The state's two largest insurance companies have decided not to join their industry colleagues in financing a ballot measure to repeal a new insurance law.

Instead, PEMCO and Safeco will rely on a pledge from Democratic Gov. Christine Gregoire to propose changes next year to make the Insurance Fair Conduct Act more palatable to the industry.

The agreement could help keep Referendum 67 off the ballot. Having PEMCO and Safeco on the sidelines could mean less money for the campaign. It also would allow trial lawyers, Democratic lawmakers and others to argue that the referendum is mostly an effort by out-of-state insurance interests to overturn a new Washington law.

So far, eight insurance companies and a PAC have donated $650,000 to the campaign to qualify the referendum for the ballot. Of that, all but $150,000 has come from out-of-state companies.

PEMCO spokesman Jon Osterberg told me today:

"The governor has promised to present changes to the new law to the 2008 Legislature and PEMCO commends her leadership in doing that. We do support her willingness to see this through. And what we trust here is that the governor will identify all these unintended economic impacts of that Senate bill and will, in fact, present revised legislation."

PEMCO has committed to stay out of the already expensive referendum campaign to repeal the law. For now, Safeco has pledged to stay out of the referendum campaign. But that could change if the measure qualifies for the ballot and progress is not made with the governor's working group, said company spokesman Paul Hollie. "We're supportive of the governor's effort," he said.

Under the new law, courts can approve triple damages if an insurance company is found to have violated the Act and unreasonably denied coverage or payment.

During the legislative session, local insurance companies wrote Gregoire a letter asking her to veto the bill. PEMCO and Safeco both then asked for a meeting with the governor. Osterberg said:

"We did meet with her and she said at the time she would sign the bill but acknowledged it, quote, 'went beyond the testimony that supported the bill.'"

On May 11, PEMCO CEO Stan McNaughton wrote her a letter saying he was encouraged by her commitment to work with industry on amendments to the bill next year. But McNaughton wrote:

We are sure you recognize that your leadership pursuing legislation next session clarifying and correcting certain aspects of the bill may not foreclose efforts to limit or eliminate the most damaging aspects of this legislation through the judicial or referendum processes. Nevertheless, we anticipate your recognition of the bill's flaws will send a helpful message to the business community that you are firmly committed to maintaining a vibrant economy and a healthy insurance market.

Gregoire wrote back May 22, suggesting that any talks might have to end if the referendum qualifies for the ballot. She wrote:

Finally, I am aware that an attempt is contemplated to repeal ESSB 5726 through referendum. Should this occur, I would likely need to suspend the efforts outlined here, due to campaign ethics rules surrounding ballot measures, and the fact that the referendum vote would probably be the last word on the issue. There would be little appetite in the Legislature to amend a law on which people had so recently spoken.

Gregoire's efforts did not head off the campaign or the insurance industry's $650,000 campaign bank account. Trial lawyers have donated $100,000 to the other side of the ballot fight.

Gregoire's letter said her goal would be to have new legislation prepared by early fall. She said a working group would look at "exact type of conduct to which extraordinary damages attach," how those damages are calculated and whether they will be capped, and which types of insurance would be subject to the new law.

Osterberg said PEMCO agrees with the other companies that the law is seriously flawed. He said the bill adds more complexity to an already complex claim process and would lead to more litigation and higher insurance rates. But he said Ref. 67 "is not in the consumer's best interest."

"The democratic process is imperfect; sometimes it is flawed. But PEMCO really feels it is not right to dump a complex referendum on consumers that is hard to understand and force them to deal with it.

...

"We just believe nothing good can come from a bloody referendum battle. There can be no winners and everyone, including the consumers, will lose."