Auto Insurance Initiative Qualifies for November 2012 Ballot

Posted on January 19, 2012 by Samuel Sorich

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.

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 1861.02. Subsection (a) of Section 1861.02 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.

Subsection (c) of Section 1861.02 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 limits 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. First, 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 as a criterion for determining rates. Second, 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. The regulation remains in effect at the present time.

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.

Qualified Initiative

The initiative which has qualified for the November 6, 2012 ballot also seeks to override the existing regulation but does not use the same language that was 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 employment loss 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.
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Signatures May Be Collected for California Health Insurance Initiative

Posted on January 6, 2012 by Larry Golub

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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Potential Changes to Prior Approval Regulations for Property/Casualty Insurers Under Consideration by California Department of Insurance

Posted on November 18, 2011 by Barger & Wolen LLP

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:

 1. Whether the terms rating factor, rate, and premium needed to be clarified in order to ensure that every item that makes up the rate is properly disclosed and reviewed by the CDI.

This issue focused primarily on underwriting rules in which a specific rule, such as a “surcharge” or “coverage,” is included in the rate and reviewed by the CDI during rate review.

The CDI asserts that the goal of the CDI is to assume that the consumer and the insurer can rely on the approval.

The CDI raised the issue whether an underwriting rule should be considered a rating factor.

The industry asserts that the terms relating to rate and premium etc. are all well settled by the courts. Further, the industry submits that the rate application process is thoroughly vetted by the CDI, which routinely seeks further information or explanation on all issues that are relevant to the rate application determination.

Consumer Watchdog announced its skepticism that not all factors that make up the rate are always properly disclosed or reviewed by the CDI. It called for new regulations that would assign narrow definitions to the terms “rating factor,” “rate,” and “underwriting guideline.”

In the context of private passenger auto insurance, Consumer Watchdog argued that “rating factor” should mean only the three mandatory factors and the optional rating factors specified in regulations adopted by the insurance commissioner and should not include discounts or surcharges.

Consumer Watchdog advocates a further regulation be adopted to the effect that any price variation from the rating factors is a violation of the statute and that discounts not be allowed.

Barger & Wolen’s Steven Weinstein, and other insurers’ representatives, pointed out that regulatory section 2632.2(a), which defines “rating factor” as any factor which “establishes or affects the rates, premiums, or charges assessed for a policy of automobile insurance,” provides good guidance. 

Weinstein cautioned against narrow definitions that would make the prior approval process inflexible, and which in turn would hurt market competition. Weinstein added that there was no evidence to support the necessity for such changes, and that the CDI indicated that certain underwriting rules, such as surcharges, could affect the rate. 

2. If underwriting rules contain rules which affect the rate, should the underwriting rules be subject to public disclosure and/or prior approval?

Currently, the Department often requests that certain underwriting rules which contain an insurer’s eligibility guidelines are required to be filed as a supporting document to the rate application. In many cases, they are deemed confidential per request of the insurer as proprietary information. The CDI expressed the view that underwriting rules, to the extent they impact the rate, should be made available for public inspection.

Consumer Watchdog argues that Insurance Code Section 1861.07, which provides that all information provided to the commissioner pursuant to the Insurance Code provisions regarding prior approval be made available for public inspection, requires disclosure of underwriting guidelines.

Insurer representatives responded that underwriting guidelines contain trade secrets that have legal protection and that section 1861.07 should not be read that broadly.

An insurer representative described the research and expense that is involved in developing underwriting guidelines. An insurer will not make this kind of investment if its guidelines are made available to the insurer’s competitors.

The disclosure of underwriting guidelines would have devastating effects on insurance competitiveness.

3. What is the effect of a rate approval in which it was based on a rate application that contained an unlawful factor/underwriting rule?

Insurer representatives asserted that the rate application and prior approval process provides full disclosure of an insurer’s proposed rates and class plans. The CDI’s job is to review and rule on the insurer’s changes.

Once the CDI approves the insurer’s changes, the insurer must be able to rely on the CDI’s approval. 

In fact, Insurance Code Section 1861.01(c) prohibits an insurer from charging a rate that has not been preapproved by the CDI. 

Mr. Weinstein reminded the CDI of the California Court of Appeal’s ruling in MacKay v. Superior Court which held that if an approved rate is subsequently found to have been illegal, that finding cannot retroactively invalidate the CDI’s prior approval.

Consumer Watchdog argued that the CDI does not have the authority to approve an illegal rate, and that the Department’s approval of an illegal rate is a nullity and beyond the scope of the CDI’s power.  

Consumer Watchdog furthered argued that the CDI’s authority over rate approvals is not exclusive. It asserted that Proposition 103 requires the CDI to share that authority with consumer representatives.

4. Whether the CDI Should Adopt Procedures for Handling Referrals from Courts

This topic was outlined by the Department’s Adam Cole. 

Mr. Cole explained that there is some confusion about how the CDI should handle cases in which the courts refer to the CDI pursuant to the primary jurisdiction doctrine. Mr. Cole asked whether there is a need for new regulations which would describe how the procedure for handling primary jurisdiction cases differs from the procedure for addressing complaints that are filed under Insurance Code Section 1858. Neither insurer representatives nor consumer representatives expressed support for adoption of regulations on this matter.

5. Additional Topic Raised by Consumer Watchdog – Actions that Constitute Approvals

Consumer Watchdog raised a topic that was not included in the workshop notice. Consumer Watchdog argued that the MacKay decision relied on statements from CDI staff to establish that a filing was approved. They called on the CDI to create a system that defines what actions by the CDI staff may be deemed to be “approvals.”

Insurer representatives rejected Consumer Watchdog’s proposal. They pointed out that the proposal would destroy necessary communication between CDI staff and insurers that enables insurers to gain regulatory certainty which results in actions that deliver products and services to consumers. Subjecting this ongoing communication to a formal process for determining the nature of each communication would put insurers and CDI staff into a regulatory straightjacket that would prevent things from getting done.

 
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Auto Insurance Discount Initiative Okayed to Collect Signatures

Posted on August 15, 2011 by Samuel Sorich

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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SB 631 - Restitution Bill Update

Posted on May 13, 2011 by Robert Hogeboom

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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New Restitution Remedy Proposed for Insurers and Licensees in California

Posted on March 8, 2011 by Larry Golub

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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Decision Stands: Proposition 103 Approved Insurance Rates Cannot be Attacked in a Civil Action

Posted on January 13, 2011 by Kent Keller

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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Defining "What is a Group?" Under Proposition 103

Posted on November 16, 2010 by Robert Hogeboom

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:

  • What is the most appropriate definition for the word “group” as used in Section 1861.12?
  • Should insurers be allowed to issue insurance on a group plan for groups such as those based on shared characteristics or status, even if the group has no membership requirements?
  • Should groups have to exist for a particular purpose other than the purpose of purchasing insurance?
  • Should insurers be permitted to form groups solely for the purpose of allowing consumers to purchase insurance at a group rate?
  • To what extent if any, do the auto rating factors found in Section 1861.02(a)(4) and California Code of Regulations 2632.5 impact what groups may be allowable under Section 1861.12?
  • How should group membership be determined?  Should there be eligibility requirements for “membership” in a group, such as payment of dues or voluntarily joining the group?
  • Should an insurer ever be required to confirm group membership of an applicant who claims to be a member of a group?  What should be required and under what circumstances?
  • Should an insurer be required to have a formal agreement with a group before issuing insurance for the group on a group plan?
  • Should an insurer that offers group rates be required to notify/offer every insured/applicant of every group rate available?  How often – at every renewal?
  • Should an insurer be required to discontinue a group rate for an individual when the insured leaves the group of otherwise becomes ineligible for the group rate?  What should the insurer have to do to confirm that the insured receiving the group rate remains eligible from one policy period to the next?
  • What should be required to establish an initial rate for a new group that has no experience data to support a rate differential?
  • What should be required to demonstrate that the group rate is justified as experience for the group develops?
  • Should there be a mandatory re-filing period when an insurer makes a new group filing with no experience data?

Written comment should be submitted by e-mail to the Group Regulations Inbox at Comments.2010-00018@insurance.ca.gov before the close of business on Friday, December 3, 2010.

TIME AND PLACE OF WORKSHOP

Friday, December 3, 2010

10:00 a.m.

California Department of Insurance

45 Fremont Street, 22nd Floor Hearing Room

San Francisco, CA 94105

For more information, contact Robert Hogeboom at rhogeboom@bargerwolen.com or 213.614.7304.
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Landmark Proposition 103 Decision Reached

Posted on October 6, 2010 by Kent Keller

On October 6, 2010, the California Court of Appeal issued a landmark decision involving Proposition 103 insurance rate approval in MacKay v. Superior Court, B220469 & B223772. 

The legal issue, as Division Three of the Second Appellate District 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.”  

In MacKay, the plaintiff class sued 21st Century Insurance Company asserting that its use of certain rating factors (persistency and accident verification) was illegal and therefore actionable under California’s Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200. 

In a unanimous decision, written by Justice Croskey, the Court held "that the statutory provisions for an administrative process . . . are the exclusive means of challenging an approved rate,” precluding a UCL action and therefore ordered the trial court to enter judgment for 21st Century.

Prior to this decision, previous decisions had created uncertainty as to whether insurers, having fully complied with the requirements of Proposition 103 rate approval, could charge approved rates free from subsequent civil challenges. 

While Walker v. Allstate Indemnity Co, 77 Cal. App. 4th 750 (2000) held that approved rates could not thereafter be civilly challenged, Donabedian v. Mercury Ins. Co., 116 Cal. App. 4th 968 (2004) created confusion on this issue.

The MacKay decision resolves all prior confusion in declaring that approved rates and rating factors cannot thereafter be civilly challenged.

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

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California Department of Insurance Requests Insurers to Submit Rate Decrease Application Filings

Posted on September 15, 2010 by Robert Hogeboom

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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AB 2578: Proposition 103 Coming to Managed Health Care?

Posted on March 25, 2010 by Rick De La Mora

by Richard De La Mora

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

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

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

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

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

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

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

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

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

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Bending the Health Care Cost Curve

Posted on March 17, 2010 by Gregory Eisenreich

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

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

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

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

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

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

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

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

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

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

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