Fee fighters

Insurers and consumer advocates are watching to see how the Department of Insurance will enforce a new rule–ordered by John Garamendi in the final days of his tenure as insurance commissioner–that makes it easier for groups to collect money to fight insurance companies.

The disagreement over these “intervenor fees” may wind up in court.

These fees are the lifeblood of groups like the Foundation for Taxpayer and Consumer Rights, which regularly do battle with the insurers on rate increases and shifting regulations. While the bulk of the FTCR’s operational budget comes from fundraising, the money it uses to hire actuaries and other experts in rate cases comes from intervenor fees.

Before Garamendi left office, he put into place a new rule specifying that these groups could collect intervenor fees, even when a rate dispute is resolved before a full-blown hearing. The rule went into effect at the end of January, but has yet to be tested.

The rule was necessary, said FTCR’s founder Harvey Rosenfield, because the insurers weren’t paying the fees–sometimes in the tens of thousands of dollars–when they decided to drop an application for a rate increase, or when they negotiated a lower rate increase.

“They were playing a cat and mouse game,” he said. “When the companies determined that the department was going to call a hearing, they’d withdraw the filing.” And, despite spending significant time and money investigating the rate request, the FTCR would be out of pocket.

Under the new rule, insurance companies need to pay the intervenor fees, even if a rate application stops short of a full-blown hearing. That’s got insurers crying foul.

“It’s a system set up to provoke confrontation,” said Bill Sirola, spokesperson for State Farm insurance company. “It’s a system that rewards the intervenors under any circumstances.”

But consumer advocates say the insurers don’t like the system because it keeps rates in check. “This is about trying to choke us off so they can rip of the consumer with impunity,” said Rosenfield.

Rosenfield authored Proposition 103, the package of insurance reforms passed by voters in 1988. The fees are part of what the department calls the “consumer participation program,” and was intended to offset the power of insurance companies in the rate-setting process.

The statute reads that the commissioner shall award “advocacy and witness fees” to an individual or group that makes “a substantial contribution to the adoption of any order, regulation or decision by the commissioner or a court.”

“The whole idea of the statute is to make sure that people get paid to represent the consumer,” Rosenfield explained.

But there’s strong disagreement over what constitutes a “decision” by the department.

By Sam Sorich’s lights, it’s a simple matter: no hearing, no fee. “The way we read the law, it requires a proceeding and it requires a decision,” said Sorich, spokesperson for the Association of California Insurance Companies.

“We think that the Department doesn’t have the authority to implement this regulation. The statute doesn’t allow it,” said Sorich. “We think good public policy agrees with the law.”

But the consumer advocates counter that any time the Department decides not to schedule a hearing–because the rate dispute has been negotiated informally or the company drops its application–that still constitutes a decision by the department, and often a savings to ratepayers.

For insurers, the Garamendi rule adds insult to injury. The industry has chafed at the “consumer participation program” for nearly 20 years.

“If you have a popularly elected commissioner, if you have the best consumer representative you can find, why do you need a paid cadre of consumer representatives?”

According to the Department of Insurance, over $2 million was paid out in intervenor fees in 2006 alone, money Sirola calls, “an unnecessary and extra cost of doing business.”

The great bulk of those fees were paid out by the Department–which of course gets its budget from the insurance companies. Only two companies had to pay intervenor fees out of their own pockets in 2006: The FTCR collected $29,000 from Farmers Insurance and almost $47,000 from Medical Protective.

But tens of thousands of dollars in fees are challenged by insurers, according to Rosenfield, in instances of rate applications that didn’t go to a hearing.
Fees going back three and four years, from companies like Norcal Mutual Insurance, SAFECO and State Farm, are still tied up in challenges. Those are the fees the new rule is intended to capture.

“Our experts were not getting paid. If they don’t get paid they can’t keep working for us. And we can’t keep doing what we’re doing,” Rosenfield said.
For now, the insurers are waiting to see how the new rule is implemented and whether to challenge is in court. “The question is, do we have to file a lawsuit,” said Sorich.

If the insurers do sue, “It’s a lawsuit they’re going to lose,” said Rosenfield.