Drivers may get break on policy

The Baltimore Sun

Three decades ago when then-Gov. Marvin Mandel heard from constituents about the high cost of automobile insurance, he bucked opposition from industry and pushed through legislation that set up a unique state agency to act as an insurer of last resort.

Now a provision of that 1972 law has come under fire for contributing to today's high costs for 70,000 Maryland motorists who rely on the state for their auto insurance.

The provision requires that residents insured through the Maryland Automobile Insurance Fund pay the entire annual premium upfront - an average of $1,700. The majority of policyholders, who are concentrated in Baltimore City and Prince George's County, can't afford that sum and are referred to little-known finance companies. Their main business is to extend short-term loans at rates as high as 30 percent, adding on hundreds of dollars in fees and interest.

Gov. Martin O'Malley says the loans put undue burden on working families, illustrating the maxim that "it is expensive to be poor," and the attorney general's office has identified the issue as one of its top consumer-protection priorities. Some state legislators and community activists say the companies are needless middlemen that gouge policyholders, many of whom are low-income residents and minorities.

But new legislation aimed at bypassing premium finance companies has failed in the General Assembly in the past two years and on at least three previous occasions. The legislation - vigorously opposed by the premium finance industry - has been introduced again this year and would allow the state fund, known as MAIF, to receive monthly payments at a lower price than what the finance companies charge.

"The cost to the consumer is so high, it's almost usury," said Sen. Lisa A. Gladden, a Baltimore Democrat who sponsored the bill in past years. "We have created a monster because now we can't change the law. The premium finance companies are too powerful; they are too strong."

Premium finance company owners say the legislation would take away their livelihood while creating a bigger bureaucracy at the state fund. They also contend that MAIF does not have the resources to provide the kind of customer service that they can.

"This business is the sole income for our families," said George Voxakis, owner of American Liberty Financial Services Inc., a three-person premium finance operation. "For me to have to compete with a government agency I think is wrong."

The premium finance companies have formed an industry group and engaged a team of lobbyists to make their case. They also organized a political action committee that last year contributed about $25,000 to lawmakers who sit on committees that would consider the legislation.

Assistant Attorney General Steven A. Silverman said the legislation is critical "in terms of its impact on the poorest consumers and in terms of fairness." He said the bill is "not designed to put premium finance companies out of business but to address a monopoly that has occurred for many, many years."

Diana Velasquez of Silver Spring obtained insurance through the agency when she started driving at 21 years old. At the time, she was a student at the University of Maryland, Baltimore County and fell behind on her payments. She said that by the time she submitted a payment, her policy had been canceled, and she had to reapply.

"It was expensive, and being a student and working, it was a bit of a challenge, but I didn't have much choice," she said. "MAIF is intended to help relieve the burden to new drivers like me, so if they're the ones who are providing the services, then they should be in charge of it completely."

The legislation has a broad coalition behind it, including the Hispanic Chamber of Commerce, the National Association for the Advancement of Colored People and Baltimore City Council President Stephanie C. Rawlings-Blake.

The General Assembly created MAIF soon after making auto insurance compulsory. The new agency was not allowed to offer monthly installment plans, and upfront payment of premiums allowed it to amass a capital reserve so the state wouldn't be on the hook for losses.

The premium finance industry, which also has commercial customers such as trucking companies, blossomed by providing loans to the fund's newly created individual motorist market. There are now more than 70 premium finance companies in the state.

MAIF wrote $153 million of premiums last year. More than 95 percent of the policyholders pay through premium finance companies, and turnover can be high because the companies cancel more than half of the policies for late payment in the first few months. Presumably some motorists then go without insurance; many return and go through the application process again.

Legislators did not intend for MAIF to compete with the private sector. MAIF premiums are typically higher than those of private insurers. Under the law, it can only insure Maryland residents who have either been rejected by two private insurers or whose policies at a private insurer have been canceled.

Mandel, a Democrat who was governor from 1969 to 1979, said he suggested then that the agency could be run by a board with a majority of members from private industry but that insurance companies balked at the proposal.

"To be honest, this was one of the toughest bills to get passed during the whole time I was governor," he said. "The insurance companies had lobbyists running around, and I finally told them, 'If you don't want to join in and you just want to fight this, we'll go to the mat and get it passed.'"

Most MAIF policyholders do not have bad driving records; more than 60 percent have no traffic offenses under their licenses, said M. Kent Krabbe, MAIF's executive director. That means they were refused by private insurers for other reasons, including a bad credit history, age or lack of experience, he said.

One consumer, Hyattsville resident Francisco Cartagena, said he obtained MAIF insurance when he bought his first car soon after moving to Maryland from El Salvador. He said that his monthly payment through a premium finance company was $110, but when he was able to switch to Allstate Corp. a year later, he paid only $65 a month.

"With the interest, it was very, very expensive," he said.

High auto insurance rates in Baltimore have been criticized for years. The Abell Foundation, a nonprofit group that focuses on poverty issues, compared three ZIP codes two years ago and found that a family of three with two cars paid an average of $5,833 in Baltimore City compared with $3,651 in Baltimore County and $2,942 in Carroll County.

Soon afterward, then-Insurance Commissioner Alfred W. Redmer formed a task force to study auto insurance rates in urban areas. One of the recommendations was to allow MAIF to take monthly payments, cutting out the premium finance companies. The current commissioner of the state's insurance regulator, R. Steven Orr, backs the idea, as does MAIF.

Premium finance companies point out that what they charge, including interest and service and reinstatement fees, is limited by state law. The insurance commissioner also may investigate the companies, just like private insurers.

Krabbe said the companies are taking on little risk because the loan is secured by unused premium, so that when a policy is canceled, they get that money back. The companies say they can lose more than a month's worth of a premium because they are required to give customers a grace period while they are still covered by MAIF, using up premium dollars.

"My people do not have a social justice mission. They are for making money," said Joseph A. Schwartz, a lobbyist for the Maryland Insurance Council, a group of premium finance companies. "But guess what, these two missions happen to coincide because it's in our interest to keep policyholders insured."

At a recent hearing before House Economic Matters Committee, which is considering the bill this year, Schwartz recounted the times that the legislation has been proposed over the years. He said there's a reason why it has garnered so little support in the past: "It's bad legislation."

Lobbyists for the premium finance companies point out that MAIF has hired its own Annapolis lobbyist, William Kress, a move that has drawn the ire of Sen. George W. Della. The Baltimore Democrat has introduced legislation that would prohibit state agencies from hiring outside lobbyists, which he said is a waste of taxpayer resources.

Like most agencies, MAIF does have its own legislative liaison, but Krabbe said that person had been out of work while undergoing rehabilitation after a car accident, so he brought Kress on board. Krabbe also said that MAIF is not funded with state money but through revenue from premiums.

Del. Dereck E. Davis, a Prince George's County Democrat and chairman of the House Economic Matters Committee, said legislation allowing MAIF to take monthly installments is "probably a good idea," but he said he would reserve judgment to hear from all interested parties.

Vice Chairman David D. Rudolph, a Cecil County Democrat, also said he wants to study the matter, specifically whether a MAIF payment plan would deliver the promised savings.

And at least one committee member, Del. Richard K. Impallaria, a Baltimore County Republican, said he would oppose the legislation.

"I think we will be better off keeping the system the way it is," he said.

laura.smitherman@baltsun.com

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