Insurance Litigation Law Blog | Regulatory Law | Bad Faith | California | Lawyer | Attorney | Barger & Wolen

On January 18, 2012, California Secretary of State Debra Bowen announced that an initiative on automobile insurance rates has qualified for the November 6, 2012 ballot.

The initiative, named the “2012 Automobile Insurance Discount Act,” would allow insurers to use continuous automobile insurance coverage with any admitted insurer or insurers as a rating factor for private passenger automobile insurance. We previously reported on this topic last summer, when the initiative was being circulated for signatures.

Under an existing California Department of Insurance regulation, an insurer may use continuous coverage as a rating factor when an individual is currently insured for automobile insurance with the insurer.

The existing regulation prohibits an insurer from basing the continuous coverage rating factor on coverage provided by another non-affiliated insurer. The initiative would override this existing prohibition.

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By Sam Sorich and Larry Golub

On January 4, 2012, the California Secretary of State announced that signatures may be collected for a proposed initiative which would bring prior approval of rates for health insurance to California, and also amend the existing regulation of automobile and homeowners insurance.

Jamie Court, the President of Consumer Watchdog, is the proponent of the measure, termed the Insurance Rate Public Justification and Accountability Act. There were actually two virtually identical versions of the initiative submitted to (and allowed to proceed to collect signatures by) the Secretary of State, file numbers 11-0070 and 11-0072, but it is expected that Consumer Watchdog will pursue signature gathering for only the second version of the initiative.  (In fact, its website only links to the second version of the initiative.)

In order to qualify for the November 6, 2012 ballot, backers of an initiative must file 504,760 valid signatures in support of the measure. The deadline for submitting signatures for the initiative is June 4, 2012.

Among other things, the initiative would give the California Insurance Commissioner the power to approve health insurance rates proposed after November 6, 2012. The rate approval statutes enacted by Proposition 103 in 1988 for most property and casualty insurance would be made applicable to health insurance. A health insurer’s rate application would have to be accompanied by a sworn statement by insurer’s chief executive officer declaring that the contents of the application are accurate and comply in all respects with California law.

The initiative would require a health insurance company to pay refunds with interest if the insurance commissioner determines that the company’s rates are excessive; this requirement would apply to rates in effect on November 6, 2012 and rates in effect after that date.

Large group health insurance policies would be excluded from the scope of the initiative unless any one of four specified conditions exists; two of the conditions relate to the level of the proposed rate increase.

For health insurance, as well as automobile and homeowners insurance, the initiative would prohibit insurers from using the absence of prior insurance coverage or a person’s credit history as a rating factor or a criterion for determining insurance eligibility.

The initiative specifies that it may be amended only (1) by the Legislature if the legislation furthers the initiative’s purposes and is passed by a two-thirds vote in both the Assembly and the Senate or (2) by another voter ballot initiative.

In its summary of the fiscal effects of the initiative if approved by the voters, the Legislative Analyst’s Office estimates that the measure would increase “state administrative costs in the low tens of millions of dollars annually to regulate health insurance rates, funded with revenues collected from filing fees paid by health insurance companies.”

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By Robert W. Hogeboom, Samuel Sorich and Steven Weinstein

On November 10, 2011, the California Department of Insurance (“CDI” or “Department”) conducted a workshop to consider potential changes to regulations that govern prior approval of property/casualty insurance rates and class plan applications. The list of topics discussed at the workshop is included in the CDI Notice of Workshop Regarding the Scope of Prior Approval dated September 21, 2011.

The workshop grew out of the 2010 MacKay v. Superior Court case in which the court held, among other things, that Insurance Code Section 1860.1 exempts approved rates from civil actions and that such rates are subject only to a limited prospective challenge by administrative procedure (under Insurance Code Section 1858 et seq.). 

Barger & Wolen was counsel for the prevailing insurer, 21st Century Insurance Company, in MacKay, and our two blogs on the MacKay case can be accessed here and here.

MacKay involved 21st Century’s use of the accident verification factor which plaintiffs asserted was not an approved rating factor, but only an unapproved underwriting guideline.

The court concluded that the “language submitted to the Department for approval” is what is relevant as to whether a guideline is “submitted to the Department as a factor affecting the rates to be charged.” 

Here, though accident verification was contained as an underwriting guideline, the insurer explained the use of accident verification in an exhibit to its rate application as affecting the rates to be charged and had been approved by the Department. 

Based on MacKay, the use of underwriting guidelines was a prominent issue in the workshop.

Heading the workshop from the CDI were General Counsel Adam Cole, Joel Laucher, Chief Deputy of Rate Regulation, and Bryant Henley, Senior Counsel for the Rate Enforcement Bureau. 

While there was an exchange of views among insurer representatives, representatives of consumer groups and the CDI staff, no decisions were made at the workshop.

Mr. Cole announced that interested parties have until December 1, 2011, to submit written comments on the workshop topics.

At that point, the CDI presumably will review the workshop record and determine whether to propose any new regulations relating to the workshop topics.

Following is a summary of the key issues discussed at the workshop:

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Barger & Wolen's Insurance Litigation & Regulatory Law and Life, Health, Disability Insurance Law blogs have been named to LexisNexis' Insurance Law Community's Top Insurance Blogs 2011.

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On November 2nd, the Group Solvency Issues Working Group (“GSIWG”) met at the National Association of Insurance Commissioners' (NAIC) Fall National Meeting to discuss the latest exposure draft of the NAIC Own Risk and Solvency Assessment (“ORSA”) Guidance Manual (the “Manual”), and regulators’ controversial plan to implement the ORSA requirement by incorporating it into the Form B Insurance Holding Company System Annual Registration Statement (“Form B”) that each insurer is required to file annually with its domiciliary regulator. 

Once implemented, ORSA would require each non-exempt insurer (or insurance group on behalf of a subsidiary insurer) to

assess the adequacy of its risk management and current, and likely future, solvency position, internally document the process and results, and provide a high level summary report annually to the domiciliary regulator, if requested.” See Manual, Exposure Draft, dated October 14, 2011. 

An insurer would be exempt from the ORSA requirement if:

1. it has less than $500 million in annual direct written premium and
2. it is not a member of a group of affiliated insurers that has $1 billion or more in annual direct written premium.   

One of the primary objectives of ORSA is to provide state regulators with a means of assessing on a group wide – instead of merely on a legal entity – basis the enterprise risk management framework and capital adequacy of an insurance group. 

In effect, regulators are seeking various tools (ORSA among them) that will assist them in preventing another AIG-type scenario where risks generated by non-insurers in the group potentially pose an existential threat to the insurer legal entity.

At the meeting, the GSIWG accepted proposed revisions to the Manual that were generally non-substantive in nature and then voted to adopt the Manual (as revised) for the Financial Condition (E) Committee to implement as part of the U.S. Solvency Framework. 

However, the GSIWG’s proposal to utilize the Form B requirement as the legal vehicle for imposing the ORSA requirement was met with firm opposition by the industry.

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The California Department of Insurance issued a notice on October 24, 2011, which advises that most of the amendments to regulatory section 2632.13 apply to accidents that occur prior to the amendments’ December 11, 2011, effective date. 

However, provisions in the amendments relating to the threshold for principally at-fault determinations and to presumptions about principally at-fault accidents do not apply to accidents that occur prior to December 11, 2011.

Background

The question of whether a driver was principally at-fault for an accident has significant implications for the driver. A principally at-fault accident affects the driving record that is used to determine the driver’s auto insurance premium and also affects the driver’s eligibility for the statutory good driver discount.

Regulatory section 2632.13 sets forth the requirements that a private passenger auto insurer must follow when the insurer determines whether a driver was principally at-fault for an accident. The section was first adopted in 1994.

Two years ago, the Department of Insurance started the process of amending section 2632.13. The process resulted in amendments to section 2632.13 which were adopted on March 16, 2011. The amendments will go into effect on December 11, 2011. 

The amendments address a number of issues including insurers’ reliance on loss underwriting exchange data, notices that insurers must send to drivers, the injury or property damage accident threshold that must be met in order for a driver to be considered principally at-fault for the accident and certain presumptions that insurers must follow when they make principally at-fault determinations.

October 24, 2011, Notice

The amended version of subsection (b) of section 2632.13 changes the accident threshold that must be met in order for an insurer to determine that a driver was principally at-fault for an accident. The amended version of subsection (c) of section 2632.13 changes the presumptions that an insurer must follow when the insurer makes a principally at-fault determination.

The question of whether the amended threshold and presumptions in subsections (b) and (c) apply to accidents that occur prior to the amendments’ December 11, 2011, effective date needed resolution.  

The department’s October 24 notice advises that the amended version of subsections (b) and (c) do not apply to accidents that occur prior to December 11, 2011, because the subsections change the legal consequences of past behavior and there is no evidence that those two subsections are intended to be applied retroactively.  

The October 24 notice concludes that the remaining amendments to section 2632.13 are procedural and do apply to accidents that occur prior to the amendments’ December 11, 2011, effective date.

The department’s October 24 notice advises that the amended version of subsections (b) and (c) do not apply to accidents that occur prior to December 11, 2011, because the subsections change the legal consequences of past behavior and there is no evidence that those two subsections are intended to be applied retroactively.

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On September 8, 2011, the California Department of Insurance (“CDI”) held a hearing to consider the adoption of three regulations which would allow an insurer to continue to pay premium taxes based on premiums that are written, rather than premiums that are received, by the insurer. No testimony was put forward at the hearing, which lasted less than ten minutes.

The CDI had a longstanding requirement that insurers must pay premium taxes based on premiums-written. In 2006, the California State Board of Equalization ruled in Matter of the Petitions for Redetermination Under the Tax on Insurers Law of California Automobile Insurance Company that the CDI’s requirement was contrary to the California Constitution and California statutes.

The Board concluded that California law directs that premium taxes should be paid on the basis of premiums-received rather than on the basis of premiums-written. However, the Board’s ruling recognized that the great majority of insurers were following the CDI’s premiums-written requirement and that converting to the premiums-received basis would be costly. 

In the interests of fairness, equity and sound tax administration, the Board urged the CDI not to compel any unwilling insurer to convert to the premiums-received basis.

The proposed regulations seek to implement the Board’s 2006 ruling. The regulations allow an insurer that has been paying premium taxes based on premiums-written to continue to do so. The regulations permit, but do not require, an insurer to switch from the premiums-written basis to the premiums-received basis, but once the insurer makes the switch the insurer cannot go back to the premiums-written basis.

At the close of the September 8 hearing, the CDI made no statement regarding whether or when the proposed regulations will be adopted.

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On August 12, 2011, California Secretary of State Debra Bowen announced that supporters of a proposed initiative on automobile insurance rates may begin to collect signatures to put the measure before California voters. Supporters of the initiative have until January 9, 2012, to submit the 504,760 valid signatures needed to put the initiative on the June 5, 2012, statewide ballot.

The initiative, named the “2012 Automobile Insurance Discount Act,” would allow insurers to use continuous automobile insurance coverage with any admitted insurer or insurers as a rating factor for private passenger automobile insurance.

Under existing California Department of Insurance regulation 2632.5(d)(11), an insurer may use continuous coverage as a rating factor when an individual is currently insured for automobile insurance with his or her insurer or an affiliate insurer. The existing regulation prohibits an insurer from basing the continuous coverage rating factor on coverage provided by another non-affiliated insurer. The proposed initiative would override this existing regulatory prohibition.

Background

Actuarial analyses indicate that, in general, drivers who maintain continuous automobile insurance coverage have a lower risk of future insured losses. Over the past several years, there has been controversy in California over how this lower risk should be considered as a rating factor for private passenger automobile insurance.

Proposition 103

Proposition 103, which was passed by California voters in 1988, enacted Insurance Code Section 1861.02.

Section 1861.02(a) provides that private passenger automobile insurance rates must be determined, in decreasing order of importance, by 1) driving record; 2) number of miles driven; 3) years of driving experience; and 4) optional factors that the insurance commissioner may adopt by regulation. 

Section 1861.02(c) provides that the absence of automobile insurance, in and of itself, shall not be a criterion for determining automobile insurance rates. Proposition 103 declared that its provisions “shall not be amended by the Legislature except to further its purposes.”  

Quackenbush Regulation

In 1996, Insurance Commissioner Chuck Quackenbush exercised his power to adopt optional rating factors under Section 1861.02(a) and adopted a regulation that allowed insurers to use “persistency” as a rating factor.

The regulation did not define “persistency.” The term was interpreted differently by various insurers. Some insurers interpreted “persistency” to mean the number of years a customer has continued insurance coverage with his or her current insurer. Other insurers defined “persistency” more broadly to include continuous coverage with any insurer.

Low Regulation

In 2002, Insurance Commissioner Harry Low adopted a regulation that limited the scope of the persistency rating factor. The Low regulation, which is incorporated in the Department of Insurance’s existing regulatory section 2632.5(d)(11), requires that in applying the persistency rating factor, an insurer may consider only the length of time a driver has been continuously covered with his or her current insurance company or an affiliate of that company. 

SB 841

In 2003, the Legislature sought to override the Low regulation by expanding the scope of the persistency rating factor.

The Legislature passed SB 841, which amended Insurance Code Section 1861.02(c) to provide that an insurer may use continuous coverage with a driver’s current insurer or another insurer as an optional rating factor to determine the driver’s insurance premium. In passing SB 841, the Legislature declared that the bill “furthers the purpose of Proposition 103 to encourage competition among carriers so that coverage overall will be priced competitively.” Governor Gray Davis signed SB 841 into law on August 2, 2003.

In September 2005, the California Court of Appeal ruled in Foundation for Taxpayer & Consumer Rights v. Garamendi (2005) 132 Cal.App.4th 1354 that SB 841 was invalid because it did not further the purposes of Proposition 103. The ruling was based on two points.

1. SB 841’s application of continuous coverage as a rating factor violated the proposition’s provision in Insurance Code Section 1861.02(c) prohibiting the use of the absence of prior insurance “in and of itself” as a criterion for determining rates. 
2. The Legislature’s attempt to specify an optional rating factor was inconsistent with the proposition’s provision in Insurance Code Section 1861.02(a)(4) delegating the exclusive authority to adopt optional rating factors to the insurance commissioner. 

The court disregarded the Legislature’s declaration that SB 841 furthered Proposition 103’s purpose of encouraging competition.

The Court of Appeal’s ruling preserved the Low regulation which limits the application of the continuous coverage rating factor to coverage with a driver’s current insurer or an affiliate of the current insurer. That regulation remains in effect today.

Proposition 17

In 2010 there was an unsuccessful attempt to override the existing regulation with a voter initiative. Proposition 17 would have allowed a driver to demonstrate continuity of coverage by providing proof of coverage from his or her prior insurer or insurers. Proposition 17 failed to gain voter approval at the June 8, 2010, statewide primary election. 

Proposed Initiative

The proposed initiative, which was approved for signature gathering on August 12, 2011, also seeks to override the existing regulation but does not use the same language that was contained in Proposition 17. 

The proposed initiative would enact a new Insurance Code section that expressly allows a private passenger automobile insurer to use continuous coverage as an optional rating factor. 

The initiative defines “continuous coverage” to mean “uninterrupted automobile insurance coverage with any insurer or insurers, including coverage provided pursuant to the California Automobile Assigned Risk Program or the California Low Cost Automobile Program.”

The initiative specifies certain circumstances that qualify for continuous coverage, including a lapse in coverage due to an insured’s active military service or a lapse in coverage of up to 18 months in the last five years due to loss of employment resulting from a layoff or furlough.

The initiative grants a proportional discount to a driver who is unable to demonstrate continuous coverage; the discount reflects the number of years in the immediately preceding five years for which the driver was insured.

Barger & Wolen will continue to report on the state of this new initiative.

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California Assembly Bill 315 (pdf), signed into law by Governor Jerry Brown on July 13, 2011, conforms California law to the Nonadmitted and Reinsurance Reform Act (NRRA) that was part of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (signed into law by President Barack Obama on July 21, 2010).

AB 315’s provisions became operative on July 21, 2011.

It was important for California to enact AB 315 by July 21, 2011, because the NRRA, which went into effect on that date, pre-empts several aspects of state surplus line insurance regulation and taxation. 

The enactment of AB 315 preserves California’s authority to regulate surplus line insurance and to collect surplus line insurance taxes.

Here is a summary of key elements of AB 315. The cited sections are the California Insurance Code sections that are added or amended in the chaptered version of AB 315.

Home State

AB 315 introduces the concept of the “home state” of the insured. The concept of home state is especially important for determining whether California law governs a surplus line transaction (1761(a)), whether a producer must obtain a surplus line license (1761(a)), and whether a California tax is imposed on surplus line premiums (1774(a)).

AB 315’s description of home state mirrors the provisions of the NRRA.

If an insured is a business, the insured’s home state is the state where the insured maintains its principal place of business. If an insured is an individual, the insured’s home state is where the insured maintains his or her principal residence. However, if 100% of the insured risk is located outside the state where the insured maintains its principal place of business or principal residence, the home state is the state to which the greatest percentage of the insured’s taxable premium for the insurance contract is allocated (1760.1(e)(1)(A)and(B)).

If more than one insured from an affiliated group is named in a single non-admitted insurance contract, the home state is the home state of the member of the affiliated group that has the largest percentage of premium attributed to it under the insurance contract (1760.1(e)(4)). Existing Insurance Code section 1215(a) defines “affiliate.”

A surplus line broker has the responsibility to determine whether California is the insured’s home state (1760.2), and is required to maintain records that verify that the insured is a California home state insured (1768).

Premium Tax Payment

Under pre-AB 315 law, the surplus line insurance tax is imposed on the portion of the premium allocated to risks in California. AB 315 changes that system in order to conform California law to the NRRA.

AB 315 imposes a tax on 100% of the surplus line insurance premium when California is the home state of the insured (1775.5(b)).

AB 315 includes special transition rules. If a new policy or a renewal policy has an effective date on or before July 20, 2011, and is placed on or before July 20, 2011, the provisions of AB 315 do not apply (1774(d)(3)).

States are allowed to enter into interstate compacts to determine the allocation of surplus line premium taxes. California has not entered into any such compacts.

Insurer Eligibility

AB 315 sets eligibility requirements for a non-admitted insurer that wants to insure California home state insureds. 

First, if the insurer is a U.S.-domiciled insurer, the insurer must be licensed to write the type of insurance in its domiciliary jurisdiction and must have a capital and surplus that together total $45 million. 

Second, if the insurer is not domiciled in the U.S., the insurer must be listed on the NAIC International Insurers Department’s Quarterly Listing of Alien Insurers (1765.1(a) and (b)).

AB 315 includes detailed requirements that must be met in order to place insurance on a limited basis with an insurer that does not meet the bill’s eligibility requirements (1765.1(h)).

AB 315 repeals provisions in Insurance Code section 1765.1 that established the List of Eligible Surplus Line Insurers (LESLI). The bill replaces LESLI with the List of Approved Surplus Line Insurers (LASLI) (1765.2(f)). The requirements of LASLI are substantially the same as the requirements of LESLI. Surplus line insurers that are on LESLI as of July 21, 2011, are automatically on LASLI (1765.1(i)). In order to remain on LASLI, insurers will have to file required documents and pay filing fees (1765.2(c)-(e) and (j)).

Commercial Insured

AB 315 retains the general requirement that a surplus line broker may place business with a non-admitted insurer only after making a diligent search for coverage in the admitted market (1763(a)). 

However, AB 315 creates a new exception to the general requirement. The diligent search requirement does not apply to a commercial insured (1763(h)). 

In order to qualify as a commercial insured, an insured must employ or retain a qualified risk manager, must have paid nationwide commercial property/casualty insurance premiums in excess of $100,000 in the immediately preceding 12 months and must meet one of five listed criteria which include minimum standards relating to net worth, revenues and number of employees (1760.1(b)). The surplus line broker is responsible for ensuring that an applicant for insurance is a commercial insured (1763(h)(2)).

Administrative Services

AB 315 allows a California domiciled insurer to have common directors with an affiliated non-admitted insurer and permits a California domiciled insurer to perform administrative services for an affiliated non-admitted insurer (1761(b)).

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In 1988, the California Supreme Court issued its landmark decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, disallowing private rights of action based on violations of the Unfair Insurance Practice Act (“UIPA”), otherwise known as third-party bad faith claims. Shortly thereafter, the prohibition was extended to first-party bad faith claims.

Most significantly, a series of Court of Appeal decisions disallowed violations of the UIPA to be brought as claims under the California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or the “UCL”). 

As one court concluded:

we have no difficulty in [holding] the Business and Professions Code provides no toehold for scaling the barriers of Moradi-Shalal.” Safeco Ins. Co. v. Superior Court, 216 Cal. App. 3d 1491, 1494 (1990). 

More recently, another court held that “parties cannot plead around Moradi-Shalal’s holding by merely relabeling their cause of action as one for unfair competition.” Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061, 1070 (2004).

In November 2009, we reported on Zhang v. Superior Court, a case that rejected Textron, and held that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact an insured asserts what appear to be violations of the UIPA is not necessarily an end run around Moradi-Shalal so long as the insured also alleges the insurer acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so. 

The case was short-lived, as the Supreme Court accepted review in February 2010 and the decision became depublished. While the Zhang case is fully briefed, the Supreme Court has not yet set oral argument.

On June 15, however, another Court of Appeal decision issued again sought to undercut the prohibition on using the UCL to pursue UIPA-like claims. 

In Hughes v. Progressive Direct Ins. Co., the plaintiff sued his insurer in a purported class action based on the automobile insurer’s alleged company-wide practice of steering its insureds to repair shops that were part of Progressive’s Direct Repair Program (DRP) and misrepresenting their ability to take their vehicle to a non-DRP repair shop. 

The sole claim alleged was under the UCL, but the predicate statute relied on to support the UCL claim was Insurance Code section 758.5.

That statute, which prohibits insurers from requiring an insured’s vehicle to be repaired at a specific repair shop, or suggesting a specific shop be used, unless the insured is informed in writing of his or her rights to select another repair shop, does not, just like the UIPA, permit a private right of action but only enforcement by the Insurance Commissioner pursuant to the UIPA. 

Accordingly, the trial court sustained the insurer’s demurrer to the complaint, concluding that just as the UCL could not be used to circumvent UIPA claims under Moradi-Shalal, neither could a UCL claim proceed based upon Section 758.5.    

The Court of Appeal reversed, and concluded that Moradi-Shalal does not bar a claim by an insured against an insurer under the UCL based solely on the allegations the insurer violated Section 758.5. 

After discussing in detail the decisions issued since the time of Moradi-Shalal vis-à-vis the UCL, as well as the legislative history of Section 758.5, and then relying on a parsed reading of the language of the UCL in which its remedies are “cumulative” to other laws unless otherwise “expressly” provided, the court found that an alleged violation of a statute like Section 758.5, so long as it does not involve conduct violating the UIPA, “may serve as the predicate for a UCL claim absent an express legislative direction to the contrary.”  

The decision, however, was not one of clear unanimity. One of the three Justices on the appellate panel issued his own concurring opinion, in which he expressed his “considerable misgivings” as to the majority opinion. After noting that the opinion “hangs precipitously on one word, namely ‘express,” Justice Fred Woods lamented that the social problems sought to be addressed by the Moradi-Shalal decision and various legislative remedies might now be undone, and that he saw “storm warnings on the horizon.”

Perhaps, just as the Supreme Court accepted review of the Zhang case last year to address that appellate decision seeking to create a chink in the armor of Moradi-Shalal, it will similarly accept review of Hughes to address this latest attack on the scope of Moradi-Shalal and bring some certainty to whether the reach of the UCL is as broad as these two lower appellate courts have held. 

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By John M. LeBlanc and Jason C. Love

On June 1, 2011, the California State Assembly passed AB 52, which was initially introduced in December 2010.

Beginning January 1, 2012, the bill would require health care service plans and health insurers in California to obtain prior approval from the Department of Managed Health Care or the Department of Insurance for all proposed rate increases.

Under the proposed legislation, the Department of Managed Health Care and the Department of Insurance would be prohibited from approving any rate or rate change that is excessive, inadequate, or unfairly discriminatory. 

In addition, the bill calls for an examination by the Department of Managed Health Care and the Department of Insurance of all rate increases that become effective between January 1, 2011 and December 31, 2011, to ensure that those rates are not excessive, inadequate, or unfairly discriminatory, and to order the refund of any payments made pursuant to any such rate.

The bill must still be approved by the California Senate and signed into law by the Governor in order to become legally operative.

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

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By Robert W. Hogeboom and Alexandra E. Ciganer

On May 23, 2011, California Insurance Commissioner Dave Jones along with State Controller John Chiang held an investigatory hearing on the claims practices of Metropolitan Life Insurance Company (“MetLife”) regarding the payment of death benefits under life insurance policies and annuities. Joining the Commissioner and State Controller were regulatory officials from the Florida and Minnesota Departments of Insurance who are also investigating death benefits claims practices.

MetLife was called to the hearing pursuant to the California Department of Insurance’s (“CDI”) investigatory subpoena to appear and provide documents to determine whether the insurer’s practices and procedures relating to its use of its death master file data and related information violates various sections of the Insurance Code.

The Commissioner’s opening statement reflects his concern that a number of life insurers are using death information to “boost their finances by stopping annuity payments, but not using the same information to pay policyholders the beneficiary payments they are due.” 

The CDI announced that it is commencing market conduct exams on the ten largest life insurers to investigate these practices. Adam Cole, CDI General Counsel, along with Insurance Commissioner Jones, gave opening statements and conducted the bulk of the questioning of MetLife officials. Mr. Cole indicated that the CDI is reviewing the death claims practices to determine if violations exist under California Insurance Code subsections 790.03(h)(3) and (5). Subsection (3) refers to failing to adopt reasonable standards for the prompt investigation and processing of claims. Subsection (5) refers to not attempting in good faith to effect prompt, fair and equitable settlements of claims. Other sections of the California Insurance Code were also cited.

In assessing whether claims settlement practices violated these statutes, Commissioner Jones dedicated a significant portion of the inquiry to MetLife’s use of the U.S. Social Security Administration death master file in identifying deceased insureds. Much of the time was spent questioning the application of the death master file to different insurance products, including group annuity, group life and individual life products, frequency of the death master file sweeps, and what constitutes a match in the death master file.

Commissioner Jones raised his concern with the varying frequency of death master file sweeps to the different products. He probed into the reasons for conducting a death master file sweep of individual life insurance products annually versus monthly or quarterly for other products. The regulators also dedicated significant attention to MetLife’s use and characterization of the death master file as a “safety net” procedure in identifying the deceased individual life insurance insured. Commissioner Jones’ view appears to be that the use of the death master file as a safety net is not sufficient and should be used as “an integral part of the normal process.” 

While the investigatory hearing was characterized by the CDI as a public hearing to investigate company actions, policies and practices, in actuality it was a disciplinary investigatory hearing to determine specific violations, which is tantamount to a deposition. As such, it was not being used as a public forum to exchange information which could ultimately lead to best practices legislation with respect to payment of death benefits, but to provide traction for the CDI to institute disciplinary proceedings against members of the life insurance industry.

A copy of the Commissioner’s Press Release on the hearing and his plans to conduct market conduct examinations is found here.

For more information, please contact Robert Hogeboom at (213) 614-7304, or rhogeboom@bargerwolen.com.

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Robert Hogeboom Testifies on California Restitution Remedy Bill

On April 28, 2011, Barger & Wolen Senior Regulatory Counsel, Robert W. Hogeboom, testified before the Senate Insurance Committee as an industry expert opposing Senate Bill 631. 

SB 631, as drafted, would give the Insurance Commissioner additional remedies of restitution and reimbursement of attorney’s fees and costs in California Department of Insurance enforcement actions brought on behalf of consumers claiming wrongful conduct by insurers or other licensees, including producers. For more details, please see New Restitution Remedy Proposed for Insurers and Licensees in California.

Immediately before the Senate Insurance Committee hearing, author Senator Noreen Evans (D-District 2) announced her decision to make SB 631 a two-year bill. Her decision is presumed to be the result of the Legislative Counsel’s opinion to the Senate Insurance Committee raising California constitutional issues that the legislation may give the Commissioner remedies only available to the courts. 

At the hearing, Hogeboom testified that the legislation would violate the separation of powers clause in the California Constitution. Restitution is only given to quasi-judicial entities such as the California Workers’ Compensation Appeals Board. Further, reimbursement of attorney’s fees and costs would exceed even the power of the courts in most cases. 

Hogeboom also testified that because the legislation would extend payment of restitution for violations of Proposition 103’s rating law, the bill would likely require a two-thirds vote of the Legislature to pass.

Based on his lengthy experience as an enforcement regulatory lawyer, Hogeboom testified that the measure would actually hinder due process rights from licensees because many producer licensees would not be able to afford an administrative hearing when they face the risk of having to pay both restitution and reimbursement of attorney’s fees and costs. This would give the CDI more leverage in forcing licensees into settlements. 

Following the April 28, 2011 hearing, the bill was put over for another year in order to more fully explore its legal issues.

For more information, contact Robert Hogeboom at (213) 614-7304 or rhogeboom@bargerwolen.com.

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Over the course of two days at the end of March, the Ninth Circuit Court of Appeals and the Sonoma County Superior Court issued two separate decisions dismissing claims by air ambulance companies that sought to obtain medical provider benefits under workers’ compensation without following the dictates of the California workers’ compensation system. In both instances, the courts found that they did not have subject matter jurisdiction to consider the claims alleged by the air ambulance companies.

In early 2009, California Shock Trauma Air Rescue (“CALSTAR”) filed two virtually identical actions in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers. 

CALSTAR’s lead lawsuit in the consolidated actions, California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al., argued that, as a result of CALSTAR being certified by the Federal Aviation Administration to operate as an air carrier, any claims for payment it submitted to workers’ compensation insurers and self-insured employers in California should not be limited to those amounts set forth in the Official Medical Fee Schedule for ambulance services, California Code of Regulations, title 8, section 9789.70. 

Rather, as a federally certified air carrier, CALSTAR asserted that the Fee Schedule is preempted by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act (“FAA/ADA”).

In other words, CALSTAR sought to avoid the limitations on payment that would apply to all other medical providers and even ground-based ambulances set forth in the Fee Schedule. CALSTAR’s complaint alleged causes of action for declaratory relief and a number of state law claims.

As reported in this blog, the federal district court dismissed CALSTAR’s lawsuits on July 24, 2009, finding, on a number of grounds, that it lacked federal subject matter jurisdiction to consider CALSTAR’s claims. CALSTAR appealed the dismissal of its two actions to the Ninth Circuit.

On March 31, 2011, the Ninth Circuit published its opinion in the two consolidated appeals, affirming the decision of the trial court and concluding that the well-pleaded complaint rule precluded the federal court’s exercise of federal subject matter jurisdiction with respect to purely state law claims.

More specifically, the three-judge panel found that CALSTAR’s claims did not “arise under” the laws of the United States, and its attempt to obtain a determination as to federal preemption of the Fee Schedule was, at most, in anticipation of its response to the defense that would be posited by the defendants – and this is not adequate to create federal court jurisdiction. 

The Ninth Circuit further dismissed CALSTAR’s attempt to fall within the case law that allows federal court jurisdiction over state law claims that “implicate significant federal issues,” since, once again, CALSTAR could not satisfy the well-pleaded complaint rule, and its state law claims do not turn on a federal issue.

Finally, the Court concluded that the mere fact that CALSTAR had alleged claims for declaratory relief in addition to its state law claims did not allow the “procedural” device of such a declaratory relief claim to confer “arising under” jurisdiction. This is especially true here, since CALSTAR’s actions did not sue any state official, which the Supreme Court and other federal circuits had found to be a prerequisite to allowing any such Supremacy Clause claims to proceed in federal court.

One of the defenses raised by the insurers and self-insured employers in CALSTAR, but never addressed by the federal trial and appellate courts was that, even if there were federal subject matter jurisdiction, the air ambulance company’s action must still be dismissed because the claims are subject to the exclusive jurisdiction of the Workers’ Compensation Appeals Board (“WCAB”) and fall within the exclusive remedies of the Workers’ Compensation Act. 

The day before the Ninth Circuit issued its decision, a California state trial court in Sonoma County had the occasion to address that precise issue, dismissing claims by another air ambulance company due to the exclusive jurisdiction of the WCAB and the exclusive remedy the Act.

REACH Air Medical Services LLC sued many of the same defendant insurers and self-insured employers as did CALSTAR, and the defendants demurred to REACH’s state court complaint on the grounds of exclusive jurisdiction/exclusive remedy. On March 30, Sonoma County Superior Court Judge Elliot Daum issued his Order sustaining the demurrers and dismissing the action without leave to amend. If REACH wanted to pursue its claims for additional benefits beyond those paid by the Fee Schedule under worker’s compensation, it could only do so within the exclusive remedies provided by the Act and before the exclusive jurisdiction of the WCAB.

One final note. In October 2010, CALSTAR filed its own state court action in Solano County Superior Court against many of the same defendant insurers and self-insured employers. That action seeks further payment of medical provider benefits for services rendered after the time CALSTAR filed its federal court action. The defendants have demurred to that state court complaint, and a hearing on their demurrers is set for April 21.

Larry Golub of Barger & Wolen has represented a number of the defendants in all three lawsuits.

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The California Department of Insurance (“CDI”) published, on March 11, 2011, proposed regulations containing suitability requirements to govern the sale of annuities (see Insurance Commissioner Jones' press release). This represents an attempt by the CDI to accomplish by regulation what it failed to accomplish several times by statute in the past decade.

The proposed regulations are based on the NAIC Suitability in Annuity Transactions Model Regulations, as revised by the NAIC in 2010, but include some revisions.

It is important to note that for many years the CDI has held the position that the prior versions of the NAIC Suitability Model did not go far enough in protecting consumers. The CDI supported unsuccessful legislation in California at least three times in the mid-2000s that sought to impose suitability requirements that were more onerous than the then current NAIC Suitability Model.

Thus, while most states have adopted laws that follow the NAIC Suitability Model, California currently lacks laws that provide specific suitability requirements that pertain to the sale of annuities.

Given the lack of express suitability requirements, the CDI has sought to regulate suitability in connection with the sale of annuities using other tools such as:

1. general legal concepts of principal-agent responsibility;
2. requirements relating to replacements; and,
3. California Insurance Code Section 785(a)’s imposition of a duty of good faith and fair dealing in connection with the sale on an insurance product to a senior.

The regulations proposed by the CDI include a provision that would make them applicable only to sales of annuities to purchasers aged 65 and older. This is in contrast to the NAIC Suitability Model which applies to all sales of annuities.

Another important distinction between the CDI’s proposed regulations and the NAIC Suitability Model is that the CDI proposal does not include the “FINRA Safe Harbor” provisions which were some of the primary revisions made by the NAIC to the Suitability Model last year. A public hearing will be held on the CDI’s proposed regulations on April 25, 2011. 

It is interesting to note that the The National Conference of Insurance Legislators recently endorsed the NAIC Suitability Model. Also, the Senate Insurance Committee of the California Legislature introduced legislation, SB 715, on February 18, 2011, that seeks to codify the NAIC Suitability Model. SB 715’s draft language is the same as the NAIC Suitability Model that was revised by the NAIC last year. 

It is not clear at this point in time why the CDI has proposed the NAIC Suitability Model in the form of regulations when the Model is pending as a proposed statute. One thought is that the CDI is hedging its bets. One problem that the CDI may have is that it is unclear whether there is sufficient statutory authority for the CDI to promulgate the NAIC Suitability Model as a regulation.

For more information, please contact Randall Doctor.

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By Robert W. Hogeboom and Larry M. Golub

On March 1, 2011, California State Senator Noreen Evans introduced Senate Bill 361 as spot bill legislation. The legislation was at the request of California Insurance Commissioner Dave Jones who seeks to enable consumers to obtain their out-of-pocket costs associated with claimed wrongful conduct by insurers or other licensees, which would include producers. 

As explained in Senator Evans’ press release, the bill grants explicit authority to the California Department of Insurance (CDI) to “order restitution as part of an administrative enforcement action.” 

Because the legislation is a spot bill, the next version of the bill will provide the details discussed in the press release. Senator Evans’ office also issued an SB 631 Fact Sheet that provides further information on the proposed legislation.

The press release and fact sheet acknowledge that the CDI presently does not have the authority to order insurers or other licensees to restore out-of-pocket expenses or money wrongfully obtained.   

The fact sheet provides examples of the types of monetary losses that are sought to be dealt with by SB 631:

1. health insurance rescissions for out-of-pocket costs for medical treatment that the CDI alleges should be covered under the policy;
2. the charging of a premium that is higher than allowed; and,
3. the effect of the recent court decision in MacKay v. Superior Court.  MacKay held that consumers cannot sue an insurer directly for rating activities that were subject to the CDI’s approval in the rate application process. 

The effect of this bill would likely result in the CDI initiating administrative actions based on consumer complaints as well as market conduct rating and underwriting and claims examinations for the primary purpose of ordering restitution to consumers.  

The press release advises that SB 631 would allow insurers to challenge the CDI’s determination in court, and it also states that the bill would preserve the ability of consumers to sue their insurer in court over the claimed wrongful conduct.

Perhaps just as important, the legislation allows the CDI to seek reimbursement for all of its costs in bringing the enforcement action.  Currently, the CDI has no authority to seek reimbursement for the costs it incurs in administrative actions.

Proponents of SB 631 may face an uphill battle with the aspect of this legislation that amends Proposition 103’s penalties relating to rating and underwriting matters. 

It is our preliminary analysis that Proposition 103 and California Insurance Code (CIC) § 1861.14 specify that violations of Article 10 “Reduction and Control of Insurance Rates” are subject to the penalties set forth in CIC §§ 1859.1 and 1858.07 (i.e., $5,000 for each act and $10,000 if willful). 

Because this legislation would have the effect of amending CIC § 1861.14 to provide restitution, it would require a two-thirds vote of the legislature.

For more information, contact Robert Hogeboom at (213) 614-7304 | rhogeboom@bargerwolen.com, or Larry Golub at (213) 614-7312 | lgolub@bargerwolen.com.

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Barger & Wolen insurance litigation and regulatory law partner Marina Karvelas will be a guest blogger for the DRI’s blog, DRI Today for the next two weeks.

Her first post, Has California Gone Too Far in Responding to Underinsurance Problems in Homeowners Insurance? is live.

California’s Office of Administrative Law recently approved new regulations promulgated by the California Insurance Commissioner for homeowners insurance. 

The regulations create new duties, impose additional standards and establish a new "unfair trade practice" violation on insurance companies and insurance producers selling homeowners insurance policies in California.

Months in the making, the new regulations profess to respond to underinsurance problems experienced by California homeowners who in the wake of wildfire disasters throughout the state in the past decade discovered they did not have enough insurance to rebuild their homes. 

The new regulations, as well as a newly revised California Residential Property Disclosure Form and California Residential Property Insurance Bill of Rights, mark a key shift in California’s public policy. 

The new California homeowner insurance regulations and disclosure requirements take effect on June 27, 2011, and July 1, 2011, respectively.

Click here to read more.

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On February 4, 2011, California Insurance Commissioner Dave Jones released draft guidelines for implementing SB 1163 (“Guidance 1163:2”).

SB 1163, signed by former Governor Schwarzenegger on September 30, 2010, responds to the federal Patient Protection and Affordable Care Act (“PPACA”), which requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage.

Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase.

SB 1163, effective January 1, 2011, requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary. 

The bill authorizes the departments to review these filings and issue guidance regarding compliance. It also requires the departments to consult with each other regarding specified actions as well as post certain findings on their Internet Web sites.

In his draft guidelines (“Guidance 1163:2”), Commissioner Jones lists several factors that will be used by the Department to determine if a rate is “unreasonable.”

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By John M. LeBlanc and Jason C. Love

On Monday January 24, 2011, newly elected California Insurance Commissioner Dave Jones announced in a press release that he had obtained approval from the California Office of Administrative Law to issue an emergency regulation allowing the Department of Insurance (the “Department”) to enforce the medical loss ratio guidelines in the Patient Protection and Affordable Care Act of 2009 (“PPACA”). 

As of January 1, 2011, the PPACA requires all health insurers in the individual market to maintain an 80% medical loss ratio. The Department obtained approval to amend 10 California Code of Regulations § 2222.12 to mirror this requirement. A copy of the amended text can be viewed here. 

The emergency regulation went into effect on January 24, 2011, and expires on July 26, 2011. It requires California health insurers to demonstrate compliance with the 80% medical loss ratio at the time of the Department’s rate review.

Originally posted to Barger & Wolen's Life, Health and Disability Insurance Law Blog.

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California Supreme Court Rejects Requests to Depublish MacKay

by Kent R. Keller

On October 6, 2010, Division Three of the Second Appellate District issued a landmark decision in MacKay v. Superior Court, 188 Cal. App. 4th 1427 (2010), declaring that approved insurance rates subject to Proposition 103 cannot thereafter be collaterally attacked in a civil action.

In brief, MacKay was a certified Unfair Competition Law (UCL) class action involving more than 500,000 class members who contended that 21st Century Insurance Company had used two illegal “rating factors” in developing automobile insurance premiums. The two factors had been included in rate and class plan filings approved on multiple occasions by the Insurance Commissioner. 

The issue, as the Court explained, was:

whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.” MacKay, supra at 1434. 

In a detailed opinion, authored by Justice H. Walter Croskey, the Court concluded that approval did preclude a collateral attack in a civil action. 

This decision is of critical importance to insurers and consumers subject to rate approval pursuant to Proposition 103. 

Prior to MacKay, it was not clear whether approval precluded civil actions. As a result, many insurers were sued, virtually always in class actions, by parties challenging approved rates on one basis or another. 

The result was that, while insurers were required to obtain rate approval before putting a rate into effect and once approval was obtained could had to use the approved rate, they did so at the peril of a class action lawsuit. 

Whether such lawsuits benefited insureds or simply increased premiums in the future is a continuing debate. What, however, was clear was that such actions often produced large attorneys’ fees awards.

Given the value of these class actions to the plaintiffs’ bar, it was not surprising that requests to depublish MacKay were numerous. 

In addition to a request from counsel for the plaintiffs in MacKay, requests were filed by Consumer Watchdog, the City and County of San Francisco, the Consumer Attorneys of California, Public Advocates, the Mexican American Legal Defense & Education Fund, the Southern Christian Leadership Conference of Greater Los Angeles, United Policyholders, the California State Insurance Commissioner, and others. 

Indeed, by a letter dated January 10, 2011, new Commissioner Dave Jones advised the California Supreme Court that he, like his predecessor, supported depublication.

Despite this tsunami of support for depublication, on January 12, 2011 the Supreme Court denied all requests and declared the case closed. 

While the reasons for denying or granting depublication are never certain, we have to believe that the Supreme Court recognized the correctness of Justice Crokey’s decision. As a result of the Supreme Court’s action, MacKay remains valid and precedential authority.

21st Century Insurance Company was represented in this case by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

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On December 29, 2010, the Office of Administrative Law ("OAL") approved California Insurance Commissioner Poizner's new regulations setting forth "Standards and Training for Estimating Replacement Value on Homeowners' Insurance." The regulations take effect on June 27, 2011. 

As discussed earlier in this blog here, the regulations encompass significant new obligations on producers and insurers:

• Require all California resident fire and casualty broker-agents and personal lines broker-agents, who have not already done so, to satisfactorily complete one three-hour training course on homeowners’ insurance valuation prior to estimating the replacement value of structures in connection with, or explaining the various levels of coverage under, a homeowners’ insurance policy;
• Require insurers, agents and brokers that provide replacement cost estimates to applicants and insureds to document who created the estimate and the sources or methods used to create the replacement cost estimate; and
• Require that all replacement cost estimates communicated to applicants or insureds be complete, based upon specifically enumerated standards set forth in the regulations. [CDI 12/31/2010 Press Release]

The final regulations, as adopted by the OAL, address some of the criticisms from industry opponents.

For example, Section 2695.183(e) was amended to remove any reference to setting or recommending a policy limit. The Commissioner's Final Statement of Reasons explains that the language was removed in response to comments that it "could be interpreted as establishing an obligation on the part of licensees to set or recommend policy limits, which is not the intent of the regulations."

Issues concerning whether the new regulations exceed the authority of the enabling statute remain and may be the subject of litigation down the road.

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By Randall Doctor and Timothy J. Moroney

As we have previously reported in this blog, the CDI issued a broadly-drafted Data Call on July 9, 2009, to all insurers admitted in California seeking information on their investments in or related to Iran as a measure to enforce U.S. governmental sanctions against Iran, including restrictions with respect to doing business with companies that do business in Iran.

As a result of that Data Call, Commissioner Poizner issued a press release advising that more than 1000 insurers licensed to do business in California had agreed to a voluntary moratorium as to future investments in companies that do business in Iran (read more here). He also released a list of 296 insurers doing business in California that would not agree to the voluntary moratorium.

The press release further advised that, as of March 31, 2010, the CDI “disqualified an estimated $6 billion in holdings” in the 50 Iran-related companies (based on 2008 data). The list of the 50 “Iran-related” companies was expanded to 51 companies in April 2010.

Earlier today, Commissioner Poizner issued a press release advising that the CDI has removed four companies from the original list of the 51 “Iran-related” companies based on those companies’ decisions to end operations in Iran. The companies removed form the List are Royal Dutch Shell (Netherlands), Shell International Finance (Netherlands), Total SA (France), and Reposol YPF (Spain).

Commissioner Poizner commends these companies for “putting principle ahead of profit” and hopes the remaining 47 companies on the List follow suit.

He also notes that the CDI’s efforts, together with efforts by the United States Government, the European Union, the United Nations, and recently by the California Legislature (in connection with divestment of State assets in connection with awarding state contracts to companies with Iranian investments), are proving to "add a layer of financial pressure to the broader legal and public relations aspects of the Iran divestment effort.”

The updated CDI List of Iran-related companies is attached here.

Barger & Wolen will continue to follow the CDI’s activities on this matter.

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Led by Robert W. Hogeboom, with special commentary from Robert J. Cerny and Western General Insurance Company General Counsel, Daniel Mallut, Recent Trends in Market Conduct Examinations will cover:

• The statutory framework for claims examinations and what §790.03(h) really means
• Understanding the Unfair Claims Settlement Regulations and how, if and when they relate to a §790.03 violation
• The examination process—new trends on which the examination will focus
• Negotiation, resolution and cost
• Order to Show Cause hearing process
• New issues in market conduct compliance

When:   Wednesday, December 8, 2010
Where:  Los Angeles Airport Marriott
            5855 West Century Boulevard
            Los Angeles, CA 90045
Time:    10:00 a.m.—2:00 p.m. (lunch provided)

Who should attend? In-house counsel and senior claims personnel who specialize in the claims examination process and disciplinary actions in California.

For more information, or to register for the event: Please e-mail Heather Milligan here or 213.614.7382.

California CLE credits are provided.

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On November 30, 2010, California Insurance Commissioner Steve Poizner issued a Notice to all California Residential Property Insurers attaching the revised California Residential Property Disclosure Form and Bill of Rights.

Pursuant to AB 2022, which was written about in detail here, California insurers must implement the new notice and revised bill of rights on July 1, 2011.

On October 27, 2010, Commissioner Poizner invited public comment with respect to changes recently made to his proposed regulations setting forth "Standards and Training for Estimating Replacement Value on Homeowners’ Insurance.” (Amended Text of Regulation). The deadline for comments was November 12, 2010.

Personal Insurance Federation of California submitted comments addressing, among other issues, whether the amended regulation meets the requirements of California Government Code section 11349.1 in that it appears to exceed the authority of the enabling statute; whether the regulations would apply to manufactured homes; as well as problems with the broad definition of "estimate of replacement cost" and new obligations imposed on insurance licensees.

As of this date, the proposed regulations have not been adopted.

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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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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 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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Yesterday afternoon, the California Office of Administrative Law (“OAL”) issued a decision finding that a rule adopted by California Department of Insurance (“CDI”) to restrict insurers’ investment in companies that do business with Iran was an improper “underground” regulation. A copy of the OAL’s decision is found here (pdf).

As we previously reported in this blog, on July 9, 2009, the CDI issued a broadly-drafted Data Call to all insurers admitted in California seeking information on their investments in or related to Iran.

The Data Call not only sought information as to insurers’ direct investments in organizations owned or controlled directly or indirectly by the Iranian government, but also indirect investments, including investments in a company that, in turn, does business with any of the five sectors set forth in the Data Call (defense, nuclear, petroleum, natural gas or banking). The information was due by September 30, 2009. 

At the time, it was announced that California Insurance Commissioner Steve Poizner sought such information as a measure to enforce U.S. governmental sanctions against Iran, including restrictions with respect to doing business with companies that do business in Iran.

On May 13, 2010, we reported that Commissioner Steve Poizner issued a press release advising that more than 1000 insurers licensed to do business in California had agreed to a voluntary moratorium as to future investments in companies that do business in Iran. He also released a list of 296 insurers doing business in California that would not agree to the voluntary moratorium. The press release further advised that, as of March 31, 2010, the CDI “disqualified an estimated $6 billion in holdings in the 50 Iran-related companies” (based on 2008 data).

Meanwhile, on March 29, 2010, five insurance trade associations (the American Council of Life Insurers, the American Insurance Association, the Association of California Insurance Companies, the Association of California Life and Health Insurance Companies, and the Personal Insurance Federation of California) filed a petition with the OAL contending that the Commissioner’s rule on Iran investment activity constituted an impermissible “underground” regulation. “Underground” regulations are rules issued by state agencies that meet the definition of a “regulation” under Government Code section 11342.600 and are subject to the California Administrative Procedure Act (“APA”), but were not adopted pursuant to the APA process.

The OAL found that the CDI’s rule on Iranian investments was indeed a “regulation,” such that it should have been, but was not, adopted pursuant to the procedures set forth in the APA. The OAL specifically advised that it was not evaluating the advisability or wisdom of the underground regulation, nor whether the CDI possessed the authority to issue such a regulation under the proper APA procedure.

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

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

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On September 30, 2010, Governor Schwarzenegger signed AB 2022 into law (Chaptered copy).

Introduced by Assembly Member Ted Gaines (R), AB 2022 revamps California’s Residential Property Disclosure Form (current page 3; new page 10) and the accompanied California Residential Property Insurance Bill of Rights (current page 13; new page 15). The new disclosure form, drafted in plain and simple language, significantly improves the current form and makes understandable the differences in residential insurance coverages available to California insurance consumers. The changes, however, are much more than stylistic.

Commissioner Poizner, whose office helped craft AB 2022, has also drafted comprehensive regulations in an effort to respond to the under-insurance problems caused by the 2003, 2007 and 2008 California wildfires.

The Proposed Regulations establish standards for accurate replacement cost estimating, broker agent training on replacement cost estimating, and new record keeping requirements. The Proposed Regulations place the burden of accurately estimating replacement value of a home squarely on the insurance industry. The new disclosure form, the first step towards this regulatory reform, removes critical language found in the current disclosure form that obligates the consumer to determine and maintain the proper policy limits on their home. 

PART 1

California Residential Property Disclosure Form (July 1, 2011)

Effective July 1, 2011, insurance companies must use the new disclosure form. The new form eliminates the legalese that plagues the current form and presents the different coverage levels in a reader friendly manner. The new form calls specific attention to the fact that “actual cash value” coverage is “the most limited level of coverage listed,” while “guaranteed replacement cost” coverage is “the broadest level of coverage.” The new coverage definitions are as follows:

• ACTUAL CASH VALUE COVERAGE pays the costs to repair the damaged dwelling minus a deduction for physical depreciation. If the dwelling is completely destroyed, this coverage pays the fair market value of the dwelling at the time of loss. In either case, coverage only pays for costs up to the limits specified in your policy.
• REPLACEMENT COST COVERAGE is intended to provide for the cost to repair or replace the damaged or destroyed dwelling, without a deduction for physical depreciation. Many policies pay only the dwelling’s actual cash value until the insured has actually begun or completed repairs or reconstruction on the dwelling. Coverage only pays for replacement costs up to the limits specified in your policy.
• EXTENDED REPLACEMENT COST COVERAGE is intended to provide for the cost to repair or replace the damaged or destroyed dwelling without a deduction for physical depreciation. Many policies pay only the dwelling’s actual cash value until the insured has actually begun or completed repairs or reconstruction on the dwelling. Extended Replacement Cost provides additional coverage above the dwelling limits up to a stated percentage or specific dollar amount. See your policy for the additional coverage that applies.
• GUARANTEED REPLACEMENT COST COVERAGE covers the full cost to repair or replace the damaged or destroyed dwelling for a covered peril regardless of the dwelling limits shown on the policy declarations page.
• BUILDING CODE UPGRADE COVERAGE, also called Ordinance and Law coverage, is an important option that covers additional costs to repair or replace a dwelling to comply with the building codes and zoning laws in effect at the time of loss or rebuilding. These costs may otherwise be excluded by your policy. Meeting current building code requirements can add significant costs to rebuilding your home. Refer to your policy or endorsement for the specific coverage provided and coverage limits that apply.

In addition, the new disclosure form removes the following statements from the replacement cost coverage definitions in the current disclosure form:

To be eligible for [this coverage], you must insure the dwelling to its full replacement cost at the time the policy is issued, with possible periodic increases in the amount of coverage to adjust for inflation and increases in building costs; you must permit inspections of the dwelling by the insurance company; and you must notify the insurance company about any alterations that increase the value of the insured dwelling by a certain amount (see your policy for that amount).”

To be eligible to recover this benefit, you must insure the dwelling to [company shall denote percentage] [ ] percent of its replacement cost at the time of loss.”

California Residential Property Insurance Bill of Rights (July 1, 2011)

The revised bill of rights that must accompany the new disclosure form eliminates the first 16 lines of the current disclosure form. The omitted lines include statements concerning the applicant’s/policyholder’s burden to determine and maintain proper policy limits such as: “Take time to determine the cost to rebuild or replace your property in today’s market.” “Once the policy is in force, contact your agent or insurance company immediately if you believe your policy limits may be inadequate.” 

The language deleted from the current versions of the disclosure form and bill of rights marks a significant change in California public policy. In Everett v. State Farm General Ins. Co., 162 Cal. App. 4th 649 (2008), the court held that the homeowner, rather than the property insurer, had the duty to maintain insurance policy limits equal to replacement costs. In reaching this conclusion, the court relied on the current version of the residential property disclosure which places the burden of determining whether a higher policy limit is needed on the homeowner.

AB 2022 and Commissioner Poizner’s proposed regulations effectively nullify Everett.

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Barger & Wolen is proud to join JVP Partners in sponsoring the 14th Annual Insurance Forum on November 9th, 2010 in Chicago. This complimentary event is open to all.

14th Annual Insurance Forum
Tuesday, November 9, 2010
7:30 a.m. - 5:30 p.m.
The Union League Club
65 West Jackson
Chicago, IL

What is the Insurance Forum? The Forum is an event presented by the Insurance Forum Committee, chaired by Kenneth M. Weine. This is an executive level program designed for insurance and risk management professionals, accountants, attorneys, corporate officers, financial examiners, and regulators.

Can I Earn Continuing Education Credit? Continuing Education credit is available for attorneys, AIRs, CPAs, CFEs, CIRs and other insurance designations. (Certain restrictions apply, so please verify that your designation is approved in the state(s) you require).

To register for this complimentary event, click here

For more information, click here

Panels & Speakers (order subject to change)

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By Larry M. Golub and Misty A. Murray

On March 23, 2010, President Obama signed the Patient Protection and Affordable Health Care Act of 2009 (“PPACA”) into law. (After the amendments made March 30, 2010, the law is referred to as The Affordable Care Act.) 

While Republicans in Congress vow to repeal such enactment, key aspects of the PPACA went into effect on September 23, 2010, which marks the six-month anniversary of the legislation. 

Although the following list is not exhaustive, here are some of the more notable changes in the health care reform law (effective September 23, 2010) that will apply to individual and group health plans:

Coverage Changes

No Lifetime or Annual Limits on Essential Benefits:

Health plans may not contain lifetime limits on the amount of benefits that will be provided for essential benefits. No regulations have yet been issued regarding the definition of “essential benefits, which in general include, but are not limited to, ambulatory patient services, emergency services, hospitalization, maternity and newborn care, prescription drugs, laboratory services, preventive and wellness services, and chronic disease management.  As for annual limits, for plan years beginning before January 1, 2014, the Department of Health and Human Services’ (“HHS”) interim regulations adopt a three-year phase-in approach of removing annual limits on essential health benefits. For more information, click here.

Anti-Rescission Rules:

Health plans may not rescind, i.e., retroactively cancel coverage, except in cases of fraud or intentional misrepresentations of material fact. These rules do not apply to prospective cancellations or any cancellation due to failure to timely pay premiums.

Mandatory Preventative Health Care Services:

Health plans must provide benefits without cost sharing (i.e., no co-payments, deductibles or co-insurance) for certain preventative services, including, but not limited to, immunizations recommended by the CDC, as well as preventative care and screening for infants, children and adolescents and for women as recommended by the Health Resources and Services Administration. Grandfathered health plans are exempt. (A grandfathered health plan is a group health plan that was created – or an individual health insurance policy that was purchased – on or before March 23, 2010, and a health plan must disclose in its plan materials whether it considers itself to be a grandfathered plan.) 

Extension of Adult Dependents Coverage:

For health plans that elect to provide dependent coverage, such coverage must be extended to adult children up to age 26.

No Pre-existing Condition Exclusions for Children:

Health plans may not impose any preexisting condition exclusions for children 19 and under. (Grandfathered plans are exempt.).

Patient Protection Changes

Right to Choose Primary Care Provider (“PCP”):

For health plans that require designation of a PCP, the patient must be allowed to designate any participating PCP accepting new patients. For children, any participating physician specializing in pediatrics can be designated as the child’s PCP and, for women, any participating OB-GYN can be designated as a PCP.

Coverage for Emergency Services:

For health plans that provide coverage for emergency services, such plans must do so without requiring prior authorization and regardless of whether the provider of emergency services is a participating provider. Emergency services provided by a non-participating provider must also be provided at the same level of cost-sharing as would apply to a participating provider.

Appeals Process:

Group plans must provide for an internal appeals process that complies with the U.S. Department of Labor regulations and individual plans must provide an internal appeals process that comports with the standards established by the Secretary of Health and Human Services. Both group and individual plans must also provide for an external appeals process that complies with applicable law or at a minimum with the NAIC Uniform External Review Model Act.

Additional health care reform changes will continue to take effect in 2010 and as late as 2018. More information about the PPACA can be found on the National Association of Insurance Commissioners (NAIC) website here.

For additional information on ERISA plans and the PPACA, the U.S. Department of Labor has posted information on its website here.

For additional information on the PPACA and individual policies and nonfederal governmental plans, the HHS has posted information on its websites here and here.

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by Robert W. Hogeboom

The California Department of Insurance (CDI) Rate Regulation Division has recently issued a first round of letters to insurers requesting that they submit rate decrease applications. All Proposition 103 lines are affected. 

Because many insurers have not recently filed rate applications, the California Rate Division suspects that due to a trend of lower loss ratios, that many insurers may be charging excessive rates.

The CDI is requesting insurers to submit rate filings and advise them of the time frame to submit the filing and threatens that if the insurer does not comply, the CDI will issue an Order to Show Cause or a mandatory request for the filing.

We have questioned the CDI's authority to mandate the submission of rate application filings. 

For more information, please view the full client alert here (pdf).

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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).

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Barger & Wolen's insurance law blogs have collectively been ranked No. 5 by LexisNexis in the Insurance Law Community's Top 50 Insurance Blogs 2009 Honorees.

According to LexisNexis,

These top blogs offer some of the best writing out there. They contain a wealth of information for all segments of the insurance industry, and include timely news items, expert analysis, practice tips, frequent postings and helpful links to other sites and sources. 

Demonstrating on a daily basis that insurance makes the world go round, these blogs also show us how insurance issues interact with politics and culture. These sites also demonstrate the power of the blogosphere, by providing a collective example of how bloggers can—and do—impact and influence the law and the business of insurance."

We are honored to be included among so many well-written and well-regarded blogs.

A Firm Approach
Our philosophy for our blogs is to provide an open platform for our partners and associates to write. Whether commenting on a recent news item, informing our readers about a new piece of legislation, or providing case summaries and case reviews, each of our blogs maintains a distinct focus:

• Insurance Litigation & Regulatory Law – Larry Golub, Editor
• Life, Health and Disability Insurance Law – Robert Renner, Editor and Scott Calvert, Co-editor
• California Insurance Regulation – Spencer Kook, Editor

For all of their hard work, we would like to congratulate and thank the editors of our blogs, as well as all our attorney contributors.

All of our blogs are available for complimentary subscription via e-mail or RSS feed. Please visit each blog individually to subscribe.

In addition to our insurance law focused blogs, please visit the firm's Litigation Management & Attorney Fee Analysis Blog.

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The California Department of Insurance has issued a notice establishing deadlines for all applications seeking approval by 2010 year-end.

• Corporate applications must be received by September 17, 2010. 
• Holding company applications must be received by October 29, 2010. 

For details, please see the attached notice. 

If you require assistance with these submissions, please contact Randall Doctor at 415-743-3707 (rdoctor@bargerwolen.com) or Timothy Moroney at 415-743-3713 (tmoroney@bargerwolen.com).

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On July 15, 2010, the United States. Senate passed the Restoring American Financial Stability Act of 2010. The bill now goes to President Obama for his signature, which is expected in the coming days.

The bill, which is over 1,600 pages, establishes new regulations designed to prevent the repeat of the recent financial crisis and end the prospect of future government bailouts. Oversight is established through the creation of the Financial Stability Oversight Council (“Council”).

Members of the Council consist of the heads of several Federal financial regulatory agencies and departments (including the Treasury Secretary who is to act as the Chairman of the Council) and an independent member having insurance expertise who will be appointed by the President subject to Senate confirmation. 

Article V of the bill covers insurance and creates within the Treasury Department a new Office of National Insurance (“Office”). The Office will monitor the insurance industry, coordinate international insurance issues, and provide a study with recommendations to Congress on ways to modernize insurance regulation.        

Various duties that the Office will oversee include:

1. Monitoring all aspects of the insurance industry and identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or U.S. financial system.
2. Identifying entities that could become subject to regulation by the Council.
3. Coordinating federal efforts on prudent aspects of international insurance matters.
4. Consulting with state regulators on insurance matters of national and international importance.
5. Advising the Secretary of Treasury on major domestic and international insurance policy issues.
6. Providing ability to collect financial information from certain insurers (smaller insurers may be exempt).

Robert W. Hogeboom, Senior Regulatory Attorney with Barger & Wolen, along with several insurance executive members of the Pacific Association of Domestic Insurance Companies (PADIC) were escorted by staff of the National Association of Mutual Insurance Companies (NAMIC) in late June to meet with key legislators from the California House of Representatives and U.S. Senate in Washington D.C. to discuss the legislation and its effect on California insurers. 

Most important to the insurance industry is the fact that within 18 months the Office must conduct a study and issue a report to Congress providing recommendations on how to modernize and improve the system of insurance regulation in the United States.

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While not yet approved by the United States Senate, the Federal Insurance Office (FIO) – the first time an entity in the federal government has been created to specifically address the insurance industry – moved that much closer to reality when the House of Representatives on June 30 passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173.  The bill passed the House by a vote of 237-192.

The Senate is expected to vote on the bill when it returns from its July 4 recess on July 12.

The FIO will be housed under the U.S. Treasury Department, though it will not have any regulatory authority. Among other things, the FIO will gather information regarding the insurance industry, will monitor the industry for systemic risks, and will serve as a negotiator for international insurance treaties. The bill contains a provision that will modernize and streamline the surplus lines and non-admitted markets. As explained by the National Underwriter, the “surplus lines provisions in the bill dictate that in any multi-state placement of surplus lines, the only state whose rules govern access to the products is the state in which the insurance is placed—the ‘principal place of business’ for the insured.”

Just prior to passage in the House, the bill dropped a tax on financial institutions to raise $19 billion to pay for implementation of the bill over five years, a provision strongly opposed by the insurance industry.

Speaking for the National Association of Insurance Commissioners (NAIC), its President and West Virginia Insurance Commissioner Jane L. Cline thanked the congressional negotiators for essentially preserving the role of state insurance regulators in protecting consumers and ensuring the viability of the insurance industry, stating, “We were pleased to see that the Federal Insurance Office (FIO) set up under the bill is narrowly designed to carry out its mission while not unnecessarily undermining strong state regulation.”  NAIC President Cline also stated: 

“The package provides senior investment protection grants for annuity suitability, an area where the NAIC and the states have a solid track record,” and “The bill also provides important clarification in regulatory authority for indexed annuities, ensuring that these guaranteed products are under the clear authority of state insurance regulators.”

While the bill will allow federal regulators to wind down troubled large institutions, the NAIC further stated that the bill made “clear that state insurance regulators will continue to have the ability to ‘wall off’ insurance companies from troubled holding companies, protecting insurance policyholders from other risks in the financial system” and that state regulators “will also retain their role to monitor consumer protections in the insurance sector.”

When the Obama administration first proposed a national insurance office last year, California Insurance Commissioner Steve Poizner stated at the time that such plan “appropriately acknowledges the primary role the states play in regulating the insurance business to benefit consumers. State oversight of insurance companies, coordinated among all state regulators, is the reason that, among all the financial players in this country, it is the insurers who are and remain the most stable and the least in need of federal assistance.”

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California Department of Insurance Commissioner, Steve Poizner, issued a press release today indicating that the Department has retained an outside actuarial firm to analyze regulatory rate change filings made with the Department by the four major health insurers in the individual market – Anthem Blue Cross, Aetna, Health Net, and Blue Shield of California. 

The purpose of the independent actuarial analysis is to ensure that health insurers, in raising their premium rates, comply with state law mandating that 70 cents of every dollar collected in health insurance premiums are to be spent on medical benefits.

In February 2010, after the Department received Anthem Blue Cross’ proposed rate change filing indicating that it was seeking to increase individual rates by up to 39%, Commissioner Poizner took the unprecedented step of requesting that an outside actuarial firm analyze the proposed rate increase to ensure that Anthem Blue Cross’ actuarial assumptions were justified and that it complied with the 70 cents on the dollar state law mandate. 

The Commissioner indicated at that time in a letter to Anthem’s parent, Wellpoint, Inc., that

[i]f the independent actuary concludes that Anthem’s assumptions are unjustified and that Anthem will pay out less than 70 cents of the premium dollar for benefits, I will take immediate action to stop Anthem from charging the increased rates to California consumers.”

On April 28, 2010, Axene Health Partners, LLC (“Axene”), the actuarial firm retained by the Department to analyze Anthem’s rate change filing, issued a report containing its findings. In short, Axene found that Anthem’s actuarial calculations and methodology were flawed which resulted in inflated total lifetime loss ratios. This, in turn, resulted in a finding by the Department that Anthem had attempted to charge consumers 50% more than state law allows. In response to these findings, Anthem withdrew its rate change filing.

The press release issued today by the Department indicates that, in light of Axene’s findings with respect to Anthem’s rate change filing, the Department will require that, in addition to the actuarial review conducted internally by the Department, the four major health insurers’ rate change filings be scrutinized by an outside actuarial firm to ensure accuracy and compliance with state law.  

Currently, Axene is reviewing rate change filings made by Aetna and Blue Shield, and will no doubt be reviewing Anthem’s anticipated rate change re-filing, as well as any future rate change filings made by Health Net.

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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.

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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).

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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 requirement that all rates and rate changes be filed with and approved by the Department of Insurance or Department of Managed Health Care before they go into effect;

• 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.

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This week, the Administrative Director of the Division of Workers’ Compensation of the California Department of Industrial Relations (“DWC”) proposed a regulation, California Code of Regulations, title 8, Section 9789.70(c), that would completely exempt air ambulance companies from the Official Medical Fee Schedule (“OMFS”) that applies to all other providers who furnish medical services under the California workers’ compensation system.

The DWC’s purported impetus for this abrupt action was “to avoid the hazards and cost of litigation against the Division,” as stated in the DWC’s Initial Statement of Reasons. That Statement further advised that the DWC based its proposed regulation on the contention that the OMFS may likely be preempted by the Airline Deregulation Act of 1978, which it says “prohibits states from adopting or enforcing regulations which have any effect on airline rates of air carriers.”

This issue of preemption by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act of 1978 (“FAA/ADA”), was asserted in a lawsuit filed last year by California Shock Trauma Air Rescue (“CALSTAR”), an air ambulance company rendering services primarily in California. That action, filed in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers, is entitled California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al.  This blog reported on that case on July 30, 2009, after the federal district court dismissed the case, finding that the federal court lacked subject matter jurisdiction over CALSTAR’s claims.  

CALSTAR then appealed the action to the Ninth Circuit Court of Appeals, where the case is now fully briefed and awaiting oral argument.

Apparently not satisfied with the court's decision in its federal court action, CALSTAR threatened to sue the DWC unless it did something to offer relief to CALSTAR and other air ambulance companies.  In an article posted on workcompcentral.com, the president and chief executive officer of CALSTAR stated that, after having the federal trial court dismiss his company’s action, “we went back to the DWC and said, ‘We’ve been instructed to sue you,’ is what brought this action on their part.” It is clear that the threat of a lawsuit prompted the DWC to issue the proposed regulation and completely exempt CALSTAR and other air ambulance companies from the ambit of the OMFS.  

The defendants in the pending federal court action contend that the FAA/ADA does not preempt the OMFS as it applies to the medical services that air ambulance companies provide in California, and indeed exempting such companies from the scope of the OMFS on preemption ground is anathema to the legislative goals and purposes of the FAA/ADA. Larry Golub and Sandra Weishart of Barger & Wolen LLP represent a number of the defendants in the litigation.

The DWC will be holding a full-day hearing on the proposed regulation in Oakland on Tuesday, April 13, 2010, to receive statements and argument from all interested persons.

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As referenced in our February 23, 2010 blog, "Reprieve for Insurers: Medicare Secondary Payer Reporting Requirements Delayed," the CMS recently published several important alerts, including the latest version of the User Guide (3.0). A brief summary of the alerts and changes to the User Guide are described below. The documents are also linked in pdf for easy reference.

NGHP RRE Compliance Alert (2/24/2010): Specifies what CMS will consider to "be in compliance" with Section 111. Basically, compliance equals: (a) Registering with the CMS Coordination of Benefits Contractor ("COBC"); (b) Engaging in data exchange testing; (c) Beginning and continuing regular Section 111 production data exchanges with the COBC. In its 2/25/2010 Teleconference for NGHP Policy Questions and Answers, CMS emphasized that they are "not interested in civil monetary penalties but a good data exchange." The CMS Alert alleviates concerns over the $1,000 per day penalty provision.

NGHP RRE Who Must Report Alert (2/24/2010): Clarifies multiple scenarios in which questions have arisen as to who is an RRE, including corporate structure issues and siblings; deductibles versus self-insured retentions, self-insurance pools, subrogation, and workers compensation, among several others.

NGHP User Guide (Version 3.0) (2/22/2010): In connection with the first production of Claim Input Files for the first quarter of 2011, TPOC reporting begins 10/1/2010; ORM reporting goes back to 1/1/2010.  CMS provides a  summary of changes to the User Guide, which is set forth in Section 1 of the User Guide.

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by Steven Weinstein & Marina Karvelas

The U.S. Department of Health and Human Services (“HHS”) announced on February 16, 2010, that it will extend the deadline for reporting requirements under the Medicare Secondary Payer Act from April 1, 2010 to January 1, 2011. The news provides welcome relief for property and casualty insurers who have been working diligently to meet the new reporting requirements amidst significant uncertainties in implementation.

In addition, the HHS promised it will release during the week of February 22 the next version of its User Guide as well as provide an alert that describes the steps that reporting entities can take to assure their ongoing compliance with the new reporting requirements. 

The Medicare Secondary Payer Mandatory Reporting Requirements

Over two years ago, Congress passed the Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”) 42 U.S.C., § 1395y(b)(7)(8). Section 111 of MMSEA added new and significant mandatory reporting requirements for liability insurance (including self-insurance), no-fault auto insurance and workers’ compensation (collectively “NGHPs” or non group health plans) as well as group health plans (“GHPs”). Every settlement, judgment, award, or other payment from insurers to a Medicare beneficiary must be reported to the HHS through its Centers for Medicare & Medicaid Services (“CMS”). Likewise, individuals who receive ongoing reimbursement for medical care through no-fault insurance or workers’ compensation must be reported to CMS.

The new MMSEA reporting requirements do not change existing rules that determine whether Medicare or another payer is the primary or secondary payer with respect to the Medicare beneficiary. The goal behind the new reporting requirements is to enable the HHS through CMS to better obtain necessary information to determine when Medicare’s financial responsibility is secondary, and if so, reduce Medicare payments, or if already paid, recoup them. In this regard, Medicare may recover any conditional payments it has made that should have been paid by the primary insurance plan.

Take for example, an auto accident where the injured party is a Medicare beneficiary. If that Medicare beneficiary has available auto liability or no-fault auto insurance to cover medical expenses, payments under those policies are primary to any Medicare payments for such expenses. In fact, Medicare is always a secondary payer to liability insurance (including self-insurance), no-fault insurance, and workers’ compensation.

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Insurance Commissioner Steve Poizner today once again rejected a rate application from the Workers’ Compensation Insurance Rating Bureau (WCIRB) to raise the Workers’ Compensation Claims Cost Benchmark. After rejecting a slightly larger increase request in July of this year, the Commissioner this time rejected a proposed hike of 22.8% in the cost benchmark.  This was yet another blow to the hopes of workers’ compensation insurers for an increased cost benchmark anytime soon.

The Commissioner explained:

One in eight Californians is unemployed. Countless others are also suffering and have either given up looking because they cannot find work or have taken part-time jobs while they seek full-time work. Any increase in costs for employers will only make our already dire economic situation worse.

Given these harsh economic realities, I refuse to rubber stamp double-digit increases to the Workers Compensation Claims Cost Benchmark, especially when I see clear evidence that the cost control reforms from 2003-2004 have yet to be fully implemented,”

…

These increases requested by the WCIRB give insurers an excuse to raise rates in concert without fully utilizing all of their cost containment tools or increasing efficiency. I will not consider an increase in the Claims Cost Benchmark until I see substantial efforts being made by insurers to use all available tools to constrain costs and improve efficiency.

With regard to the controlling of costs, in the Commissioner’s prior July denial of a request by the WCIRB to raise the Workers’ Compensation Claims Cost Benchmark, the Commissioner issued a 27 point outline of means in which costs can be trimmed by workers’ compensation insurers. Commissioner Poizner’s remarks seemed to indicate that he was disappointed by insurers’ efforts to curb costs. More specifically, the Commissioner stated, “I will not consider an increase in the Claims Cost Benchmark until I see substantial efforts being made by insurers to use all available tools to constrain costs and improve efficiency.”

This denial of the cost benchmark is the latest in a long string of decisions by the Commissioner that have been stringent in their treatment of the cost benchmark, despite the WCIRB’s repeated requests for significant increases. We expect Commissioner Poizner to continue to reject any attempt to raise the cost benchmark until there is significant improvement in California’s unemployment rate (as of last check unemployment in California is a stifling 12.2%, 4th highest among states in the country).

November 9, 2009 WC Benchmark Decision and Order

November 9, 2009 Department Press Release

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Effective immediately, insurers may offer a verified actual mileage option instead of, or in addition to, the estimated mileage program that traditionally has been used in determining automobile insurance premiums in California.

Specifically, for purposes of determining the number of miles driven annually by the insured, as required under the Second Mandatory Rating Factor, insurers can either: (a) switch to the new program; (b) offer both the verified actual mileage program and the traditional estimated mileage program; or (c) stick with the traditional program. Insurers that offer both programs must make participation in the verified actual mileage program voluntary. 

The underlying impetus behind the new regulations is the Commissioner's environmental push to reduce CO² emissions and gasoline consumption by incentivizing drivers to drive less. "The Commissioner finds that basing the Second Mandatory Rating Factor on verified actual miles driven, rather than on estimated miles driven, may enable policyholders to reduce their premiums by driving less and create incentives for innovation in insurance rating in California with numerous attendant benefits." 10 CCR, § 2632.5(c)(2)(F); ("Commissioner Poizner Announces Final Approval of Pay-As-You Drive Regulations.")

Under the new option, an insurer may require an insured who chooses the verified actual mileage option for one vehicle to choose that option for all vehicles insured under the same policy.

The new option allows for a variety of different verification methods.  An insurer may select one or more of the following:

1. odometer readings which are read by the insurer or its agent or insurer's third-party vendor;
2. odometer readings read by auto repair dealer in servicing the vehicle or by a vendor retained by the insurer;
3. odometer readings obtained by government licensed smog check stations or any other government agency that maintains public records of odometer readings;
4. odometer readings reported to the insurer by the insured or the insured's agent;
5. by a technological device provided by the insurer or otherwise made available to the insured that accurately collects vehicle mileage information. Such a device can only be used by the insurer to collect information for determining actual miles driven and not to collect or store information about the location of the insured vehicle, with the following caveat: "nothing in this section shall prevent a motor club or insurer from using a technological device to collect information about the location of the insured vehicle as part of an emergency road service, theft service, map service or travel service."
6. any other method approved by the Commissioner.

The verification methods selected by the insurer must be made available to all insureds equally. For example, if the insurer permits its insureds to self-report odometer readings, it must uniformly offer that verification method to the public.

In addition, by utilizing the new program, insurers are permitted to do the following: 

• retroactively or prospectively adjust premiums based on actual miles driven provided the insurer gives notice to the policyholder prior to the effective date of the policy;
• where both a mileage estimation program and a verified actual mileage program are offered, the insurer may provide a discount to a policyholder who participates in the verified actual mileage program. Such a discount, however, must be actuarially supported. Specifically, in order to use the discount, the insurer must demonstrate "cost savings or actuarial accuracy associated with obtaining and using actual miles driven rather than estimated mileage." In addition, the discount must be applied to all policyholders in the verified actual mileage program, regardless of the method of verification used.
• offer the option to purchase coverage for a specified price per mile – "Price Per Mile Option." The regulation, however, offers no guidance in setting that "price per mile," other than making it subject to compliance "with all applicable laws." (This provision of the new regulation will likely require further clarification by the Commissioner or the courts).
• combine Percent Use, Academic Standing, Gender, Marital Status, and Driver Training with the Second Mandatory Rating Factor. If so, the insurer must demonstrate in its class plan that the rating factors used in combination, when considered individually, comply with the weight ordering requirements of 10 CCR § 2632.8.

Lastly, where an insurer utilizes both programs, they must be included in one class plan.

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An amendment introduced by Sen. Jay Rockefeller, D-W.Va. to require “24-hour health coverage”* has drawn industry fire, according to an article, Another Health Care Amendment Draws P&C Industry Fire, by Arthur D. Postal.

In a letter to the Senate Finance Committee, which was not expected to take up the amendment today, the p&c industry argues that, “the amendment would upend the systems now in place to protect injured workers, drivers and passengers.”

The insurers added that the 24-hour coverage concept “would destroy the healthy and competitive auto insurance marketplace.”

According to a lobbyist for the American Insurance Association, the amendment is not likely to be taken up by the committee, although it has been officially filed.

In a bulletin to members, the Independent Insurance Agents and Brokers of America said the work on language in the legislation in the Senate panel was supposed to be completed this week, but “the markup could very well slip into next week and potentially beyond.”

The letter, delivered to all members of the Senate Finance Committee was signed by:

• American Insurance Association
• Council of Insurance Agents and Brokers
• Independent Insurance Agents and Brokers of America
• National Association of Health Underwriters
• National Association of Mutual Insurance Companies
• Property Casualty Insurers Association of America

* Twenty-four hour health coverage typically refers to a coordinated system of health care delivery, whereby a person receives all medical care for injuries and illnesses from a single health care provider.

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Certain producer group representatives have publicly criticized the current version of the proposed Producer Compensation Transparency Regulation (the “Proposed Regulation”) that was forwarded recently by the New York Insurance Department (“NYID”) to the Governor’s Office of Regulatory Reform (“GORR”) for review. As discussed in our September 14, 2009, Client Alert, if the Proposed Regulation becomes effective it will apply to all insurance producers that transact business in New York. 

In a September 15, 2009, P&C National Underwriter article N.Y. Comp Regulation Proposal Unacceptable, Says IIABNY, the Independent Insurance Agents & Brokers of New York  objected, among other things, to the Proposed Regulation’s requirement that producers explain to their customers whether they are functioning as an agent or a broker and how these legal classifications affect the producer’s compensation, saying such a technical discussion would engender confusion amongst consumers. Representatives of IIABNY have also criticized the Proposed Regulation’s ambiguity regarding the disclosure rules that apply to policy renewals.

The spokesman for IIABNY raised the possibility that producer groups might institute legal action if the State did not agree to make necessary revisions to the Proposed Regulation.

In addition to IIABNY, spokespersons for the Independent Insurance Agents & Brokers of America, the National Association of Professional Insurance Agents and the Council of Insurance Agents & Brokers have also criticized certain aspects of the Proposed Regulation.

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On September 10, 2009, the New York Insurance Department (NYID) announced that it had sent the long anticipated Producer Compensation Transparency Regulation (the Proposed Regulation) to the Governor’s Office of Regulatory Reform (GORR) for review. Following GORR approval, the Proposed Regulation will be published in the New York Register and will be subject to a forty-five day period of public comment. After reviewing any comments received during such public comment period, the NYID may adopt, revise or withdraw the Proposed Regulation.

Assuming the current form of the Proposed Regulation becomes effective, it would require insurance producers selling or renewing an insurance contract in New York to make certain mandatory disclosures to purchasers regarding the compensation the producer will receive related to the sale of the insurance. Such disclosures are required to be provided to the purchaser no later than the time the application for insurance is submitted.

More notable among the various required disclosure items are the following:

• The producer must disclose to the purchaser that the purchaser has the right to obtain information about the compensation expected to be received by the producer for the sale and for any alternative quotes obtained by the producer by requesting this information from the producer.
• If the purchaser, in fact, requests more information regarding the producer’s compensation, the producer is required to provide, among other mandatory disclosures, a description of any alternative quotes obtained by the producer, including the coverage, premium and compensation that the insurance producer or any parent, subsidiary or affiliate would have received based, in whole or in part, upon any such alternative quotes.

In addition, the Proposed Regulation would require that insurance producers maintain records evidencing that they have provided the disclosures required by the regulation for a period of three years subsequent to the date of such disclosures.

In anticipation of the likely adoption of the Proposed Regulation, insurance producers may wish to begin developing a compliance process, including the preparation of disclosure forms, which is designed to satisfy the regulation’s requirements.

If you have any questions regarding the Proposed Regulation, please contact Dennis C. Quinn at (212) 655-3878 or dquinn@bargerwolen.com.

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by Robert W. Hogeboom

On September 4, 2009, Harvey Rosenfield submitted the Stop Insurance Overcharges Act (pdf), a proposed state-wide ballot measure, to Attorney General Jerry Brown.

The initiative would:

• limit all insurance broker fees charged if brokers also receive a commission;
• mandate that all other fees, including installment fees billable to a policyholder, is premium subject to prior approval;
• seek to eliminate the absence of prior insurance as a criteria for automobile and homeowner rates or insurability;
• preclude use of claims experience in calculating discounts or surcharges for automobile insurance. 

We anticipate that insurers, managing general agents, brokers and trade associations will be establishing a strategy to contest the proposed initiative.

I look forward to your comments and/or thoughts regarding this significant issue as I will be coordinating our efforts to defeat this initiative. Please contact Robert W. Hogeboom at rhogeboom@bargerwolen.com and/or (213) 614-7304.

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The California Department of Insurance has established the filing deadlines (September 18, 2009, or, in the case of holding company applications, October 30, 2009) in order to obtain year-end approval of 2009 transactions.  For details, please see the attached notice. 

If you require assistance with these submissions, please contact Michael Rosenfield (213-614-7321) or mrosenfield@bargerwolen.com).

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Earlier this year, California Shock Trauma Air Rescue (“CALSTAR”), an air ambulance company rendering services primarily in California, filed an action in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers. CALSTAR’s lawsuit, California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al., argued that, as a result of it being certified by the Federal Aviation Administration to operate as an air carrier, any claims for payment it submitted to workers’ compensation insurers and self-insured employers in California should not be limited to those amounts set forth in the Official Medical Fee Schedule for ambulance services, California Code of Regulations, title 8, section 9789.70.  

Rather, as a federally certified air carrier, CALSTAR asserted that the Fee Schedule is preempted by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act (“FAA/ADA”).  In other words, CALSTAR sought to avoid the limitations on payment that would apply to all other medical providers and even ground-based ambulances set forth in the Fee Schedule.  CALSTAR’s complaint alleged causes of action for declaratory relief and a number of state law claims.

The defendants filed motions to dismiss on a variety of grounds. Prominent among the bases for the motions was the claim that the federal court lacked subject matter jurisdiction over CALSTAR’s action.  Another basis for the lack of federal court subject matter jurisdiction was that CALSTAR’s claims are subject to California’s exclusive workers’ compensation system and which claims can and should be resolved through lien requests by CALSTAR at the Workers’ Compensation Appeals Board. 

In a detailed ruling issued July 24, 2009, the federal court granted the motions to dismiss on the basis that the court lacked subject matter jurisdiction over CALSTAR’s claim. The fact that CALSTAR sought to use a federal statute, the FAA/ADA, to claim that certain state laws were preempted was inadequate to support jurisdiction in the federal courts under well-established case law.  The court also observed that CALSTAR had not sued the State challenging its power to enforce the Fee Schedule, but rather only sued third parties (i.e., insurers and self-insured employers) who have neither “the ability to enact or enforce state laws.” In short, CALSTAR was asking the federal court for an advisory opinion as to the preemption of the Fee Schedule, something it lacked the power to do.

Barger & Wolen represented a number of the defendants in the litigation.

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Insurance Commissioner Steve Poizner today rejected a rate application from the Workers’ Compensation Insurance Rating Bureau (WCIRB) to raise the Workers’ Compensation Claims Cost Benchmark by 23.7 percent. This was contrary to what was hoped for by workers' compensation insurers.

Based on testimony received in June hearings, the Commissioner noted that he believes that an increase in the cost benchmark would lead to increased worker’s compensation premiums for small business. More specifically, the Commissioner sternly noted,

[m]y response to this requested record increase by workers' comp insurance companies is this – no. I will not include avoidable costs in the Benchmark.

The Commissioner further explained,

[b]ecause of the faltering economy, record unemployment levels, and objections to the proposed increase from employers, I have focused on whether insurers and other parties in the workers' comp system are exhausting every available avenue to control costs before granting any increase to the Benchmark.

With regard to the controlling of costs, following hearings last month, the Commissioner issued a 27 point outline of means in which costs can be trimmed by workers compensation insurers. That outline can be found here. The Commissioner further noted that he expects insurers to implement the efficiency procedures he outlined before a re-application for a cost benchmark increase.

Today’s denial of the cost benchmark is consistent with the Commissioner’s recent treatment of such requests over the past several years – as he has routinely either denied the requests outright or allowed for a minimal increase, despite much larger requests.

2009 WC Benchmark Proposed Decision and Proposed Order

2009 WC Benchmark Addendum Report

2009 WC Benchmark Decision and Order

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