Recent Victory on Behalf of Medical Supplement Insurers against California Department of Insurance

As a result of the filing of a Writ of Mandate and Declaratory Relief Action by Barger & Wolen LLP Senior Regulatory Counsel Robert W. Hogeboom and Litigation Partner John Holmes, the California Department of Insurance (“CDI”) agreed to cease and desist its practice of requiring insurers to file and pay fees on insurer notices to policyholders policyholder “notices” in connection with Medicare supplement policies. Further, the CDI agreed to refund to each of the plaintiff insurers in the suit all filing fees that had been paid to the CDI since 2012.

The action was filed on behalf of five Torchmark Group insurers who issue Medicare supplement insurance policies in California. Under California Insurance Code (“CIC”) § 10192.14(c), each insurer is required to submit an annual rate filing for each Medicare supplement product to demonstrate compliance with a minimum lifetime loss ratio requirement.   

Since June 2012, the CDI has required insurers which issue Medicare supplement policies to file and seek approval for each form of “notice” to policyholders. The term “notice” was broadly defined by the CDI to include invoices, friendly reminder letters, changes in premium, lapse notices, etc. The CDI alleged that all of these notices were “policy forms” subject to approval under CIC § 10192.15(a). Each notice was subject to a filing fee of $460. 

The CDI also withheld approval of rate filings pending the filing of notices and payment of filing fees notwithstanding that actuarial approval had been given. The notice filing fees alone aggregated approximately $15,000 each year for the plaintiff insurers. 

A Writ of Mandate and complaint for Declaratory and Injunctive Relief was filed against the CDI alleging that the notices were not “policy forms” within the meaning of CIC § 10192.15(a). Further, we alleged the CDI had no authority to disapprove a rate filing based on failure to file notices for approval. 

Prior to a hearing on the action, the CDI agreed to discontinue the notice filing requirements and fee charges. The CDI also agreed to refund all filing fees that had been previously collected.

 

 

 

 

 

 

 

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

By Robert W. Hogeboom and Samuel J. Sorich

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

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

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

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

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

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

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

 

Judge Invalidates California Regulation on Estimating Replacement Costs for Homeowners Insurance

By Samuel Sorich and Larry Golub

On March 25, 2013, Los Angeles Superior Court Judge Gregory Alarcon issued a decision which found the California Department of Insurance’s regulation on estimating replacement costs for homeowners insurance to be invalid. The decision is Association of California Insurance Companies and Personal Insurance Federation of California v. Jones.

California Code of Regulation section 2695.183 was adopted by the insurance commissioner in 2010; the regulation went into effect on June 27, 2011. Section 2695.183 requires insurers to use a detailed method for estimating replacement costs for homeowners insurance. The regulation specifies that an insurer that communicates an estimate which does not comport with the regulation’s method makes a misleading statement in violation of Insurance Code section 790.03.

Two insurer trade associations, the Association of California Insurance Companies and Personal Insurance Federation of California, challenged the validity of section 2695.183. The associations petitioned the Los Angeles Superior Court for a judgment declaring section 2695.183 to be invalid because its adoption is beyond the insurance commissioner’s authority. Judge Alarcon granted the associations’ petition.

Insurance Code section 790.03 defines unfair and deceptive acts or practices in the business of insurance. Subdivision (b) of section 790.03 states that the definition of unfair or deceptive acts includes making a statement “which is known, or which by the exercise of reasonable care should be known, to be untrue, deceptive, or misleading.” The insurance commissioner relied on section 790.03(b) as authority to adopt section 2695.183, contending that the regulation simply interpreted section 790.03 by identifying one type of misleading statement.

Judge Alarcon rejected the commissioner’s reliance on section 790.03(b). The judge’s decision explains,

By characterizing all estimates of replacement costs as misleading (save the one provided by 10 CCR § 2695.183), Defendant, in exercising its authority under § 790.10, expands the meaning of something ‘known’ or which ‘should be known’ to be misleading beyond the parameters of § 790.03(b).”

Judge Alarcon’s decision notes that “[t]he limits of the authority granted by § 790.03 are underscored by Cal Ins Code § 790.06 which provides a special process which the commissioner can determine how acts not listed in § 790.03 can be defined as unfair or deceptive.”

The need to interpret the authority granted to the insurance commissioner by Insurance Code section 790.03 in light of Insurance Code section 790.06 was also central to the recent decision of California Administrative Law Judge Stephen J. Smith, who found that the Fair Claims Settlement Practices Regulations may not be used by the insurance commissioner to constitute unfair claims acts under section 790.03, which was discussed in this blog post.

Unfair Acts Ruling May Save California Insurers from Stiff Fines

Robert Hogeboom was quoted in a Sept. 17, 2012, Law360 article, Unfair Acts Ruling May Save Calif. Insurers From Stiff Fines (subs. req.), about the impact of a ruling in which a California administrative law judge found that California's Department of Insurance had overstepped its bounds in enforcing Fair Claims Settlement Practices Regulations. Hogeboom represents Torchmark Corp. insurers, who are defendants in the case.

According to the article, the five Torchmark companies stood accused of nearly 700 unfair or deceptive acts but Judge Stephen Smith ruled in their favor, finding that the Department of Insurance had misused the fair claims regulations to expand the state's insurance laws. Experts believe the ruling will embolden other insurers to challenge the agency.

Hogeboom told the publication that, in the past, insurers have been quick to settle unfair practice claims because they didn't want to risk having to pay the hefty fines associated with them. He said the ruling should give insurers more leverage and shows that the Department of Insurance had been using improper procedures when it came to determining unfair acts.

 “Notwithstanding that the judge says this is particular to the Torchmark case, what he said throughout [the ruling] resonates,” Hogeboom said. “It resonates to the industry, and it should resonate to the department.”

 

Administrative Law Judge Invalidates Fair Claims Settlement Practices Regulations by California Department of Insurance

Insurance companies could soon be off the hook for stiff penalties and fines imposed by the California Department of Insurance’s (“CDI”) for violations of the Fair Claims Settlement Practices Regulations (“FCPR”).  This is according to California Administrative Law Judge Stephen J. Smith, who recently issued a 51-page ruling finding the CDI’s Fair Claims Settlement Practices Regulations might not be brought as unfair claims acts.  

This ruling affects how the CDI has imposed penalties against insurers for claims since the inception of the FCPR in 1992. Since that time, only two cases have gone to adjudication challenging the procedure, and fines, as most insurance companies have chosen to settle. In both cases, the insurance companies -- an auto insurer and a life and health insurer -- retained Robert Hogeboom, senior insurance regulatory attorney with Barger & Wolen, to represent them.

In the most recent decision, Judge Smith’s ruling was based on the CDI’s Order to Show Cause (“OSC”) action alleging 697 violations against the five Torchmark groups of life and health insurers.

According to Hogeboom,

This ruling is an extraordinary indictment of the FCPR because for the past 20 years the CDI has required insurers to follow the FCPR under threat of an OSC proceeding and large fines."  

This may also result in changes to Market Conduct Examinations if they are to serve as the basis for an OSC proceeding.  

The decision will impact all lines of insurance regulated by the DOI.

Full Analysis of the Decision

On August 25, 2012, California Administrative Law Judge Stephen J. Smith, issued a 51-page ruling that found the California Department of Insurance’s (“CDI”) Fair Claims Settlement Practices Regulations (“FCPR”) may not be asserted as unfair claims acts. The ruling affects how the CDI has asserted penalties since the inception of the FCPR in 1992 in Order to Show Cause proceedings based on Market Conduct Examinations. Robert Hogeboom of Barger & Wolen represented the successful insurer, the Torchmark group of five life and health insurers, in the proceeding.

Judge Smith’s ruling was issued in the form of an Order pursuant to the CDI’s Order to Show Cause (“OSC”) action alleging 697 violations against the five Torchmark group of life and health insurers. The violations were based primarily on violations of the FCPR contained in § 2695.1 et seq. of Title X, California Administrative Code. The OSC was issued following the CDI’s Market Conduct Claims Examination which examined Torchmark’s life and health claims settlement practices principally through application of the FCPR.

On behalf of Torchmark, Barger & Wolen filed a denial of the allegations in the OSC followed by a Motion to Strike the FCPR allegations. The motion relied on California Government Code § 11506 to challenge the FCPR as improper to seek monetary penalties and a cease and desist order. A four-hour legal argument on the Motion occurred on May 25, 2012, before Judge Smith. In the court’s extensive ruling, which contained 150 separate findings, the court ruled that:

  1. None of the standards prescribed in the FCPR appear anywhere in California Insurance Code § 790.03 (pursuant to which statute the CDI adopted the FCPR); these are additional standards added exclusively by regulatory action of the CDI.
  2. The FCPR as applied are unenforceable pursuant to California Government Code §§ 11152 and 11342.2, which establish the test for determining the validity of regulations. Specifically, the court held that § 2695.1 of the FCPR improperly creates new unfair standards and duties within the meaning of Insurance Code § 790.03(h), which subjects insurers to the penalty provisions of Insurance Code § 790.035 for failure to meet those standards.
  3. The FCPR through CCR § 2695.1(a) dramatically and impermissibly expands the scope, nature and reach of the 16 unfair claims settlement practices set forth in Insurance Code § 790.03(h)(1)-(16). The court held that new unfair acts may only be promulgated by the legislature or through the process set forth in Insurance Code § 790.06.
  4. The CDI’s language in CCR § 2695.1 impermissibly amends Insurance Code § 790.03(h) such that a violation can be proved by means of a single knowing act or by proof of a general business practice, which amendment lowers the burden of proof and quality of evidence necessary for the CDI to prove a violation of § 790.03(h). In order to assert a violation of § 790.03(h), proof must be shown that the violation was both knowingly committed and performed with such frequency as to reflect a general business practice.
  5. An OSC drawn from the conclusions or statements in a Market Conduct Examination is improper to support a valid pleading. Such examinations lack specificity about each act. OSC pleadings must assert violations under Insurance Code § 790.03(h)(1)-(16) and pleadings must set forth the charges and allegations in ordinary and concise language, such that the acts or omissions of which the respondent is charged may be reasonably ascertained. 

Hogeboom’s observations on the ruling are the following:

  1. The ruling is an extraordinary indictment of the FCPR and how for the last 20 years the CDI has required insurers to follow the FCPR under threat of an OSC proceeding and large fines.
  2. The ruling will require the CDI to plead OSCs using pertinent facts relating to each specific transaction.
  3. The ruling may result in changes made to Market Conduct Examinations if they are to serve as the basis for an OSC proceeding.
  4. The ruling requires the CDI to show a general business practice as a condition for a violation of claims settlement practices specified in § 790.03(h)(1-16).
  5. The ruling also covers all Insurance Code § 790.03 unfair practices. Accordingly, this brings into question the validity of the § 790.03 penalty provisions in the recent regulation containing the standards for homeowners’ estimates of replacement value contained in CCR § 2695.183 and the long-standing broker fee regulations in CCR § 2189.5.

Because of the impact of this decision on the claims regulations and market conduct examinations, Mr. Hogeboom will hold a seminar on the background of the FCPR, the court’s decision and Market Conduct Examinations in the near future. Mr. Hogeboom is also available to meet with specific insurers at their home offices upon request.

For more information or for a copy of the ruling, please contact Robert Hogeboom at (213) 614-7304 or via e-mail; or Mr. Hogeboom’s assistant, Veronica Montero-Kossak, at (213) 680-2800 ext. 7204 or via e-mail.

 

Updated: California Legislature Passes Insurance-Related Bills Prior to Ending 2012 Session

The California Legislature’s regular 2012 session ended on August 31. In the last days of the session, legislators passed hundreds of bills, including several insurance-related measures. Here are noteworthy insurance-related bills that were passed by the Legislature and sent to Governor Jerry Brown. The governor has until September 30, 2012, to act on these bills.

Update: Please check back frequently for updates as the governor signs or vetoes the legislation.

Senate Bills

SB 863 is the sweeping 160-page workers’ compensation bill that was passed in the last hours of the legislative session. SB 863 would increase aggregate permanent disability benefits by approximately $740 million per year, phased in over a two-year period. The bill would change several aspects of the workers’ compensation system. Among other things, SB 863 would create an independent medical review process for resolving medical care disputes, establish an independent bill review process for resolving medical billing disagreements, adopt a statute of limitations for workers’ compensation liens, and restrict the reasons that can be used to avoid obtaining treatment within a medical provider network. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

SB 1216 would conform California law to the revision to the NAIC Credit for Reinsurance Model Law that was adopted in 2011. Among other things, SB 1216 would establish criteria that the insurance commissioner is to use in certifying reinsurers; reinsurance provided by certified reinsurers would be an asset or credit against the liabilities of a ceding insurer. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

SB 1234 would create the California Secure Choice Retirement Savings Investment Board which would be charged with conducting an analysis and reporting to the Legislature on whether a statewide retirement savings plan for private employees who do not participate in any other type of employer-sponsored retirement savings plan should be created. The Board’s analysis would have to be paid for by funds made available through a non-profit or private entity, federal funding, or an annual Budget Act appropriation.    

SB 1298 would establish conditions for the operation of autonomous vehicles on public roadways. The bill defines “autonomous vehicle” as a vehicle equipped with technology that has the capability to drive a vehicle without the active physical control or monitoring by a human operator.

SB 1448 would conform California law to the revision to the NAIC Insurance Holding Company System Regulatory Model Act that was adopted in 2010. Among other things, SB 1448 would require the board of directors of an insurer that is part of a holding company system to file a statement affirming that the board is responsible for overseeing corporate governance and internal controls, and SB 1448 would authorize the insurance commissioner to evaluate the enterprise risk related to an insurer that is part of a holding company. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

SB 1449 would permit the approval of life insurance and annuity products that include the waiver of premium during periods of disability and the waiver of surrender charges if the insured encounters specified medical conditions, disability, or unemployment.

SB 1513 would expand the investment options available to the State Compensation Insurance Fund.   

Assembly Bills

AB 53 would require each admitted insurer with written California premiums of $100 million or more to submit a report to the insurance commissioner on its minority, women, and disabled veteran-owned business procurement efforts. The first report would be due July 1, 2013. An insurer would be required to update its report biennially. AB 53 includes a January 1, 2019 sunset date. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 1145 would create a supplemental job replacement benefit in the form of a voucher for up to $6,000 to cover skill enhancement expenses. The benefit would be available to an employee who is awarded workers compensation permanent partial disability benefits.

AB 1454 would allow doctors of audiology to be appointed as qualified medical evaluators by the administrative director of the Division of Workers’ Compensation.

AB 1687 would authorize the Workers’ Compensation Appeals Board to award attorney’s fees to an applicant who prevails in a dispute that arises in the course of the medical utilization review process.

AB 1708 would authorize auto insurers to provide proof of insurance coverage in an electronic format that may be displayed on a mobile electronic device. Proof of insurance in this format would be allowed to be presented to a peace officer. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 1747 requires every life insurance policy to include a provision for a grace period of not less than 60 days from the premium due date; the provision must state that the policy remains in force during the grace period. AB 1747 requires an insurer to provide an applicant for an individual life insurance policy an opportunity to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium. AB 1747 provides that a notice of pending lapse or termination of a life insurance policy is not effective unless the notice is mailed by the insurer to the named policy owner, a designee for an individual life insurance policy, and a known assignee or other person having an interest in the individual life insurance policy, at least 30 days prior to the effective date of policy termination if termination is for nonpayment of premium. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.  

AB 1875 would limit the civil deposition of any person to one day of seven hours. The bill specifies exceptions to this limit. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 1888 would allow a person who has a commercial driver’s license to attend a traffic violator school for a traffic offense while operating a passenger car, a light duty truck, or a motorcycle. Attendance at the school would prevent the offense from being counted as a point for determining whether the driver is presumed to be a negligent operator who is subject to license revocation. However, attendance at the school would not bar the disclosure of the offense to insurers for underwriting or rating purposes.

AB 2084 would expand the list of eligible policyholders who can purchase blanket insurance. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.   

AB 2138 would give the insurance commissioner the authority to require every admitted disability insurer and every other entity liable for any loss due to health insurance fraud to pay an annual maximum fee of twenty cents for each insured under an individual or group insurance policy it issues in California. The fee is to be used to fund increased investigation and prosecution of fraudulent disability insurance claims. Under current law, the maximum fee is ten cents.SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 2152 would require a health plan that intends to terminate its contract with a provider group or a general acute care hospital to notify the Department of Managed Care at least 30 days prior to the termination of the contract. AB 2152 also would require a health insurer that intends to terminate its contract with a provider group or a general acute care hospital to provide services at alternative rates of payment to notify the Department of Insurance at least 30 days prior to the termination of the contract. AB 2152 would require health insurance policies to include additional notices and disclosures. 

AB 2160 would require the California insurance commissioner to treat a domestic insurer’s investment in a company that has business operations in Iran as a non-admitted asset. We recently blogged on the passage of AB 2160 here. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 2298 would prohibit an insurer that issues or renews a private passenger auto insurance policy to a peace officer or a firefighter from increasing the premium for the policy because the peace officer or firefighter was involved in an accident while operating his or her private passenger auto in the performance of his or her duty at the request or direction of his or her employer. AB 2298 provides that in the event of a loss or injury that occurs as a result of an accident during any time period when the private passenger auto is operated by the peace officer or firefighter and is used by him or her at the request or direction of the employer in the performance of the employee’s duty, the auto’s owner shall have no liability.

AB 2303 is the Department of Insurance’s omnibus bill which addresses a variety of matters, including applications for non-resident surplus lines broker licenses, pre-licensing requirements for bail agents, the creation of a limited lines license for crop insurance adjusters, and changes to the conservation and liquidation process. AB 2303 would abolish the advisory committee on automobile insurance fraud within the Fraud Division of the Department of Insurance. AB 2303 also would repeal the provision that excludes policies that have been effect less than 60 days from the statute which governs the cancellation of private passenger auto insurance policies.

AB 2354 would revise the licensing requirements for travel insurance agents. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.   

AB 2406 requires the Department of Insurance to publish on the department’s website all requests by a person or group representing the interests of consumers for compensation relating to intervention in a proceeding on an insurer rate filing or participation in other proceedings. Findings on such requests also must be published on the website. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

Dodd-Frank Does Not Preempt All California's § 1011(c) Reinsurance Approval Requirements Applicable to Foreign Insurers

Prior to the Dodd-Frank Act, California Insurance Code § 1011(c) required all California-admitted insurers to obtain prior approval from the California Department of Insurance for any reinsurance transaction that exceeded a 50% or 75% threshold.  

In other words, even if each insurer that was a party to the reinsurance agreement was only licensed in California and was domiciled elsewhere, § 1011(c) approval was nonetheless required.

On its face, the Dodd-Frank Act appears to preempt those California approval requirements as they pertain to reinsurance transactions involving only foreign insurers. 

The CDI appeared to acknowledge this preemptive effect in CDI Bulletin No. 2011-2 when the CDI stated that it:

will not exercise its discretion to conserve a non-domestic insurer for failure to obtain prior consent to such reinsurance transactions."

In the CDI’s view, however, assumption reinsurance transactions do not fall within the category of Dodd-Frank preempted reinsurance transactions. 

The CDI has confirmed to us that it does not view assumption reinsurance to be a true “reinsurance” transaction, but rather a “purchase” or “sale.” Moreover, assumption reinsurance transactions are expressly included within the definition of “sale” and “purchase” in California’s Reinsurance Oversight Regulations.

Accordingly, California-admitted insurers domiciled outside California appear, at least in the CDI’s view, to remain subject to the prior approval requirements of § 1011(c) with respect to any sale or purchase transaction (including a sale or purchase involving assumption reinsurance) that exceeds the regulatory specified thresholds.

Emergency Regulations to Enforce PPACA Medical Loss Ratio Guidelines Granted to California Department of Insurance

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.