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

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 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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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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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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