SACRAMENTO, CA, Feb. 16, 2017 —The Third District Court of Appeals has upheld a decision permitting California Insurance Commissioner Dave Jones to ignore “institutional advertising” expenses incurred by Mercury in responding to the insurer’s request for a 3.9-percent rate increase in 2009 by ordering it to reduce rates by 5.4-percent.

In Mercury v Jones, the appellate court endorsed the Commissioner’s disallowance of Mercury General’s entire advertising budget of approximately $30 million, agreeing with CDI that such expenses could be completely ignored from calculations of the insurer’s profitability because the advertising was not for any specific insurer within the Mercury general group, and because it did not provide pertinent information about any of those insurers or their products.

Under Proposition 103, narrowly approved by voters in 1988, the Department of Insurance is given wide latitude to approve or reject proposed rate increases in property-casualty insurance lines.  Under regulations adopted by CDI, an insurer’s projected rate of return is calculated not on the basis of its actual results, but based on a complicated formula that understates actual expenses and overstates revenues.  Section 2644.10(f) of those regulations disallows, “institutional advertising” expenses, which are defined to include, “advertising not aimed at obtaining business for a specific insurer and not providing consumers with information pertinent to the decision whether to buy the insurer’s product.”

Mercury argued that advertising is not ‘institutional advertising’ if it is aimed at obtaining business for an insurer or it provides consumers with information pertinent to the decision whether to buy the insurer’s product, and that its advertisements were all aimed at obtaining business for Mercury or its affiliate insurance companies and providing information to consumers on why they should buy a Mercury product.

The Court, however, sided with CDI in ruling that all of its advertising expenses should be excluded because the ads were in the name of the fictional, “Mercury Insurance Group,” and were not aimed at obtaining business for any particular insurer.

The Court also rejected arguments by Mercury, supported by a broad coalition of property-casualty insurance trade groups, that the resulting rate of return, after disallowance of the expenses and implementing the rate reduction, would result in confiscation because it would deprive the insurer of the right to a fair profit.

"Insurers spend millions of dollars on brand advertising which provides zero benefit to consumers,” Jones said in a press release hailing his victory, “including paying tens of millions for stadium and arena naming rights and sponsorships of tournaments and other sporting events.  The appellate court rejected the insurers' legal challenge and affirmed my authority to stop insurers from passing along to consumers brand advertising costs, such as expenses for sports stadium naming rights, sponsoring sporting events, or advertising the name of the insurance companies on a blimp."

IIABCal General Counsel Steve Young voiced a different opinion.

“Mercury’s treatment at the hands of the CDI certainly gives the appearance of being something other than fair and balanced,” Young said.  “Independent agency companies have a hard enough time competing against the vast billions of dollars spent on advertising by captive agency and direct writing insurers.  It is disingenuous for the Commissioner to speak of “blimp advertising,” because nothing of the kind was involved here.  To disallow these expenses by Mercury, solely because a group name was used rather than a specific company within the group, elevates form over substance.”

It was not known whether Mercury intends to ask the California Supreme Court to review the case.

Here is the commisioner's full press release.

Here is the holding of the appellate court filed Feb 10th.