By Melody Hanatani
Daily Press Staff Writer

SUNSET PARK More than 120,000 policyholders with the Automobile Club of Southern California will receive a refund check after a Santa Monica-based consumer watchdog settled a lawsuit alleging the motor club had illegally tacked auto insurance surcharges on its clients.

The $22.5 million settlement, which refunds an average of $187 for affected AAA members who purchased insurance between April 1, 1999 and July 31, 2004, was announced by both parties last week.

The Foundation for Taxpayer and Consumer Rights (FTCR), a non-profit advocacy group based in Sunset Park, filed the lawsuit in 2002, alleging the motor club had violated Proposition 103 by overcharging new clients who were either previously uninsured or who failed to demonstrate that they had carried a policy. The suit was filed against the Interinsurance Exchange of the Automobile Club, the insurance arm of AAA. The lawsuit was a consolidation of two separate allegations brought by the FTCR and Los Angeles resident Tracy Landers.

“We are pleased that the exchange had agreed to settle this lawsuit by providing refunds for these surcharges,” Harvey Rosenfield, the author of the proposition and the attorney representing FTCR, said in a statement.

Proposition 103, passed in 1988, is an insurance reform initiative that made it illegal for companies to affix an extra fee for prospective clients who previously were uninsured. It was a practice to keep lower-income and younger people off of insurance, according to Doug Heller, spokesman for the FTCR.

In the late 1990s, the consumer advocacy group started seeing insurance companies using the practice again. The state legislature enacted a bill in 2003 that would’ve allowed the companies to maintain the surcharge, but that was later overturned by the courts who ruled it unconstitutional under Proposition 103, Heller said.

“It was a Catch-22,” Heller said on Monday. “People who couldn’t afford insurance before ... were now getting a surcharge.”

The exchange maintains that it did not violate the terms of the proposition or any other state regulation developed in conjunction. The automobile club’s practices were audited and approved by the California Department of Insurance, AAA spokesman Steve Lenzi said on Monday.

“The issue was settled really because we believe in the best interest of our insured and to avoid protracted and costly litigation,” Lenzi said.

One of the largest automobile insurance companies in the state, Southern California’s branch of AAA insures more than one million auto policy holders.

The consumer watchdog has filed several suits related to Proposition 103 since it was enacted, including a similar one settled in 2006 with the Government Insurance Employees Insurance Co., better known as Geico. The insurance company, known for its talking gecko mascot, was ordered to pay an average $63 to its affected policyholders.

The FTCR is still involved in ongoing litigation against Safeco.

The automobile club will also pay for legal fees as part of the settlement.

melodyh@smdp.com