Stop Selling at Inflated Rates, 2 Insurers Told : State Farm, Safeco Targeted by Gillespie Order; Commissioner Also Considers Refunds, Fines

State Insurance Commissioner Roxani Gillespie on Monday told State Farm, the biggest seller of auto insurance in California, and Safeco, the 12th-biggest, to stop selling to new customers at inflated rates or respond within 10 days why they should be permitted to do so.

The commissioner said she is prepared to call hearings on the matter and may order the companies to refund any excess money they have collected from new customers as compared with old ones.

If the companies violate such an order, they could be fined up to $100,000 for each operating subsidiary, an aide said. State Farm has two such subsidiaries and Safeco has three.

Tells of Her Resolve

“The law says--same risks, same rates,” Gillespie declared. “Unlawful or unethical business practices will simply not be tolerated.”

The commissioner’s action came two weeks after State Farm announced it would sell new policies only through its 20% higher-priced State Farm Fire and Casualty subsidiary. It said its old customers would continue to pay the more common, lower State Farm Mutual rates. Safeco officials, meanwhile, quietly told some of their agents to stop selling policies at lower “preferred” prices.

In a terse statement, Gillespie announced that she had “notified both insurers that they are violating California insurance laws which require insurers to offer similar rates to policyholders with similar risks.”

She added that the new sales policy of State Farm and Safeco that followed passage of Proposition 103 “unfairly discriminates against new policyholders.”

Both companies quickly indicated they would stick with their sales policies pending the response that Gillespie invited them to make.

“We obviously don’t believe that we have done anything illegal or we wouldn’t have done it in the first place,” said Jim Stahly, a spokesman for State Farm, from its headquarters in Bloomington, Ill.

“In the next few days, we will be sending a letter back or calling the department,” Stahly added. “In the meantime, we’re not changing our (sales) orders today to our subsidiaries.”

Meanwhile, Safeco spokesman Gordon Hamilton, at company headquarters in Seattle, said that some Safeco agents continue to sell new auto policies in California at preferred rates, but that others have been instructed since the election to sell only at higher, “non-standard” rates.

“We’ll have to take a look at the (Gillespie) letter and work with the department to resolve any differences that may exist,” Hamilton said.

Checks by The Times with several State Farm agents found them saying that since State Farm ordered that new customers be accepted only at higher rates, the bottom has dropped out of the company’s new-policies sales.

“We’ve gotten so much bad publicity, nobody’s calling me for insurance,” one of the company’s Los Angeles agents said.

“Normally, when you come back after a four-day weekend like today, the phones are ringing off the hook,” another said. “There have been no calls today, and there were none last week.”

But these and other agents who were contacted said they had been told by agents for other companies that new business is off sharply industry-wide in pricing confusion that has followed the passage of Proposition 103.

Gillespie said she would like to think that Californians are reacting against companies that have raised their prices by going to other companies. “That’s the way it should be,” she said.

The view of the agents and Gillespie that the insurance market in California remains in a turbulent state three weeks after the election was not reflected Monday in briefs submitted by insurance industry lawyers asking the Supreme Court to keep its all-encompassing stay of the provisions of Proposition 103 in effect. They maintained that the market has settled down as a result of the stay.

“Prompt issuance of the stay helped stabilize the situation and thereby protected the public interest,” the industry attorneys said in a 32-page brief filed with the court. “Its removal would reignite the crisis.”

They added that if the initiative were allowed to go into effect now, many insurers would have “no choice” but to refuse to write new policies or to decline to renew policies because of the legal uncertainties about the measure.

The high court could decide as early as this week whether to lift all or part of the stay and whether to formally review the insurers’ claims that the measure is unconstitutional.

Proposition 103 mandates 20% across-the-board rollbacks from 1987 levels for auto and most others types of property-casualty insurance. But all of these were put on hold by the Supreme Court just two days after the election.

State Atty. Gen. John K. Van de Kamp, one of the state officials defending the initiative, has urged the court to agree to resolve the measure’s constitutionality but to lift the stay in the interim, or block only its rate-cutback provisions, while allowing the rest of the measure to go into effect.

Sponsors of the measure also asked the court to allow it to take effect in whole or in part. But they added that the insurers should be required to go first to the state trial courts for a test of the measure’s validity as applied in a specific case or to the insurance commissioner in an attempt to obtain an exemption from its rate rollback provisions.

In the brief filed Monday, Frank Rothman of Los Angeles, one of the attorneys for the insurers, argued that the court’s stay had “cooled the fires of the immediate crisis” and that allowing all or part of Proposition 103 to take effect now would “add yet another measure of confusion to the current situation.”

“Removing, tinkering or conditioning the stay would rekindle the fires and intensify the crisis,” Rothman said.

Meanwhile, Reid McClaran, legal counsel to Gillespie, said that Monday’s action by the commissioner on State Farm and Safeco amounts to “a notice of non-compliance” to which the companies can respond in several ways.

“They can argue there’s been no violation, or they can enter into a consent order, or they can request an administrative hearing,” he said.

Gillespie said, however, that there has never been a company in California that has asked for a hearing on a rate matter. She indicated that if the companies do not stop charging higher rates to new customers, she would call a public hearing herself in short order.

The commissioner noted she had issued notices like the one Monday only privately in the past.

“We went public at this time because of all the difficulties that are going on (in the insurance market),” she explained. “If anyone else is thinking of doing something like this, we want to nip it in the bud.”

According to the Insurance Department, State Farm in 1987 held 16.8% of the auto insurance market in California, and Safeco held 1.3%.

Reich reported from Los Angeles and Hager reported from San Francisco.