseph have initiatives on that ballot they strongly support.

Consumer Watchdog and Joseph have been battling for a few years over voter propositions that each side has introduced that would modify or add to California’s Proposition 103.

Prior to the passage of Prop 103 in 1988, insurance companies were not required to file rates for approval except for health and life, and the state was considered an “open competition” state in which competition regulated the marketplace.

A major provision of Prop 103 dealt with personal automobile insurance, requiring personal automobile insurance rates to be determined using the following factors in decreasing order of importance: insured’s driving safety record, number of miles driven annually by the insured, and number of years of driving experience the insured has had.

The proposition also prevented rates from being determined based on a person’s history of insurance.

The upcoming Nov. 6, 2012 ballot may have two more initiatives on it that would alter Prop. 103. Consumer Watchdog’s Insurance Rate Public Justification and Accountability Act, and the 2012 Auto Insurance Discount Act, backed personally by Joseph and the American Agents Alliance. The latter initiative has qualified with enough signatures and is awaiting approval. Signatures are still being collected for the Consumer Watchdog initiative.

The main focus of Consumer Watchdog’s initiative is to require health insurance companies to file for rate increases like auto insurers do now.

However, it’s not just about health insurance. Among the proposed act’s 900 words is language that prohibits “unfair pricing” not only for health, but for auto and home insurance based on prior coverage and credit history.

The initiative proposes to accomplish these ends by: “(1) requiring health insurance companies to publicly disclose and justify their rates, under penalty of perjury, before the rates can take effect; (2) prohibiting unfair pricing for health, auto and home insurance based on prior coverage and credit history; and (3) requiring health insurance companies to pay a fee to cover the costs of administering these new laws so that this initiative will cost taxpayers nothing.”

The 2012 Auto Insurance Discount Act is being sponsored by the American Agents Alliance, not Mercury. AAA says the initiative’s new law “will allow consumers to receive a discount for their years of continuous automobile coverage regardless of the company where they seek insurance.”

The persistency initiative is similar to Proposition 17, which was on the California ballot in 2010. The Proposition 17 campaign was sponsored largely by Mercury General Corp. It was opposed by most newspaper editorials and by Consumer Watchdog. The insurance industry outspent the proposition opponents and the initiative was narrowly defeated, 52 percent to 48 percent.

The latest persistency initiative is being supported personally by Joseph, who called the initiative he’s backing “pro consumer” because it would allow portable persistency as opposed to the singular choice of loyalty programs that lock consumers into one carrier.

In other words, someone with auto insurance at one insurer can move to another auto insurer and get credit being previously insured by the first insurer.

But Consumer Watchdog does not like the idea of basing auto insurance rates on whether a person previously had insurance or charging more to those without insurance history.

Consumer Watchdog is also bashing Joseph for spending $8 million AAA’s 2012 ballot initiative. The proposed initiative is nearly identical to Mercury’s failed 2010 measure, Prop. 17, which would have allowed insurance companies to increase premiums on good drivers who had a prior lapse in insurance coverage or simply had not been driving for a time.

It’s Consumer Watchdog’s contention that Mercury is passing along to its customers the expense of the Prop. 17 campaign, and the group pointed to Mercury’s rate filling, which does not list the political expenses as an exempt item, a specific item that an insurance company is not calculating in its rate filing in its argument for its increased expenses for the year.

“It’s pretty obvious what’s going on here: Mercury wants to raise rates on everyone this year and then promise discounts to some drivers through its discriminatory ballot initiative next year,” Consumer Watchdog Executive Director Doug Heller said.

Under California law, insurers must reduce the administrative costs they pass on to policyholders by deducting political campaign and lobbying expenses from their rates. “In 2009 and 2010, Mercury Insurance spent $16 million on its deceptive but unsuccessful initiative campaign promising to give ‘discounts’ to consumers, which Consumer Watchdog and others pointed out would actually raise millions of drivers’ premiums,” the group stated.

But Joseph said that Mercury is not passing along the cost of the Prop. 17 campaign to its consumers, but to its shareholders. The reason the political contributions were not included in the filing is because Mercury General, a holding corporation, paid for the campaign. The campaign wasn’t contributed to by Mercury Insurance itself, Joseph said.

“None of the political contributions, including contributions to Prop. 17, came out of the insurance companies,” Joseph said. “It’s not there because the insurance company never participated. Therefore they are not passed along to the policyholders. It’s on the holding company’s ledger, which is paid for by our stockholders. That just reduces the money our stockholders get.”

Joseph, who added that “Mercury General doesn’t need the insurance commissioner’s approval to do anything,” accused Consumer Watchdog of “behaving like some of the politicians in Washington,” and “making inferentially false statements and changing the subject.”

But putting the political expenses on the holding company’s ledger means the expenses still must be reported, because, Heller noted, Mercury General is holding company that does mostly business in California.

“Mercury wants its policyholders to cover the costs of the insurance company’s political attacks,” Heller added. “And that is not allowed in California.”

Topics California Trends Carriers Auto Pricing Trends