Thomas D. Elias: What blackmail won for insurance companies

Until a consumer advocacy group used the Public Records Act to unearth previously secret records, it was uncertain just what the insurance industry won when it blackmailed millions of Californians last summer and fall.

Now it's clear the companies won immense new freedoms from longstanding regulations that have saved California insurance customers billions of dollars since 1988, when voters passed Proposition 103 – and despite this, some firms are still not back in the market here.

Here's how the blackmail worked: Companies like State Farm, Allstate and Farmers stopped selling new property policies anywhere in California, claiming intolerable losses from wildfires. They neither specified how much they lost nor mentioned the $13 billion they clawed from electric companies to compensate for most of their wildfire payouts of the last six years.

But they loudly insisted they would never again sell homeowners coverage or other property insurance here without relief. The tactic met the dictionary definition of extortion, one form of blackmail: "The act of getting something from someone through violence, threats, or other forms of coercion."

There was no violence here, but plenty of threats and coercion.

To its credit, the state Legislature rejected a bill that would have knuckled under to the insurance companies.

But elected Democratic Insurance Commissioner Ricardo Lara quickly reacted by doing just that in the form of new, eased regulations. He gave the industry what it wanted, but did not immediately reveal all the details.

Now the Consumer Watchdog group, formerly the Foundation for Taxpayer and Consumer Rights, main sponsor of Proposition 103, has uncovered what Lara gave away under the guise of compromise.

Supposedly, the companies committed to sell homeowner policies in wildfire areas up to 85 percent of their market share in non-threatened places. They could, Lara said, meet that commitment by selling bare bones policies akin to those offered by the hyper-expensive, last-resort Fair Plan.

But there was a lot Lara did not say. For one thing, if his new regulations withstand legal challenges, he and future commissioners could waive the 85 percent market share commitment in wildfire areas when insurers claim they can't do it.

This information was found in emails and proposed legislative language given to lawmakers and lobbyists by a deputy insurance commissioner.

It contains no solid standard of proof for potential insurance company claims that "it is not possible" to meet their commitments.

Plus, insurers can reach their 85 percent level by pulling customers out of the Fair Plan and giving them the same low-coverage, high-cost policies as the Fair Plan, but possibly at even higher prices.

The proposed new regulations did not say how the new industry commitments would be enforced or monitored. So Lara and future commissioners would be accepting the companies' word for any claims they make. There is no stated penalty for failure to meet commitments.

The new rules also mimic what the Legislature rejected by allowing insurance companies to set future rates via private predictions of future catastrophes, without disclosing how predictions are reached.

Lara also apparently gave away some key consumer protections in Proposition 103, even though that may be illegal. One example: his plan authorizes insurance companies to pass through to customers the unregulated cost of "reinsurance," policies the companies buy to protect against large losses. These would be limited to "California-only risks," even though no one has proven risks are higher here than in other fire-prone states like Idaho, Oregon, Utah, Washington, Texas and Arizona.

There also would be no requirement to disclosure communications between insurance companies and state regulators. Plus, there are new limits on public participation in reviews of proposed new rates.

It all amounts to a massive giveaway, unprecedented except in the prior insurance industry blackmail of the 1990s that ended the companies' obligation to sell earthquake insurance in California.

All this angers Democratic U.S. Rep. John Garamendi of Fairfield, who was the first elected insurance commissioner. Lara's plan, he said, threatens "protection of consumers against unchecked corporate interests."

No one knows how much of this will pass legal muster, but one thing is certain: While Lara denies surrendering, his almost total cave to the companies will cost every property owner in California big bucks on future insurance bills.