Calif. associations take issue with broker definition, OAL to weigh in

The California Office of Administrative Law (OAL) has decided to accept a petition filed by Insurance Brokers and Agents of the West (IBA West) requesting review of the outgoing Insurance Commissioner John Garamendi’s attempt to designate a recent settlement as a “precedential decision.”

IBA West’s petition alleged that the Department of Insurance had issued, used, enforced or attempted to enforce an underground regulation that declared a settlement agreement as a precedential decision. OAL announced it would formally publish the petition on Nov. 10 and require the California Department of Insurance and any other interested party to submit comments by Dec. 11. IBA West would have 15 days after CDI submitted comments to submit any “rebuttal.” OAL said it would rule on the merits of the petition no later than April 9, 2007.

The petition concerns the scope of California Government Code Section 11425.60, which permits administrative agencies such as the California Department of Insurance (CDI) to designate certain decisions as “precedential” — the consequence of which is that they are given the force of law without going through conventional legislative or rulemaking channels, according to IBA West.

Earlier this year, CDI designated a “settlement agreement” it had reached with American Reliable Insurance Co. as “precedent.”

IBA West challenged CDI’s action, in part, on the ground that only fully adjudicated decisions are eligible for designation under the Government Code. Thus, it asked OAL to invalidate the commissioner’s actions.

The actual settlement agreement in question is highly objectionable, said Steve Young, IBA West General Counsel, because it attempts to reclassify brokers as “agents in fact” of American Reliable merely because some of their actions could be regarded as beneficial to the insurer.

“Almost every broker transacting insurance in this state could be subject to retroactive attack on theories of ‘de facto agency’ liability, if the commissioner has his way,” Young said.

CDI alleged that American Reliable had violated California law by “permitting” particular retail broker-agents to charge brokers’ fees. The allegation is based on the CDI’s conclusion that the brokers in question were “de facto agents,” or in other words, producers who were acting as brokers, but whose relationship with the insurer was tantamount, in CDI’s view, to that of an appointed agency, Young explained.

CDI contends that a broker-agent becomes an agent when the insurer has filed a notice of agency appointment with the Department (as set forth in various provisions of the California Insurance Code), or when a producer “acts on behalf of an insurer.”

The Department contends that a producer should be regarded as acting on behalf of the insurer — and therefore be considered an agent of the insurer — if any of the following factors are in existence:

• A broker has discretion to issue binders;
• A broker submits only those types of risks that the insurer has indicated it wishes to underwrite;
• The insurer permits the broker to use its name or logo in advertising;
• The insurer directs or controls the broker “in any respect”
• The insurer refers customers or potential customers to the broker;
• If the insurer reserves the right to discipline a broker for failing to follow the insurer’s underwriting rules;
• If the insurer provides any type of contingent or other incentive compensation; and
• If the broker and insurer have a long-standing relationship.

“CDI is improperly attempting to regulate fees that licensed California producers may charge for professional services, when there is no provision of the insurance code — or any other legal authority — permitting it to do so,” said Roger Chaix, president of the California Insurance Wholesalers Association, which submitted a letter to the OAL in support of IBA West’s petition. “CDI’s designation of the American Reliable settlement as a ‘precedential decision’ reflects part of a larger, onerous CDI strategy — the regulation of fees wholesale brokers and other insurance producers may charge for professional services.”

“This is a broad and inappropriate use of a settlement that has the effect of creating a regulation applicable to all brokers and producers who do not transact directly on behalf of insurers,” said Robert W. Hogeboom, legal counsel for the Alliance of Insurance Agents and Brokers and senior partner of the Los Angeles law firm Barger & Wolen LLP. The Alliance also submitted support for IBA West’s petition.

“The American Reliable settlement agreement, in our view, grossly mis-states the current law of California on important issues of “agent vs. broker” capacity,” Young emphasized. “It represents nothing less than a declaration of war on every insurance broker in this state and every customer served by every insurance broker.”

The IBA West petition, drafted by Steve Hirsch, a partner in the San Francisco law firm of Keker & VanNest, asked the OAL to declare that Garamendi’s decision in the American Reliable case constitutes an illegal “underground regulation,” and that the commissioner has no legal authority to designate any mere settlement agreement as a “precedent.”

“This attempt by CDI to create new regulations in the guise of legal precedent, without due process, is disruptive to the marketplace and ultimately, harmful to consumers,” Chaix said.

Young said IBA West is “happy that the OAL has accepted the petition” and is “optimistic” that it will rule on the merits in IBA West’s favor.

A copy of the petition and supporting attachments can be found at: www.ibawest.com