Insurance rate-setting is an important issue for insurance companies, since it has a direct impact on their ability to pay claims and their financial viability. Profit is certainly not the only concern when it comes to insurance rate setting—there is also the need to ensure that consumers are being treated fairly. California law accounts for both of these factors.

Under the law known as Proposition 103, the California Department of Insurance is required to approve automobile insurance rates to ensure both that insurance companies are able to pay their claims and that consumers are not exploited. The law allows consumer advocacy groups to oppose insurance rate increases, to obtain hearings, and to examine insurance companies’ records. 

Proposition 103, according to the agency, has saved consumers billions of dollars since it was approved in 1988. One issue which is currently of great importance to the insurance industry concerning the law, though, is whether rate reviews may be retroactive. In other words, may the Department of Insurance force insurance companies to pay fines and refunds for rates it approved in previous years?

Farmers is currently engaged in a dispute with the Department of Insurance in which it is opposing the agency’s attempt to review auto insurance rates from 2008. According to Farmers, the attempted review is illegal, since Proposition 103 doesn’t allow for retroactive review of approved rates. Farmers is arguing that rate review is only forward looking under the law, while the Department of Insurance is standing its ground that it has the right to review previously approved rates.

We’ll say more about this dispute in our next post, and the importance of insurance companies working with experienced legal counsel to ensure compliance with the law and to protect their rights when legal disputes arise.