Mercury Insurance has been ordered by the California Insurance Commissioner to pay a historic $27.5 million penalty for willfully violating Proposition 103, by charging California consumers illegal auto insurance fees between 1996 and 2006.
In February, 2004, the California Department of Insurance (CDI) filed an administrative noncompliance complaint against Los Angeles-based Mercury Insurance Co. for “willfully misrepresent[ing] the actual price insurance consumers could expect to pay” for auto insurance, charging premium in excess of the rates approved for Mercury by the Insurance Commissioner. The complaint also charged that Mercury willfully subjected consumers to unfair rate discrimination in violation of Proposition 103, the California insurance regulation law that requires companies to obtain the approval of the Commissioner for the rates and premiums they charge consumers, and that prohibits unfairly discriminatory charges.
Consumer Watchdog requested the right to participate in the case and was granted intervention in May 2007; Consumer Watchdog, represented by lawyers at Consumer Watchdog and Arthur D. Levy, prosecuted the action with the Department.
Under Proposition 103, auto insurance companies are prohibited from charging agent fees without obtaining prior approval of the fees from the Insurance Commissioner. Mercury circumvented Proposition 103 for over ten years by creating a sham “broker” system whereby it charged unapproved agent fees, called “broker” fees, to California consumers purchasing new Mercury auto insurance policies. California consumers were required to pay the $100 to $150 fee in order to get the policy.
On January 7, 2015, the Insurance Commissioner adopted an Administrative Law Judge’s 66-page Proposed Decision, finding that Mercury willfully violated Proposition 103 by charging California consumers unapproved and illegal agent fees when they purchased new Mercury auto insurance policies between 1996 and 2006.
Click here to download the ALJ’s Proposed Decision and the Insurance Commissioner’s Order Approving the Proposed Decision: http://www.consumerwatchdog.org/resources/order_adopting_proposed_decisi...
"For ten years, Mercury enabled and promoted a system to avoid Proposition 103’s prohibition against illegal agent fees and bilk consumers out of millions of dollars,” said Harvey Rosenfield, author of Proposition 103 and counsel for Consumer Watchdog. “The $27.5 million fine shows that justice has finally been served against Mercury for years of flagrant violations of the law.”
The ALJ’s Proposed Decision found that a penalty of $27.5 million “against Mercury is reasonable given the totality of the evidence in this noncompliance proceeding.” The ALJ’s Proposed Decision was based on evidence collected by attorneys representing Consumer Watchdog during a 13-day evidentiary hearing in 2013.
"Mercury Insurance is infamous for playing every angle in its effort to avoid accountability for cheating its customers, and the Commissioner’s decision marks a victory for both consumers and California," said Pamela Pressley, Consumer Watchdog’s Litigation Director and an attorney on the case. "Mercury is finally being held accountable for years of illegally charging fees to California consumers."
The ALJ’s Proposed Decision held:
• From July 1, 1996, through 2006, Mercury’s de facto insurance agents charged and collected unapproved ‘broker fees’ that constituted premium in excess of the rates approved for Mercury by the Commissioner, in violation of Insurance Code section 1861.01, subdivision (c).
• From July 1, 1996, through 2006, Mercury’s de facto insurance agents charged “broker fees” of varying amounts over and above the rate or premium approved for Mercury by the Commissioner, which resulted in unfair rate discrimination, in violation of Insurance Code section 1861.05, subdivision (a).
• Mercury shall be assessed a civil penalty in the amount of $27,593,550, pursuant to Insurance Code section 1858.07, subdivision (a).
The Department’s proceeding stems from a civil suit brought against the company for permitting its insurance agents to charge consumers undisclosed “broker” fees that were added to the price of insurance that was quoted in advertising. In a 2004 decision by the California Court of Appeal (Krumme v. Mercury Insurance Co.), the court determined that:
• Mercury’s insurance agents were illegally charging auto insurance customers by adding broker fees in addition to standard agent commissions; and
• Mercury ran a deceptive advertising campaign that did not disclose the unlawful fees, thus advertising a lower price than people ended up having to pay.
"Mercury’s advertising and marketing materials urged prospective customers to compare Mercury’s rates with those charged by other insurers, such as State Farm, but did not disclose the extra “broker” fees that customers would face if they chose Mercury over another insurer.
The court determined that this practice ran afoul of California’s false advertising laws (Bus. & Prof. Code, § 17200 and 17500). The court further concluded that “because broker fees may be charged only by bona fide brokers, not persons and firms claiming to be brokers that are in reality appointed agents, the brokerage fees collected by Mercury’s “brokers” were illegal.” These practices were found to be deceptive and illegal and were barred by the court.
Although the court ordered Mercury to stop charging the illegal fees in 2003, Mercury brazenly ignored the court’s orders and continued to charge the fees through 2006. Mercury even attempted to pass legislation in Sacramento that would have legalized its conduct; that legislation was defeated, but a bill sponsored by insurance agents passed weakening consumer protections in this area.
The Department sought a fine against Mercury of $10,000 for each policy that included an illegal “broker” fee charged by one of Mercury’s agents. The charging of these illegal fees began in 1996, according to the agency’s complaint. Based on the findings in the civil court case, Mercury faced up to $1.8 billion in fines to the state.
The case is In the Matter of Mercury Insurance Company, Mercury Casualty Company and California Automobile Company, California Department of Insurance File No. NC-03027545; Office of Administrative Hearings Case No. N2006040185.
