5:10 PM EST, February 18, 2013
Drivers who buy their car insurance through the Maryland Automobile Insurance Fund, the state's auto insurer of last resort, seem always to be the door mats of the State House, but that comparison might be too generous. Rugs get a little respect every once in a while.
For years, we have groused that MAIF customers — and there are about 36,000 of them on any given day — are legally fleeced by premium finance companies. Under state law, MAIF must collect insurance premiums in advance, but since most customers don't have the money for a year's worth of coverage (on average, at a cost of about $1,800) they must be fronted by companies that charge high interest rates.
The simple solution to this dilemma would be to allow MAIF to accept payment by installments — dividing up the premium over a year — as most private insurance companies do. But the finance companies have strongly resisted this (in the past, they've earned up to 30 percent interest on what are essentially risk-free loans), and lawmakers have generously looked the other way.
But that standoff changed more than one year ago when the Maryland Court of Appeals ruled in support of a Maryland Insurance Commissioner's decision that the way premium finance companies had long calculated interest charges — what's known as the Rule of 78s — violated state law that sets the maximum interest charge at 1.15 percent for 30 days. Companies could no longer front-end load interest charges in a way that was highly profitable, and MAIF drivers benefited to the tune of about $2.7 million in lower payments annually.
Alas, as MAIF drivers can tell you, good things don't necessarily last forever. On Feb. 26, a Senate committee is scheduled to consider a bill submitted by Sen. John Astle of Annapolis to essentially toss out that December, 2011 court ruling and give premium finance companies back their carte blanche to rip off MAIF customers.
How could the legislature be seriously contemplating such a move? Here's one possibility: Many MAIF customers are poor. That's why they end up paying such high prices. Chances are, they've missed a payment or two in the past, and private insurers refuse to take them back. The half-dozen or so premium finance companies, on the other hand, can afford lobbyists and the political muscle that comes with them.
If members of the General Assembly are truly interested in MAIF, what they ought to be doing is supporting Baltimore Sen. Catherine E. Pugh's proposal to allow MAIF to accept premiums on an installment basis. That reform could save drivers as much as $300 per year. That would be a nice little bonus for families struggling to make ends meet.
Would the change pose a financial risk to MAIF? Absolutely not. Those who failed to make a payment would lose their insurance coverage — the same penalty that makes the insurance premium finance business risk-free — so MAIF wouldn't be out a dime.
Lawmakers may fret that MAIF policies shouldn't be all that attractive. They are intended to be a safety-net, after all, not to compete with private insurers. But even after the court ruling that lowered interest charges, that doesn't seem to pose a problem. MAIF officials report that they have the fewest customers than at any time in the past 30 years as a lot of Maryland drivers are obviously buying their policies elsewhere.
Premium finance companies are certain to oppose the idea of a MAIF-operated installment plan and will likely argue that it would cost them jobs. That's probably true. But jobs supported by overcharging some consumers hardly seems like the kind of jobs lawmakers should be underwriting. Even worse would be to return to the bad-old-days of truly usurious interest charges (particularly when late penalties and other fees are considered) and take millions of dollars out of the pockets of MAIF drivers.
Consumers deserve better treatment from their state government. Independent agencies like MAIF and its cousin, the Injured Workers Insurance Fund, which provides workers' compensation insurance, are not exactly glamorous or high-profile, but they've been vital for keeping drivers on the road and businesses protected when the private insurance market failed them. In either case, lawmakers would be wise to put the interests of policyholders above all else.
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