Proposed Regulations list 20 standards to determine if insurer is operating in hazardous financial conditions

By Robert W. Hogeboom and Samuel J. Sorich

On June 21, 2013, the California Department of Insurance (“CDI”) submitted its Proposed Action and Notice of Public Hearing to adopt regulations listing conditions that the Commissioner may consider in determining whether an insurer is operating in a hazardous condition. If a hazardous condition is found, the Proposed Regulations permit the Commissioner to issue an Order requiring that the insurer take specific steps to correct, eliminate, or remedy the condition.

The Proposed Regulations list 20 conditions which the Commissioner may consider in making a determination whether an insurer is operating in a hazardous condition. Most are directly related to adverse findings relating to the insurer’s financial condition discovered upon review of the insurer’s filed financial statements and holding company filings. However, one of the conditions the Commissioner may consider is “adverse findings reported in market conduct exam reports.” This would include both rating and claims examinations. This suggests that the CDI is attempting to bring market conduct examinations within the framework of “hazardous financial condition.”

The Proposed Regulations permit the Commissioner to issue an Order following his determination that the continued operations may be hazardous based on any part or all of the 20 conditions. The most controversial aspect of the Proposed Regulations permits the Commissioner to order the insured to comply with any of the corrective measures in the Proposed Regulations. The corrective measures include, among others, increasing capital and surplus, suspending dividends, documenting adequacy of premium rates, and adopting and utilizing governance practices acceptable to the Commissioner. 

One of the corrective actions is the ability of the Commissioner to “increase the insurer’s liability to an amount equal to any contingent liability if there is a substantial risk that the insurer will be called upon to meet the obligation undertaken within the next 12 month-period.” 

There is no administrative hearing process to resolve disputes involving the Commissioner’s corrective action Orders. Rather, once the Order is issued, the insurer has the opportunity to be heard by requesting a meeting with the Commissioner. Thereafter, the only redress for the insurer is to seek a judicial challenge. 

Based on the fact that these Proposed Regulations provide increased powers to the Commissioner to order corrective actions based on his finding of hazardous conditions without a hearing, we believe that their legal authority will be closely scrutinized. Among the concerns we highlight the inconsistency with accounting rules and express statutory provisions which establish and limit the Commissioner’s authority.

For more information contact Robert W. Hogeboom at rhogeboom@bargerwolen.com or (213) 614-7304, or Samuel J. Sorich at ssorich@bargerwolen.com or (916) 448-2800.

 

How has New York law on bad faith claims against insurers developed since the Bi-Economy and Panasia decisions?

R. Steven Anderson and Kyle M. Medley provide analysis and historical perspective of two 2008 decisions from New York’s highest court. The full article, Tempest in a Teapot: New York’s Bi-Economy Decision Five Years Later, appears in The Association of Insurance & Reinsurance Run-Off Companies (AIRROC) quarterly journal, an excerpt appears below:

New York courts have a general reputation as being insurer-friendly in their resistance to policyholder claims for damages beyond policy coverage terms and limits. Historically, New York courts refused to recognize contract-based bad faith claims for breach of a first-party insurance contract. Insureds have fared no better proceeding under a tort theory of bad faith liability, absent “egregious tortious conduct” and “a pattern of similar conduct directed at the public generally.” See Roconova v. Equitable Life Assurance Society, 83 N.Y. 603, 615 (N.Y. 1994).

In 2008, however, two decisions by New York’s highest court – Bi-Economy Market, Inc. v. Harleysville Insurance Co., 10 N.Y.3d 187 (N.Y. 2008), and a companion decision handed down on the same day, Panasia Estates, Inc. v. Hudson Insurance Co., 10 N.Y.3d 200 (N.Y. 2008) – threatened to alter the legal landscape in New York by recognizing a policyholder’s right to seek recovery of consequential damages beyond policy limits where such damages were the direct consequence of insurer claims  handling that violated the insurer’s obligation of good faith and fair dealing and were foreseeable by the parties at the time the policy was issued.

The Bi-Economy decision initially caused jurists and insurers to speculate as to whether the decision had opened the floodgates to claims against insurers beyond policy limits. Much of the speculation centered on Judge Robert S. Smith’s strongly-worded dissent in Bi-Economy, which predicted that the majority’s decision would “open the door” to punitive damage claims against insurers in New York ..."

Click here to continue reading the full article

When a Cruise Goes Off Course

Carnival Cruise Line’s Fascination vessel lost power while at sea on June 30th, 2010 with over 2000 passengers.David McMahon and Jack Pierce authored a column, When a Cruise Goes Off Course, that ran in the Claims Journal on Feb. 27, 2013, about the insurance coverage ramifications of the Carnival Triumph cruise ship saga that left passengers stranded without power or plumbing for days.

A class action was filed just one day after the ship was towed back to port alleging that conditions aboard the ship, which resulted from a fire in the engine room, caused severe “risk of injury or illness,” and that company officials should have known that the ship's systems could fail based on prior problems with the vessel.

In their column, McMahon and Pierce look at the unique liability and insurance issues surrounding the cruise ship fiasco and property and business interruption claims that may arise from it. The authors also note that Carnival's liability exposure under the facts alleged in the class action “does not seem extensive, particularly when compared to other recent cruise line accidents involving serious personal injuries and loss of life.”

The largest insurance claim Carnival is likely to seek, the authors wrote, involves the business interruption loss the company experienced.

This could be significant,” McMahon and Pierce wrote. “Not only did Carnival lose revenue for the cruise at issue, but the damaged vessel will likely be out of service for the foreseeable future, resulting in lostrevenue that the ship would have otherwise generated. The U.S. Coast Guard, and perhaps other agencies as well, can be expected to conduct potentially lengthy investigations into the cause of the engine room fire. The engines will have to be repaired and the vessel thoroughly cleaned and scrubbed prior to the next voyage, which may be a long time down the road.”

 

Podcast: Impact of Recent California Legislation

Sam Sorich recently participated on an A.M. Best podcast where he addressed recent legislation passed by the State of California, and the potential impact of these bills on insureds and the upcoming election.

You can listen to the podcast here.

TranscriptPad for iPad Offers Powerful Mobile Transcript Review

TranscriptPad is an elegant, fast and powerful transcript review app for the Apple iPad, designed specifically for the legal field, from the same folks who designed TrialPad, their flagship trial presentation and legal file management app. Similar software exists for your PC or Mac, such as the excellent Deposmart (from Clarity Legal), but TranscriptPad is the first dedicated transcript review and annotation app for the iPad. 

TranscriptPad accepts transcripts in .txt format, and exhibits in .pdf format. (Make sure you request the transcript in .txt format, as some court reporting agencies have their own proprietary format). The .txt format is a simple and relatively small file format that all court reporters can generate, and usually do so at no extra charge. Importing is a breeze, and can be done via email, Dropbox or even iTunes. I’ve uploaded multiple transcripts simultaneously, quickly and without any problems.

TranscriptPad

Transcripts are imported into case folders that you create and that are stored on your iPad. Opening a case folder reveals a deponent folder (created automatically upon import, with the deponent’s name and date of the deposition, along with the volume number). Multiple sessions of the same deponent are placed automatically in the deponent’s folder.

You can read a transcript hands-free by pressing the play button at the bottom of the screen, which allows you to adjust the speed. You can also flip back and forth as if you are reading a book (either in landscape or portrait orientation). 

Most attorneys like to annotate their transcript when reviewing, and here’s where the software really shows off. You can create your own “issue” codes to any part of the transcript. Issue codes can be assigned any name along with a choice of six colors, and appear in the margins of the transcript. You can also flag a portion of the transcript for later review. Issues codes, flags or any portion of the transcript can be emailed or exported to Dropbox. 

TranscriptPad contains a powerful search feature that allows you to search across any transcript or even multiple transcripts. Each hit is highlighted in the text, and you can create issue codes or flags from there, or email the section containing the search result. Detailed or summary reports of your issue codes, flags and searches are easily generated, and can be exported in .pdf or .txt format. 

TranscriptPad’s price tag is $49.99, which is pricey for an app, but on the other hand, this is robust and professional software. Similar software for the Mac or PC start at $200, and go much higher. For lawyers, paralegals, experts, in house counsel, and others who review and annotate transcripts, and who place a premium on mobility, TranscriptPad is a must. TranscriptPad can be found here (www.transcriptpad) and purchased in the Apple App store.

 Originally posted on Barger & Wolen's Life, Health & Disability Insurance Law blog.

Next Up in the 'Tort War': Discounted Medical Expenses?

We recently blogged here about the California Supreme Court’s decision in Howell v. Hamilton Meats.

In a long-awaited, and nearly unanimous decision, the California Supreme Court has held that an injured plaintiff whose medical expenses are paid through private health insurance may recover as economic damages no more than the amounts paid by the plaintiff’s insurer for those medical services, and that this discounted amount does not fall within the collateral source rule.

Dan Walters in a recent Sacramento Bee post, 'Tort war' could hit the California Capitol is wondering if the trial attorneys will take this loss lying down:

The issue in the case (Howell v. Hamilton Meats) was whether the injured party could collect the full medical bills imposed by doctors, hospitals and other medical care providers, or would be limited to the amounts actually paid by insurers, which are often pennies on the dollar.

The case, stemming from a 2005 collision in San Diego County, involved $200,000 in medical bills that were whittled down to $60,000 before payment.

The trial judge decreed that only the smaller amount need be paid, while an appellate court said it should be the full amount, and several other pending cases had conflicting appellate court decisions, so the issue was kicked upstairs to the Supreme Court.

Its widely watched ruling hit personal injury lawyers in their wallets but elated insurers, who had said an adverse outcome would have cost them, and their policyholders, another $3 billion a year. (emphasis added)

The legislature has just returned to Sacramento, and, according to Mr. Walters, the “Consumer Attorneys of California, the lobbying arm of personal injury lawyers, has made no secret that it wants legislation to counteract the Supreme Court decree.”

We’ll keep you posted if and when legislation is introduced.

 

Technology and the Courtroom

When introducing technology into the courtroom, the trial lawyer needs to be master of that domain. This is not the time to experiment. Trial lawyers not comfortable with technology should seriously consider utilizing litigation-technology support services, who -- for a price -- can provide everything needed to make the presentation look and feel professional, freeing the lawyer up to concentrate on the case.

For those who doubt, Robyn Weisman's recent article in ALM’s Law Technology Review, Wrong Way: Preventing (and Recovering From) Courtroom Snafus, (free subscription) outlines what could happen when technology and people crash during trials, and how to recover from (and prevent) those disasters.

Ms. Weisman’s article provides sound advice for all lawyers utilizing technology in the courtroom. The inability to incorporate technology into your case, or the misuse (or abuse) of PowerPoint, can do more damage than good.

Fredric Lederer, chancellor professor of law and director of the Center for Legal and Court Technology and Legal Skills at William & Mary Law School, says there are three types of trial technology snafus: 1) real or perceived hardware failure, 2) real or perceived software failure, and 3) attorney ineptitude.

Hardware and software failures can be minimized, somewhat, by ensuring that your equipment is up-to-date, with the latest software installed. Back up your software on CD-rom or DVDs. Keep an extra laptop computer handy, preferably one that has a mirror image of your main computer, just in case. Make sure you have the proper cables, extension cords and adapters available. I would never venture into a trial without first paying a visit to the courtroom and getting to know the clerk and scouting out their equipment first, as they often insist that you use their equipment. 

Even for those who master technology, or who use professional services, Ms. Weisman wisely points out some of the pitfalls of using technology that have nothing to do with hardware or software failures. Technology can too easily run roughshod over the rules of evidence. An inadvertent keystroke or move of the mouse can display documents not yet admitted into evidence, or your PowerPoint presentation may obstruct, rather than elucidate your point.

But, for those lawyers who take technology as seriously as their arguments, it can make a world of difference in creating winning presentations. 

Originally posted on Barger & Wolen's Life, Health & Disability Insurance blog.

For the Government, Transparency and Accountability Is a One-Way Mirror

The much-touted and recently signed Financial Reform Bill includes a provision that prevents the public from obtaining any documents relating to SEC investigations (past or present, open or closed) pursuant to the Freedom of Information Act

As discussed in an article by Barger & Wolen partner Michael A.S. Newman in the Los Angeles and San Francisco Daily Journals, the law flies in the face of well-established notions in this country that the workings of the government must remain visible to the general public. 

Click here to read the full article (pdf).

Robert Hogeboom Testifies Against Homeowners' Insurance Regulations Proposed by the California Department of Insurance

Robert H. Hogeboom, Senior Regulatory Attorney at Barger & Wolen LLP, testified on May 17, 2010, that the California Department of Insurance (“CDI”) should withdraw its proposed regulations on standards and training for estimating replacement value on homeowners’ insurance (“Proposed Regulations”). 

Representing the Insurance Agents and Brokers Association of California, Hogeboom criticized the CDI for proposing draconian regulations with no proper authority and creating a new “unfair practice” violation applicable to producers and insurers. Specifically, the Proposed Regulations provide that an estimate not conforming to the new CDI standards set forth in the Proposed Regulations is a misleading statement within California Insurance Code § 790.03, which identifies certain prohibited acts in the business of insurance.

For Hogeboom’s full analysis of the Proposed Regulations, click here.

For Hogeboom’s filed comments and objections to the Proposed Regulations, click here.

For a copy of the Proposed Regulations, click here.

California Insurance Commissioner Issues List of 296 Insurers Refusing to Agree Not to Invest in "Iran-Related" Companies

Earlier today, California Insurance Commissioner Steve Poizner issued a press release advising that more than 1000 insurers licensed to do business in California have agreed to a voluntary moratorium as to future investments in companies that do business in Iran. 

At the same time, Commissioner Poizner released a list of 296 insurers doing business in California that would not agree to the voluntary moratorium. The list of those 296 insurance companies is attached here, and the list of the 50 “Iran-related” companies, as found on the Department’s website, is also attached here.

Our blog previously reported on this issue after Commissioner Poizner first announced his Terror Financing Probe back in June 2009, and shortly thereafter issued a Data Call on July 2, 2009, to all insurers admitted in California seeking information on their investments in or related to Iran. As stated in the press release issued today:

100 percent of the 1,306 insurance companies licensed in California responded to his request to provide data on their investments with companies doing business with Iran’s, nuclear, defense, and energy sectors.

This has been a controversial issue in California over the past year, and it is unclear, now that this list of 296 has been generated, how far Commissioner Poizner, who is currently running for the Republican nomination for Governor, will pursue matters with respect to insurance companies that have refused to agree they will not make any future investments in companies that do business with Iran. 

Today’s press release provides no clue, other than to note that as of March 31, 2010, the California Department of Insurance “disqualified an estimated $6 billion in holdings in the 50 Iran-related companies” (based on 2008 data). 

Among the questions facing insurers are the following: 

  • Will the Department seek to have any future investments “disallowed” as part of an insurer’s surplus? 
  • Will the Department order insurers to dispose of such investments? 
  • Does the Department have any legal ability to take any further action? 

Barger & Wolen will continue to follow the Commissioner's activities on this matter.

For more information, please contact Larry Golub at (213) 614-7312 (lgolub@bargerwolen.com).

AB 2578: Proposition 103 Coming to Managed Health Care?

by Richard De La Mora

Having unsuccessfully urged Congress to impose a national freeze on health insurance rates, Harvey Rosenfield has refocused his efforts on the California legislature and AB 2578.

Who is Harvey Rosenfield? He is, in his own words, the “author of California’s landmark property-casualty insurance rate regulation Proposition 103 – recognized as the most successful rate regulation in the country.” In fact, AB 2578, which cleared Assembly Health Committee earlier this week, includes the following provisions modeled closely on Proposition 103:

  • A prohibition on the use or approval of rates that are “excessive, inadequate, or unfairly discriminatory”;
  • A right for consumer advocates to request a hearing on a rate application, and a requirement that a hearing be granted whenever the rate increase sought exceeds 7%.

Finally, Mr. Rosenfield has made sure that he and his friends in the consumer advocacy industry are taken care of by advocating a provision requiring health plans to pay the consumer advocacy fees associated with fighting the health plan’s rate application.    

We have seen this played out before, as our firm has represented property-casualty insurers in administrative and judicial matters involving insurance rates regulated under Proposition 103 since 1989.

While property-casualty insurers have had plenty of time to adjust to the dictates of rate regulation, health plans will face a steep learning curve if AB 2578 becomes law. 

We are hopeful that this legislation will not become law. Even if it does, AB 2578 will likely face legal challenges and hurdles as did Proposition 103.

From our experience, we learned some of those challenges will be more successful than others. Nevertheless, if rate regulation comes to pass, a company’s goals can still be achieved provided that it has a complete understanding of the proposed regulatory system, plans ahead, has input into the development of regulations, and prepares itself for life after the system is implemented.

Barger & Wolen will continue to keep our clients and friends apprised on new issues pertaining to AB 2578 via the firm’s Insurance Litigation & Regulatory Law Blog and the Life, Health & Disability Law Blog. If you would like to be notified about upcoming events and seminars pertaining to AB 2578 and other issues, please subscribe to our blog via the RSS feed or add your e-mail in the left column.

Bending the Health Care Cost Curve

We are inundated with news reports and talking heads discussing "health care reform" or "ObamaCare."  Always a favorite target, insurers are scrutinized for proposed premium rate increases and we hear calls for Congressional hearings on the topic.

What is absent from the noise is an intelligent discussion of what the government can and can't legally do.

For example, on March 3, 2010, the Ninth Circuit Court of Appeals issued an opinion in California Pharmacists Association, et al. v. David Maxwell-Jolly, Director of The California Department of Health Services enjoining California's legislative attempt at reducing payments to medical service providers by five percent under the State's Medicaid program.

The Court held that the State must establish reimbursement rates that are (1) consistent with high-quality medical care and (2) sufficient to enlist enough providers to ensure that medical services are generally available to Medicaid recipients.

In other words, under the Federal Medicaid Act, a State cannot pick a rate that may lead to rationing or shortages in the market place. Apparently, California's legislature failed to conduct the necessary analysis before attempting to mandate lower reimbursement rates.

The government's ability to fix prices is ultimately constrained by the very instrument that gives the government its legitamacy, the United States Constitution. California has a long history of insurance premium rate regulation and the Courts have recognized that the Constitution places very real limits on what the government can do.

California's Proposition 103 was passed in 1988 and attempted to require insurer's to “rollback” by 20% the premium on policies of property and casualty insurance issued or renewed after November 8, 1988. Proposition 103 allowed relief from the 20% rate rollback requirement only if an insurer could establish that it was “substantially threatened with insolvency.”

In Calfarm v. Deukmejian, 48 Cal.3d 805 (1989), the California Supreme Court struck down the “insolvency” standard for relief from the rollback requirement. To replace that standard the Court held that an insurer must be granted relief from the rollback if it would deny the insurer the “possibility of a just and reasonable return” on its Proposition 103 lines of business. Calfarm, supra at 816, 820-825.  Specifically, the Court stated at page 817:  

[t]he concept that rates may be set at less than a fair rate of return in order to compel the return of the past surpluses is not one supported by precedent. ‘The just compensation safeguarded . . . by the Fourteenth Amendment [of the Constitution] is a reasonable return on the value of the property used at the time that it is being used for the public service . . . . [T]he law does not require the company to give up for the benefit of future subscribers any part of is accumulations from past operations. Profits of the past cannot be used to sustain confiscatory rates for the future.’

So, as we hear calls for hearings on health insurance premium rates and politicians making promises regarding what health insurers will be required to provide and do under proposed health care reforms, remember that every service promised comes with a cost. A cost for which the health insurer has the Constitutional right to charge a premium sufficient to reimburse its cost and provide it with a fair rate of return [profit].