State Insurance Commissioner David Jones on Monday ordered Mercury Insurance to pay a $27.5 million fine for charging policyholders unauthorized broker fees.

Mercury, part of Los Angeles insurer Mercury General Corp., responded that it intends to challenge the fine in court. It is one of the largest fines ever levied against an auto or home insurer in California.

Jones, acting on complaints put forward by a local consumer group, said brokers defined by the insurer as independent third parties were in fact Mercury agents. As such, Jones said, any fees that these “brokers” charged had to be approved by the Insurance Commissioner under terms set out by Proposition 103, the auto insurance reform measure approved by voters in 1988. Because Mercury failed to obtain this approval, Jones said the fees were invalid.

Jones said Insurance Department investigators determined that Mercury’s insurance agents charged and collected $27.5 million in improper fees between 1999 and 2004.

“Mercury auto insurance consumers paid $27.5 million in unapproved fees,” Jones said. “While the $27.5 million fine against Mercury is significant, it is commensurate with the amount of money that was unlawfully collected from Mercury policyholders.”

Mercury, which has been embroiled in several legal tussles over the years with the state insurance commissioner’s office, issued a statement Monday afternoon disputing the fine and saying the company intends to challenge it in court.

“We are highly disappointed and strongly disagree with the Commissioner’s determination that Mercury had violated California’s rate laws and his decision to impose a penalty,” the statement said. “We strongly believe that this decision is contrary to California’s rate laws, due process and basic notions of fairness. We intend to vigorously litigate this matter of law and we intend to ultimately prevail on the merits in a court of law.”

Consumer Watchdog, the successor organization to the group that put Proposition 103 on the ballot, hailed the decision, which it said came after a decade-long battle.

“The recalcitrant insurance company and its CEO fought us at every turn,” Consumer Watchdog President Jamie Court said in a statement. “In the end, Mercury will pay the state for violating Proposition 103 and creating a sham ‘broker’ system.”