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California Insurance Commissioner Requires Overhaul of Workers’ Comp Rate-Making System to Increase Transparency

Citing the inclusion of avoidable costs, California Insurance Commissioner Steve Poizner for the third straight time rejected a filing submitted on behalf of insurers by the Workers’ Compensation Insurance Rating Bureau (“WCIRB”) seeking an increase in the workers’ compensation pure premium rates and claims cost benchmark (“Benchmark”). See this link for Commissioner Poizner’s Decision and Order.

The WCIRB had originally submitted a filing recommending a 29.6% increase, which was subsequently amended to 27.7%. The WCIRB justified the recommended rate increase as warranted primarily because of rising medical costs. This increase would have affected policies with effective dates on or after January 1, 2011. See this link for a summary of the proceedings relating to the WCIRB’s filing.

Pure premium rates reflect the loss (both medical and indemnity) and loss adjustment expense expected to occur on policies. Pure premium rates are a benchmark that insurers can use as a tool for determining their own rates. Pure premium rates have not been increased since January 1, 2009, and this is the third increase in excess of 20% filed by the WCIRB since then.

While the Benchmark is purely advisory and does not set workers’ compensation rates, Commissioner Poizner criticized the requested increase as the Benchmark has in the past allowed insurers to file for and pass on rate increases to businesses.

Calling for transparency and stating that “[t]he workers’ compensation rate-making system is long overdue for some much needed reforms,” Commissioner Poizner also announced three reforms that he believes will significantly improve and inject transparency into the workers’ compensation rate-making process. Under these reforms, the WCIRB will be required to:

1. calculate future advisory pure premiums based on insurers’ actual, filed rates rather than on theoretical benchmark numbers;
2. include in each future rate filing a table showing (in addition to industry average numbers) the proposed change for each individual worker classification; and
3. use California Department of Insurance filing information and data from the WCIRB to evaluate overall workers’ compensation insurer profitability.

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Recently, we reported on the California Supreme Court’s decision in Clark v. Superior Court (National Western Life Insurance Company), wherein the Court confirmed that the only monetary remedy available under the Unfair Competition Law, Business & Professions Code section 17200 (the “UCL”) is restitution, and that a claim for treble damages is not restitution, nor is the nature of restitution comparable to a penalty.  

The Court echoed that holding in a new decision issued November 18, 2010, Pineda v. Bank of America, N.A. As with Clark, Pineda was a unanimous opinion by the Court.

At issue in Pineda were penalties provided for under California Labor Code section 203 when an employer fails to timely pay final wages to an employee. The first issue addressed by the Court was whether a one-year or three-year statute of limitations applied to a claim for such penalties when an employee sues only to recover the penalties and not the final wages themselves (which had already been paid). On that issue, the Court held that the longer, three-year statute applied.

Turning to the second issue, whether Section 203 penalties can be recovered as restitution under the UCL, the Court explained once again that a penalty is not restitution because it does not function to restore to a plaintiff the status quo or something in which the plaintiff had a vested interest. Relying on its earlier decision in Cortez v. Purolator Air Filtration Products Co., 23 Cal. 4th 163 (2000), which held that unpaid overtime wages were able to recovered as restitution under the UCL, the Court contrasted such unpaid wages to a penalty for not paying wages. The former are consider to be the earned property of the employee and thus restitutionary in nature whereas the latter are not compensation for work performed or restoring to the employee funds in which the employee has a vested ownership interest, but rather a payment to encourage employers to timely pay their employees and to punish them if they do not do so.

One would hope that, with the holdings of the Clark and Pineda cases, the issue of what is restitution and the limited monetary remedies available for a private action under the UCL can now be laid to rest.

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In a non-published decision issued on November 18, 2010, the California Court of Appeal affirmed summary judgment against class-action lawyers seeking refunds on broker fees in Munn v. Eastwood Insurance Services.  

The decision rejected the argument that if a broker performs any act on behalf of the insurer, the broker is a de facto agent, and subjects the broker to a refund of all broker fees collected. 

The court rejected the “any one act test” and followed the “totality of the circumstances test,” which has been advocated by this firm for several years as the appropriate test to distinguish the difference between an agent and broker.

The “totality of the circumstances test” was codified into law by legislation in 2008 (AB 2956) that Barger & Wolen Senior Regulatory Partner Robert Hogeboom helped draft.

The court’s decision upheld the FSC comparative rater and the electronic Zap App systems as the appropriate mechanisms for brokers to input information and process applications, and it rejected the plaintiffs’ claim that it was a process to encourage upfront underwriting and binding by the broker. 

Finally, the court recognized that the recent amendment to California Insurance Code section 1623, which includes the definition of “broker” and creates a presumption, did provide the court with “guidance in assessing the facts as part of the totality of the circumstances.” 

Barger & Wolen’s Robert Hogeboom and Suh Choi served as special consultants on the broker fee issue to Eastwood’s counsel, Milford Dahl and Zack Broslavsky of Rutan & Tucker, and to Judi Partridge, former owner of Eastwood. 

If you have any questions, please contact Robert Hogeboom via e-mail or at (213) 614-7304.

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Notice of California Department of Insurance Workshop

By Robert W. Hogeboom

On Monday, November 11, 2010, the California Department of Insurance (CDI) issued a Notice of Workshop Regarding Affinity Groups Under California Insurance Code Section 1861.12.

The Workshop, scheduled for Friday, December 3, 2010, in San Francisco, deals with group rating programs and the likely need for regulations defining the term “group” for eligibility under Section 1861.12, “which is a part of Proposition 103 and authorizes insurers to issue property and casualty ‘insurance coverage on a group plan.’”

Section 1861.12 does not define the term “group” and does not specify the conditions as to when insurance may be issued on a group plan.  

Barger & Wolen notes that the issue as to “what is a group?” is of major importance to insurers that have submitted group rating plans. It is likely that the CDI will issue regulations with respect to the usage of those plans, and those regulations will likely continue the present policy of ensuring that all of the coverage offered by group members be available and offered to all insureds.

The notice sets forth 13 areas that the CDI will address at the workshop and invites written comments to be submitted prior to the close of business on December 3, 2010:

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by Sandra Weishart

In Levine v. Blue Shield of California, the California Court of Appeal for the Fourth Appellate District, Division One, unanimously held that a health insurer has no duty to advise an applicant concerning how coverage could be structured to obtain lower monthly insurance premiums. 

The Levines filed the action, both individually and on behalf of a putative class, alleging causes of action for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment and unfair competition under Business and Professions Code section 17200. 

The appellate court affirmed the trial court's order sustaining Blue Shield's demurrer to the entire complaint, holding that Blue Shield had no duty to disclose the information that the Levines alleged was not provided during the application process.

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By Randall Doctor and Larry Golub

In response to news that, on November 9, 2010, California Insurance Commissioner Steve Poizner filed a lawsuit against the California Office of Administrative Law's (OAL) over the OAL's rejection of the Commissioner's rules relating to insurers' investments in companies that do business with Iran, OAL Director Susan Lapsley issued a press release later that same day indicating:

Our office is authorized by law to scrutinize rules that have been challenged as ‘underground regulations’ (regulations and rules that state agencies issue or use that have not been properly adopted pursuant to the [Administrative Procedures Act]…The Commissioner did not follow that required process but rather simply imposed new rules unilaterally without any public input or comment. This is exactly the type of action the APA is designed to prevent.”

As readers to this blog know, the OAL issued a Determination on October 11, 2010, in which it concluded that the rules Commissioner Poizner unilaterally imposed upon insurers in February 2010, regarding the treatment of their investments in companies that do business with Iran, should have been promulgated pursuant to the APA.

Since the rules did not follow the correct legal process, the OAL found those rules to be void.

Not to be deterred, the Commissioner retained the California Attorney General’s office to file his lawsuit against the OAL alleging that the OAL abused its discretion.  (While the lawsuit is directed against the OAL as the only "respondent," the action also names as "real parties in interest" the five insurance trade associations that brought this issue to the OAL.) 

In a letter to the Attorney General, also issued on November 9, Director Lapsley similarly criticized the Attorney General’s office, stating that,

in any litigation against [the OAL], just as we have in the past, we would request and expect representation from the Attorney General’s office as the Attorney General has an affirmative duty to represent state agencies…It appears to me that there is a conflict in the Attorney General representing the Insurance Commissioner and the Department of Insurance in an action against this Office. This Office has no other option but to bring this to your attention and to inform you that it does not consent to or waive the conflict.”

Director Lapsley specifically noted that the Attorney General's office is currently representing the OAL in another matter involving underground regulations.

Finally, in her press release, Director Lapsley stated:

Given the enduring fiscal crisis facing the State of California, it is regrettable to have to devote any public resources toward resolving this matter. Our mission of regulatory oversight makes it our responsibility and statutory obligation to issue an opinion if we believe an agency is acting outside the law using underground regulations. We stand by our opinion.”

We will continue to follow and report on the developments in this matter.

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By Larry Golub, Randall Doctor and Marina Karvelas

On November 9, 2010, California Insurance Commissioner Steve Poizner issued a Press Release announcing that he is filing a lawsuit challenging the California Office of Administrative Law's (OAL) October 11, 2010, determination that the Commissioner's efforts to stop insurers from investing in Iran constituted "underground regulations." 

In a Petition for Writ of Mandate, to be filed in the Los Angeles Superior Court, the Commissioner contests the OAL's analysis of the issues and seeks to clarify his authority to address insurance company investments in contracts in Iran.

Attorney General Jerry Brown is representing the Commissioner in the lawsuit.

In his Petition for Writ of Mandate , the Commissioner alleges three causes of action based on specific conduct engaged in by the Commissioner that the OAL determined amounted to "underground regulations."  These include the Commissioner's:

1. creation of a List of companies doing business in Iranian energy, nuclear, banking and defense sectors and the determination that these companies are subject to financial risk;
2. creation of a Form requiring California licensed insurance companies to notify the Commissioner whether they would agree voluntarily not to invest in such companies in the future;
3. directive to California licensed insurance companies to file financial statements identifying Iran related investments and treating those investments as "non-admitted."  

The Commissioner defends his actions under his authority pursuant to Ins. Code 12921.5 to "disseminate information concerning the insurance laws of this State for the assistance and information of the public," his examination powers under Ins. Code 729, 730, 733, 734 and 736 and under Ins. Code 923, his authority to

"make changes from time to time in the form of  the statements and the  number and method of filing reports as seem to him or her best adapted to elicit from the insurers a true exhibit of their condition."  (Poizner v. Office of Administrative Law)

Earlier, on November 1, 2010, notwithstanding the OAL's determination, the Commissioner  issued a reminder letter to all California licensed insurance companies that they need to comply with the supplemental filing requirements for Iran related investments no later than November 15, 2010.

Barger & Wolen will continue to follow further developments in this matter.

For more information, please contact:

Larry Golub | 213.614.7312 | lgolub@bargerwolen.com

Randall Doctor | 415.743.3707 | rdoctor@bargerwolen.com.

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In Hernandez v. Chipotle Mexican Grill, Inc., published October 28, 2010, the California Court of Appeal held that, while employers must provide employees with breaks, they need not ensure employees actually take their breaks. 

Rogelio Hernandez (Hernandez) brought this class action against Chipotle Mexican Grill, Inc. for allegedly denying employees meal and rest breaks. In moving for certification, Hernandez submitted statistical evidence allegedly showing that a overwhelming majority of employees missed their breaks, e.g. 92% of employees missed at least one meal break.

Chipolte also filed a motion, but to deny certification, and it presented evidence of a company-wide policy encouraging meal and rest breaks. As noted by the Court, Chipotle provides employees with free food and beverages during breaks. Because Chipotle paid employees during breaks, the employee time records may not reflect whether breaks were actually taken.

In determining whether certification was appropriate, both the trial court and appellate court addressed the legal issue of whether employers must only provide breaks, or whether employers must also ensure that breaks are actually taken.

The Court recognized that this issue was currently pending review before the California Supreme Court (Brinker v. Public Storage, S166350, and Brinkley v. Public Storage, S168806), but ruled that the Supreme Court would likely hold that employers need not ensure that breaks are actually taken.

The Court stated that placing this obligation on employers would place an

undue burden on employers whose employees are numerous or who … do not appear to remain in contact with the employer during the day.”

It would also create

perverse incentives, encouraging employees to violate company meal break policy in order to receive extra compensation under California wage and hour laws.”

The decision is significant not only for its substance, but also for procedural reasons. 

Class counsel often times will argue on certification motions that their legal theory of liability and damages should not be decided on certification, because certification is only a procedural, not a merits question. This misstates what a trial court may be obligated to review for certification.

In order to decide whether common or individual issues predominate, it must be determined at the certification stage how the law requires liability and damages to be proven at trial. This inquiry may not be able to be satisfied without the trial court actually addressing what the law is at the certification stage, and in certain cases where the certification issues are intertwined with the merits issues some analysis of the merits is permitted.

As noted by the Hernandez trial court, if the law does require employers to ensure breaks are actually taken, class treatment of this case would be appropriate. Having held that the law only requires employers to provide breaks, certification in this action was inappropriate.

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