CA Appeals Court: Mercury Insurance Must Pay $27.5M in Fines

A state appeals court reinstated $27.5 million in state penalties against Mercury Insurance Co. on Tuesday for charging illegal broker fees in more than 180,000 transactions with auto insurance customers from 1999 to 2004.

Source: San Francisco Chronicle | Published on May 9, 2019

The fines, imposed by the state Department of Insurance in 2015, were overturned in 2016 by a judge in Orange County, who said the fees had been legally assessed for insurance brokers’ services to customers, such as comparison shopping. But the Fourth District Court of Appeal in Santa Ana said the purported brokers were actually insurance agents, working for Mercury, who provided no customer services and had no authority to charge fees.

Otherwise, insurance agents posing as brokers “could charge unapproved and unfairly discriminatory fees for alleged separate services that would increase consumers’ cost of insurance,” said Justice David Thompson in the 3-0 ruling. “This is contrary to the voters’ intent as expressed in Proposition 103,” the 1988 initiative that required state approval of rates for auto insurance and other property and casualty coverage.

The fees ranged from $50 to $150 per customer. The total of the penalties is one of the largest the Insurance Department has ever levied against an auto or home insurer.

The ruling was hailed by Consumer Watchdog, the advocacy group that sponsored Prop. 103 and joined the state agency in defending the fines.

“After over a decade of battling against Mercury’s aggressive litigation tactics seeking to evade accountability for its deceitful ‘broker fee’ over charges, today justice has finally prevailed,” said the group’s lawyer, Pam Pressley.

State Insurance Commissioner Ricardo Lara, who inherited the case from his predecessor, Dave Jones, said the court recognized that “insurers cannot avoid the department’s scrutiny by charging ‘fees’ on top of the rates already approved by the commissioner.”

Mercury said in a statement, “We are disappointed and surprised that the appellate court reversed the trial court’s decision, and we are currently evaluating our options, including the possibility of an appeal.”

Insurance agents handle transactions for insurance companies, while brokers handle transactions for insurance customers. The court said Mercury, founded in 1962, sold insurance through its agents until Prop. 103 passed in 1988, but then “converted” about 700 agents to brokers. The brokers charged fees on auto insurance policies while providing the same service as agents who could not charge fees, the court said.

The Insurance Department told Mercury in 1999 that it was violating the law, and the company then sponsored legislation that it claimed would resolve the problem. But a judge and a state appeals court, both in San Francisco, ruled the practice illegal and barred the company in 2004 from selling insurance through purported brokers who were actually agents.

However, a company designated as a Mercury agent, Auto Insurance Specialists, continued selling insurance through brokers until it was purchased by Mercury at the start of 2009, the court said.

In Tuesday’s decision, the court said the 2004 appellate ruling in San Francisco foreclosed Mercury’s arguments that its fees from 1999 to 2004 were legal.

The earlier ruling found, conclusively, that in charging the fees “Mercury’s ‘brokers’ were acting on behalf of Mercury, not providing a service to customers,” Thompson said. “Mercury had notice for years of its potential for imposition of penalties and deliberately chose not to modify its conduct.”