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Dawson and Rosenthal
Dawson and Rosenthal

Insurance companies may try to charge policyholders unfair rates

Following last year’s national tax overhaul, California State is reminding its insurance companies that their rates must reflect the new corporate tax rate. The Tax Cuts and Jobs Act was passed in December of 2017. One of its components was a major reduction of the corporate tax rate. Under the new law, the tax rate for corporations was slashed from 35 percent to 21 percent—a 14 percent difference. This means that insurers are obligated to adjust their prices to accommodate the new tax rate.

Passing savings on to consumers

Many insurance companies writing policies in California have been charging their clients rates that were based on the previous corporate tax bracket. The new, lower tax rate means that many insurance premiums may now be excessively high. Some insurance companies still have not adjusted their policyholders’ rates to reflect the 21-percent tax rate. In an attempt to address the discrepancy, The California Department of Insurance sent notices to several insurance companies reminding them to pass their savings on to consumers.

Proposition 103

Under California’s Proposition 103, insurance companies’ rates must not be “excessive, inadequate or unfairly discriminatory.” The proposition limits insurers’ profits by requiring them to pass their savings on to policyholders, thereby preventing unfair insurance rates. Failure to comply with Prop 103 can result in fines and other disciplinary actions against a company.

Keeping insurance fair

This serves as a reminder that insurance companies do not always play fair with their consumers. Sometimes, they only comply with the law after someone takes legal action. This can apply to unjustly high insurance rates, bad faith practices and other unlawful actions. Now that insurers have a 14 percent reduction in their corporate tax rate, they should have ample funds to provide fair rates and full settlement payouts to their customers.