Consumer Group Fighting Insurance Rates Draws Fire

Critics note that the advocacy group, Consumer Watchdog, profits from the special insurance regulation process it not only created, but dominates.

By Will Evans
|  Friday, Oct 5, 2012  |  Updated 7:08 AM PDT
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Consumer Group Fighting Insurance Rates Draws Fire

Gunnar Pippel

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A consumer group that has reaped millions of dollars in fees from insurance companies thanks to a state initiative it wrote is facing a new wave of criticism from Democratic and Republican political consultants and lawmakers.

Critics note that the advocacy group, Consumer Watchdog, profits from the special insurance regulation process it not only created, but dominates. The consultants argue that the group is trying once again to use a ballot initiative to generate more revenue.

“It’s one of the all-time great scams,” said Republican consultant Rob Stutzman, who is working with an opposition research firm but wouldn’t say who is paying for the effort.

Other consumer advocates defend the system and the group.

"Insurance companies do not like effective advocates," said Mark Savage, senior attorney for Consumers Union, which publishes Consumer Reports.

Scrutiny of Consumer Watchdog has intensified as it battles Proposition 33, an industry-backed measure on car insurance, and pushes its own proposition for the 2014 ballot, which would create similar regulation of health insurance rates that could earn the group even more money.

Jamie Court, the Santa Monica-based group's president, bats down the critiques, which have persisted for many years.

“This is probably the most successful consumer protection in the history of America,” Court said. “And that’s exactly why the insurance industry attacks us and their camouflaged consultants attack us.”

Under a law passed by voters in 1988, insurance companies must submit rate changes for car and home insurance to state regulators for approval. Consumer groups can challenge rate increases – and get paid for their time by the insurance companies.

Consumer Watchdog founder Harvey Rosenfield wrote that ballot measure. The group, along with state Insurance Commissioner Dave Jones, now wants to expand the approach to include health insurance rates.

From January to June this year, the California Department of Insurance ordered companies to pay Consumer Watchdog nearly $500,000 for its efforts challenging several rate increases, according to a California Watch review of department filings.

Since 2008, the group has earned $5.6 million for disputing insurance rates and weighing in on regulatory changes. The industry argues those costs get passed on to consumers in the form of higher insurance costs.

Court said that cost is far outweighed by the billions of dollars in consumer savings from the group's successes in keeping rates lower.

Safeco Insurance, for example, asked for a 6.9 percent increase in homeowners insurance in 2009. Consumer Watchdog argued that the company used improper calculations and that rates should be trimmed by 11.7 percent. Safeco eventually agreed to an overall 2.2 percent decrease. In March of this year, the department ordered Safeco to pay Consumer Watchdog $51,000 for its effort.

Critics point out that Consumer Watchdog is the only group that has received money under the system since 2008 and blame a cozy relationship between the group and state regulators.

“They cornered the market on this because they literally wrote the law,” said Democratic consultant Steve Maviglio, who set up a website attacking the group this year and asked the IRS to investigate it last month. "It looks horrible when it's only one group raking in millions of dollars."

The knock on the "intervenor" process, as it is known, is gaining some traction in the Capitol.

In May, state Sen. Juan Vargas, D-Chula Vista, a former insurance company executive, called for a legislative hearing on why other groups aren’t participating. “We must get the facts about why more consumers are being excluded from the process," he said in a news release. 

And in July, Gov. Jerry Brown approved an insurance industry-sponsored bill requiring the state to publish online all requests to participate.

Since 2008, only one other group has attempted to dispute insurance rates, state filings show. The Berkeley-based Greenlining Institute tried to intervene six times in 2008 and 2009 – but regulators denied them each time.

In those cases, Greenlining criticized insurance companies for lacking diversity on their boards, paying their executives too much and failing to make more charitable donations in minority communities. The department ruled those concerns irrelevant to the specific insurance rate proceedings.

Greenlining eventually felt unwelcome and stopped trying, said the group's general counsel, Samuel Kang.

“It’s clear that the intervenor system is broken,” he said.

Kang's group, meanwhile, is feuding with Consumer Watchdog over Greenlining’s decision to back Prop. 33, this November’s ballot initiative bankrolled by Mercury Insurance’s chairman.

Prop. 33 would allow companies to base car insurance rates on whether a customer previously had been insured. Supporters say that would lead to discounts for those who maintain continuous coverage, while critics argue that it would raise rates for other drivers. George Joseph, the billionaire chairman of Mercury Insurance, has sunk $8.4 million into the initiative, according to campaign finance tracker MapLight.org. The opposition has raised $94,000, most of it from Consumer Watchdog.

Rate cases weren't the right forum for Greenlining's arguments, said insurance department general counsel Adam Cole. He acknowledged that two other Greenlining petitions were not acted on, but would have been denied for the same reason.

“We bent over backward to grant them intervention," he said. "We couldn’t identify any aspect of their submission that touched on whether a rate is excessive or inadequate."

Previous intervenors

Previously, the system had more players. Four organizations besides Consumer Watchdog won intervenor fees in 2007. But those who are no longer getting the fees say they do not feel shut out.

Robert Bernstein, a former insurance department researcher, said he simply didn't have time and might participate again when he retires.

Public Advocates, Consumers Union and Santa Rosa activist John Metz said they shifted to other priorities, like affordable housing and health care.

Consumer Watchdog is uniquely positioned to take on the industry and fight lengthy rate cases, said Savage, of Consumers Union.

"This stuff is extraordinarily complicated, and large players like insurance companies throw massive resources at it, and it’s a stacked deck in some ways," he said. "I think that explains why there aren’t more players."

In the past year, Metz and the Consumer Federation of California both received approval to intervene in regulatory proceedings. And the state insurance department, hoping to spur more participation, is inviting advocates to a series of workshops in November to learn about the process.

But it's not as if the insurance industry wants more intervenors.

"That sounds more expensive rather than less expensive," said Mark Sektnan, president of the Association of California Insurance Companies.

Sektnan questions the need for an intervenor process all together. "I have to pay for someone to challenge my rate filing," he said. "The whole concept is a little awkward."

Critics ask why state regulators can't do the job themselves and whether Consumer Watchdog really adds value. Consumer advocates counter that without intervenors, the department would be subject to the unchecked influence of the industry.

Consumer Watchdog's Rosenfield said he copied the idea from the California Public Utilities Commission's intervenor process. He wanted to give insurance regulation some teeth by empowering consumers, he said.

Examining costs

Under the intervenor system, the group bills for the time of its attorneys and experts and – when a hearing in Sacramento is involved – travel expenses. The group's lawyers must be reimbursed at the market rate for attorneys in San Francisco and Los Angeles, a department spokesman said. Rosenfield's hourly rate is $650; others in the organization bill at hourly rates from $300 to $525.

The rates are high because they build in the group's overhead costs as well, said Court, Consumer Watchdog's president. In 2011, Consumer Watchdog said it intervened in a dozen of the nearly 8,000 rate case filings.

But critics have maligned Rosenfield over the years for profiting personally, pointing to his substantial compensation.

In 2010, Rosenfield received $472,000 as an outside counsel to Consumer Watchdog, according to the group's tax filings. The vast majority of that money comes from the group's civil litigation against large companies, not the intervenor process, Court said.

State filings show Rosenfield is only superficially involved in most intervenor cases, sometimes charging for less than an hour of his time. The intervenor fees attributable to Rosenfield in 2010, for example, total $23,000.

Rosenfield said he stepped aside as head of the organization to let younger advocates become leaders. In 2010, he also took in $41,000 as president of the sister group Consumer Watchdog Campaign, which works on the ballot measure campaigns.

Rosenfield also received $100,000 as president of the Consumer Education Foundation, which runs a website on economic issues and distributes money to Consumer Watchdog.

Last week, state Sen. Ted Gaines, R-Roseville, who owns an insurance company, called on [PDF] the Los Angeles County district attorney to investigate the Consumer Education Foundation. Rosenfield said, "All of these arrangements with each organization are completely appropriate," and he defended his pay.

"I’m one of the handful of people who make a lot of money doing good, as opposed to all the hordes of lawyers and lobbyists and PR hacks for the insurance industry who are making a lot of money fighting for the right of corporations to abuse consumers," Rosenfield said.

Consumer Watchdog's funding

Consumer Watchdog gets 40 percent of its funding from attorney and intervenor fees, according to its state filings. Court, the group's president, said much of that comes from civil litigation. He said about half the intervenor compensation the group receives goes to outside experts like actuaries.

The rest of the group's funding comes from individual donations and grants from foundations like The California Endowment, the San Francisco-based Tides Foundation and the Streisand Foundation, its filings state. The California Endowment also provides funding for California Watch.

State insurance department officials said they carefully determine whether an intervenor has made a "substantial contribution" to a rate case before awarding compensation.

"The intervention process has certainly saved consumers untold amounts of money in terms of the rates they pay for insurance, and we welcome that," said department spokesman Byron Tucker.

Most rate requests don't face any challenges. But just the threat of a Consumer Watchdog intervention can serve to keep rates down, said Deputy Commissioner Chris Shultz.

Cole, the department counsel, calls it a "tripartite relationship."

"Consumer Watchdog, they are on one end of the spectrum, the insurance companies are the other," he said. "They sort of frame the debate."

The department rarely denies Consumer Watchdog's petitions to intervene or for a formal hearing. It did, though, in April, approving an auto insurance rate increase the group had opposed.

Regulators also usually grant Consumer Watchdog the fees it requests, sometimes slightly less.

In 2009 and 2010, under Insurance Commissioner Steve Poizner, the department pared down the group's request for compensation in nearly every case, shaving off $140,000, or 4 percent, filings show.

In one case, an administrative law judge decided that Consumer Watchdog's expert witness was not believable, and his compensation was docked 25 percent. Still, regulators determined the group played a key role in lowering the requested rates in that case. In other cases, regulators made deductions in compensation on the grounds that Consumer Watchdog's attorneys hadn't adequately documented their work.

Since 2011, under Commissioner Jones, Consumer Watchdog has gotten what it requested in every case except two – an overall deduction of 1 percent.

Department officials said they continue to closely review requests for compensation.

"My guess is that Consumer Watchdog saw that we were studying its bills closely and scrutinizing its submissions," said Cole, the department's attorney, "and therefore have been more diligent about making sure that everything they give us is entirely supported."

View this story on California Watch

This story was produced by California Watch, a part of the nonprofit Center for Investigative Reporting. Learn more at www.californiawatch.org.

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