What extortion won the insurance companies

Until a consumer advocacy group used the Public Records Act to reveal previously secret records, it was unclear exactly what the insurance industry gained when it extorted millions of Californians last summer and fall.

It’s now clear that companies have won huge new freedoms from longstanding regulations that have saved California insurance customers billions of dollars since 1988, when voters passed Proposition 103 — and yet some firms still haven’t returned to the market here.

Here’s how the extortion worked: Companies like State Farm, Allstate and Farmers stopped selling new property policies all over California, claiming unbearable wildfire losses. They neither specified how much they lost nor mentioned the $13 billion they extracted from electric companies to offset most of their wildfire payouts over the past six years.

But they strongly insisted they would never again sell homeowners coverage or other property insurance here without relief. The tactic fits the dictionary definition of extortion, a form of extortion: “The act of obtaining something from someone by violence, threats, or other forms of coercion.”

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

To his credit, the state legislature rejected a bill that would have affected insurance companies.

But Democratic Insurance Commissioner-elect Ricardo Lara quickly responded by doing just that in the form of new, relaxed regulations. He gave the industry what it wanted, but didn’t immediately reveal all the details.

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

The companies are understood to have committed to selling homeowner policies in wildfire areas up to 85 percent of their market share in non-threatened locations. They could, Lara said, fulfill that commitment by selling bare-bones policies similar to those offered by the overpriced Fair Plan of Last Resort.

But there was a lot Lara didn’t say. For one thing, if his new regulations survive legal challenges, he and future commissioners could walk away from the 85 percent market share commitment in wildfire areas when insurers say they can’t do it.

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

It does not contain a robust standard of proof for potential claims by insurance companies that they are “impossible” to fulfill their commitments.

In addition, insurers can reach their 85 percent level by pulling customers from 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 do not say how the industry’s new commitments will be implemented or monitored. So Lara and future commissioners will take the companies’ word for any claims they make. There is no specified penalty for non-compliance.

The new rules also mimic what the Legislature rejected by allowing insurance companies to set future interest rates through private projections of future crashes without disclosing how the projections were arrived at.

Lara also apparently gave some key protections to consumers in Proposition 103, even though it may be illegal. One example: His plan would allow insurance companies to pass on to customers the unregulated costs of “reinsurance,” policies that companies buy to protect themselves against large losses. They will be limited to “California-only risks,” although no one has proven that the risks here are higher than in other fire-prone states like Idaho, Oregon, Utah, Washington, Texas and Arizona.

There also would be no requirement to disclose communications between insurance companies and state regulators. In addition, there are new restrictions on public participation in reviews of proposed new tariffs.

All of this amounts to a massive giveaway, unprecedented except for the previous insurance industry extortion in the 1990s that ended the requirement for companies to sell earthquake insurance in California.

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

No one knows how much of this will pass legal scrutiny, but one thing’s for sure: While Lara denies he surrendered, his nearly full cave of companies will cost every California property owner big bucks in future insurance bills.