Live by Prop 103, Die by Prop 103

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

In the wake of that destruction has come the predictable insurance-market dislocation: massive rate increases for homeowners policies, scores of nonrenewals, and a flood of applications to join the already-burdened California FAIR Plan.

Noting in particular the increased burden this has had 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, expected to be heard soon by the Assembly Insurance Committee, would prohibit nonrenewals of homeowners policies held by named insureds who are 65 or older for homes located in areas deemed at “high” or “very high” risk of wildfire. It also would cap premium hikes for those insureds at 25%, would only permit such hikes once every five years, and would grant the insured three years to pay off any increased premiums.

There are plenty of concerns one could (and I would) raise with the substance of the bill, while still acknowledging the validity of the issue Connolly wishes to address. But there’s just one problem: under the terms of California’s 35-year-old Proposition 103, the measure is facially unconstitutional.

Connolly acknowledges that the measure seeks to amend Prop 103, which is why its text notes that it would require a two-thirds vote in both chambers of the California State Legislature to pass. But that’s actually not the only requirement to make changes to a voter-passed proposition in California. To take effect, the bill must also be deemed “to further its purposes.”

What exactly does that mean? Well, as the 2nd District Court of Appeal of California wrote in the 1998 decision Proposition 103 Enforcement v. Quackenbush:

Any doubts should be resolved in favor of the initiative and referendum power, and amendments which may conflict with the subject matter of initiative measures must be accomplished by popular vote, as opposed to legislatively enacted ordinances, where the original initiative does not provide otherwise.

Prop 103’s stated purposes were to “to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace.” To accomplish these purposes, the law circumscribes a limited (I would argue, far too limited) set of risk-based variables that insurers may consider in underwriting and rate-setting. Some of those factors are mandatory and the set of them is to be considered exhaustive; insurers may not add any new variables to the list, even if they can produce actuarial justification for their use.

An insured’s age is not a permittable variable under Prop 103 for homeowners insurance policies. There is also no reason to suspect that the use of age would be actuarially justified. Indeed, prescribing mandatory homeowners insurance discounts on the basis of age is precisely the sort of “arbitrary practice” that Prop 103 was passed to prohibit.

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

It would be completely understandable if Connolly, a duly elected representative of the people of California, were to feel frustrated that even a measure that receives two-thirds majorities in both chambers of the legislature is held hostage to the results of a ballot measure passed 35 years ago by a bare 51% majority of the public. Indeed, I have written here before about how California’s initiative process generally, and Prop 103 specifically, perverts the democratic process.

But he would not be the first. If there’s anyone who knows the pain of coming to grips with this paralyzingly inflexible law, it’s George Joseph, the 101-year-old chairman (and erstwhile longtime CEO) of Mercury General.

A legend of the insurance industry, the man who basically invented risk-based auto insurance rates in the 1960s, Joseph embarked on a more than 20-year battle to amend Prop 103 in one small but simple way. All he wanted was to be able to offer “persistency” discounts—which Prop 103 permits insurers to grant to their own long-term insureds as a loyalty reward—to customers who kept continuous coverage with other insurers.

Given the evidence that insurance customers tend to suffer from “lock in” and don’t shop around for alternatives once they pick a carrier, Joseph’s strategy was unquestionably pro-consumer. Indeed, in recent years, the industry has come under fire for controversial pricing practices that exploit that very consumer apathy and charge higher rates to those insureds deemed least likely to shop around. Mercury’s plan was the antidote to all of that.

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

Good intentions notwithstanding, in the off chance that AB 478 also receives the required two-thirds support in both chambers, there’s no question it would also meet the same fate.