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Mercury Insurance Company has agreed to pay $41,188,505 to California, ending a two-decades-long legal fight with the California Department of Insurance ("DOI").

The DOI said that the payment is the largest property and casualty payment in its history.

The payment resulted from a record $27.6 million penalty plus more than $8.1 million in interest. The California Supreme Court recently rejected Mercury's request for review of the case and historic fine, prompting Mercury to pay the penalty, plus interest, and to settle a second phase for $5,460,868 that had not yet been tried in the courts. The second phase involved DOI allegations about false advertising that it was preparing to prosecute under the Unfair Insurance Practices Act.

The DOI's commissioner, Ricardo Lara, said in a statement that, "This was a hard fought legal battle to protect consumers, defend Proposition 103, and make sure all insurers play by the rules in California. No insurance company is above the law."

The DOI said that, in 1998, it discovered Mercury's scheme to evade Proposition 103 protections. According to the DOI, Mercury misrepresented that its agents were brokers, implying that they worked for the consumers rather than Mercury. The DOI asserted that Mercury then illegally allowed agents to charge and collect unapproved fees directly from consumers on more than 180,000 transactions from 1999 to 2004. At the time, according to the DOI, Mercury advertised its rates as lower than the competition, but did not disclose it charged illegal broker fees on top of the rates.

The DOI alleged that the extra fees gave agents a huge incentive to place policies with Mercury, even if another insurance company's policy would have cost the consumer less.

Aside from charging consumers unfairly discriminatory rates for a Mercury insurance policy and misrepresenting the amount of its rates in comparison to its competitors, Mercury's use of unapproved fees unfairly edged its competitors out of large segments of the auto insurance market, the DOI asserted.

"Mercury's illegal actions misled consumers and undercut competitors, which gave them an unfair advantage in the insurance marketplace," Commissioner Lara added.

With respect to the alleged false advertising by Mercury, the DOI alleged that Mercury advertised its premium was lower than its competitors, when the premium was actually higher than advertised once the illegal fees were added. The DOI settled those claims for an additional $5,460,868, which included cost reimbursements for the 20 years of litigation, and a half-million dollars in additional penalties.

Of the $41 million payment, $36,227,637 in penalties and interest will be paid to the California General Fund. Nearly $5 million of the payment will repay the Proposition 103 Fund. The Proposition 103 Fund comes from a surcharge on insurance companies that they may pass through to consumers.

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Settlement agreement

Court of Appeal decision