The History of Mercury Insurance and Its Controversies

Mercury InsurancePhoto:  Los Angeles Times

Mercury Insurance has been the center of controversy over the past few years for its connection with a  California auto insurance measure that could force a surge for customers who allow their coverage to lapse.

It may seem like Mercury came out of nowhere and suddenly began having a huge impact on California auto insurance. In truth, however, Mercury Insurance and its owner have been around for some time.

The History of Mercury Insurance

Mercury Insurance was founded by George Joseph in 1961. After earning his math and physics degrees from Harvard in just three years, Joseph began working as an actuarial trainee at Occidental Life for $225 a month then quit when he realized that he could make more money as a salesman.

Shortly afterward, he created his own property and casualty company, Mercury General, which targeted customers who had trouble acquiring auto insurance.

The company has grown significantly since that time and is now the third-largest vehicle insurer in California in terms of market share, with over 1 million policyholders and $4 billion in assets.

Despite the company’s humble beginnings it has faced major controversies over the years for its participation in a number of political measures that consumer watchdogs feel are beneficial to the company, but harmful to insurance customers.

While the most recent issue involves an auto insurance bill that offers a discount to drivers who never allow their coverage to lapse, Joseph has been fighting for various changes to California insurance laws for many years.

Mercury’s Impact on California Auto Insurance

Although Mercury Insurance Group has been in the spotlight as a controversial insurer for some time, the company has actually had a unique impact on California auto insurance.

In 1962, when the company first opened its doors, Joseph began offering insurance policies to drivers who had a difficult time acquiring auto coverage from other companies. While most companies targeted “preferred” clients, Joseph wanted Mercury to reach all types of drivers.

As a result, customers who could not access insurance with larger companies were able to obtain a policy from Mercury Insurance at a lower premium.

About three decades later, Proposition 103 was passed which required companies to reduce their insurance rates to at least 20 percent less than the rates in effect on November 8, 1987. Proposition 103 replaced the McBride-Grunksy Insurance Regulatory Act that did not require insurance companies to file rates for approval except for health and life insurance coverage.

The proposition also changed how companies could determine their rates. Now, companies like Mercury must base insurance rates on the customer’s driving safety record, the number of miles that customer drives annually and the number of years the customer has been driving.

Mercury Insurance was very open about their displeasure with Proposition 103. Since then, the company has made numerous attempts to have California legislation reversed by supporting new measures such as 2010’s Proposition 17.

The company has put up millions of dollars over the years in an effort to change bits and pieces of California auto insurance law and is attempting to do so again in 2012.

Mercury Insurance Fights Against Proposition 103

After Proposition 103 was passed, Mercury faced criticism for imposing surcharges on customers who had not been previously insured. The Insurance Commissioner had authorized “rating factors” for setting auto insurance premiums, one of which was known as “persistency.”

Persistency is defined as the length of time a customer has been insured by the company writing the auto coverage. Under this rating factor, companies could determine rates based on customers’ persistency of business (i.e. auto insurance coverage) with the company in question.

But consumer advocates complained that Mercury, when filing its list of rating factors to the Insurance Commissioner, used the title persistency but altered its meaning internally so that the company can determine auto insurance rates based on the length of time a customer had been uninsured — regardless of whether the coverage lapse was with Mercury Insurance or not.

In other words, a driver who was insured by any company could receive a persistency discount with Mercury. On the other hand, a person who had no prior insurance for a period of more than 30 days faced a surcharge, which consumer advocates voiced was a clear violation of Proposition 103.

In 2001, a group of plaintiffs filed a class action lawsuit against Mercury Insurance for violating Proposition 103’s “no prior rule.” The Insurance Commissioner during that period determined that the company stretched its interpretation of persistency and therefore would violate Insurance Code section 1861.01 if it continued imposing a surcharge to customers who had no prior coverage.

One year later, Mercury made an official attempt to repeal Proposition 103 by seeking legislation that could override the “no prior rule” provision. The company reportedly donated a total of $895,000 to more than two-thirds of the legislature — an act that was criticized since a change to the provision required a two-thirds vote.

Despite the criticism, the California legislature passed the measure. However, Mercury’s campaign angered then Governor Gray Davis, who ultimately vetoed the bill.

To everyone’s surprise, Mercury came back the following year with a new bill, SB 841, which sought to repeal the law. Gray Davis reportedly received over $100,000 from Mercury and signed the bill. Mercury Insurance then followed the signature with an additional $175,000 to Davis’ campaign.

Consumer Watchdog and a coalition of consumer, taxpayer and civil rights organizations filed suit at the Los Angeles Superior Court on October 15, 2003, asking to have the legislation invalidated as unconstitutional. The Superior Court, as well as the appellate court, ruled that SB 841 was indeed invalid.

Continuous Auto Insurance Discount Act

Many people are aware of the Continuous Auto Insurance Discount Act, known as Proposition 17, that was introduced to California’s June 20, 2010 ballot. However, most don’t realize that Mercury Insurance was directly responsible for this bill — and that it was nearly identical to SB 841.

As with SB 841, consumer advocates criticized the measure for penalizing individuals who did not maintain coverage (i.e. military personnel, older drivers and unemployed workers), as well as drivers seeking insurance for the first time.

Joseph allegedly allowed the company to spend $16 million to back the initiative with $8.2 million coming from his own pocket. Despite his financial contributions, California voters did not pass the initiative.

Many thought Prop 17 would be dropped completely after being voted down, but in 2011 it was announced that the  California auto insurance measure was reintroduced as the 2012 Automobile Insurance Discount Act.

This time around, the measure expanded the definition of “continuous coverage” to include individuals who have short lapses or have been forced to allow their coverage to lapse due to unemployment, injury or military service.

Consumer groups immediately jumped on the new initiative, stating that the new proposal still punishes individuals who have never carried their own coverage, as well as low-income families that are unable to afford coverage for extended periods of time.

It seems that Mercury is ready to face anyone that challenges the initiative. This may be due to the fact that its attempts to pass the Continuous Auto Insurance Discount are not the only controversies Mercury has faced.

Mercury Insurance Raises More Eyebrows

In addition to allegedly overcharging customers prior to Proposition 103, the company was highly criticized in a 2006 lawsuit for training employees to mistreat customers. Mercury Insurance settled the suit with the California Department of Insurance in 2008 after the company’s claims handling practices were investigated.

In December 2011, the company gained back the spotlight for seeking permission from the California Department of Insurance to raise insurance rates by $89 million — an increase that was deemed too excessive.

One thing is certain, we can expect to hear more from Mercury Insurance regarding their new initiative. Supporters of the measure helped it qualify for the November 2012 ballot by acquiring over 500,000 signatures. Now it will be up to the voters to decide whether the continuous coverage act will be passed into law.