Court Decision Threatens Stability in California’s Insurance Market

If after 16 years of off-and-on court cases, attempting to interpret the ambiguous and contradictory language of Proposition 103 isn’t enough, this month, another interpretation came down from the Second District Court of Appeals in a case known as Donabedian v. Mercury.

The ruling states that under Prop. 103, any citizen has the right to act as a “private citizen attorney general” and directly sue any insurance company if he or she disagrees with the company’s rates, rules, or underwriting plans, which are approved by the California Department of Insurance (CDI).

Sam Donabedian, a private citizen, filed a lawsuit against Mercury Insurance Company in the Superior Court, claiming that under Prop. 103, it was illegal for the company to use a prior insurance record—approved by CDI—as part of its underwriting and pricing practices. Judge Carolyn Kuhl agreed with Mercury’s argument that only the insurance commissioner, not the courts, can hear consumer complaints.

The judge cited a 1947 law giving the state insurance department regulatory authority over the insurance industry. The case was then taken to the appellate court. Interestingly, two friends-of-the-court briefs were filed: one by Harvey Rosenfield, author of Prop. 103 and counsel to the Foundation for Taxpayers and Consumer Rights (FTCR), and the second by CDI.

In his brief, Commissioner John Garamendi threw a bombshell into the scenario. He urged the court to approve citizen lawsuits against insurance companies, explaining that CDI “simply lacks sufficient resources to pursue every allegation.” The Appellate Court reversed the lower court decision and concluded that consumers have the right to enforce Prop. 103 through the state’s Unfair Competition Law (UCL).

CDI told the court that it did not have the “resources” to check every single activity of the insurance industry in California, but welcomed private citizen lawsuits to help CDI do its job. With more than 1,350 employees, CDI is the second largest insurance department in the U.S., with the largest budget of any in the U.S.—$170 million for fiscal year 2004.

Following is a direct quote from the California Insurance Commissioner’s Web site stating what he believes are the duties of CDI: “Overseeing the industry and protecting the state’s insurance consumers is the responsibility of the California Department of Insurance. CDI regulates, investigates and audits insurance business to ensure that companies remain solvent and meet their obligations to … policyholders.”

As administrator, the commissioner enforces the laws of the California Insurance Code and promulgates regulations to implement these laws.

The Appellate Court ruling allows private citizen lawsuits against insurance companies for rating plans approved by the commissioner. However, Prop. 103 implicitly states: 1.) “Insurance Code section 1860.1 grants to the Commissioner original and exclusive jurisdiction over insurance ratemaking matters” (Id. p. 4) and 2.) “No insurance rate may be charged unless approved by the Commissioner. (Ins. Code, § 1861.01, subd. (c))” So then, why would the commissioner or CDI require help to regulate the industry?

The law also states that the commissioner is responsible for enforcing the Insurance Code, including the review and approval of proposed rates and class plans to ensure that rates are fair and adequate and not in violation of Chapter 9 of Division 1, Part 2 of the Insurance Code.

These provisions give the California insurance commissioner exclusive original jurisdiction over the rate making process. Therefore, Rosenfield, author of Prop. 103, violates the very initiative he claims to have written by allowing the 36 million citizens of California the right to sue an insurance company that has lawfully, under Prop. 103, received approval for its rates from the insurance commissioner of California through the CDI.

Plus, the insurance commissioner, under Prop. 103, is now in violation of the law, which requires him to regulate the industry by allowing 36 million citizens to regulate the insurance industry under Prop. 103.

It gets even better. There is also a “double-enrichment” aspect to the new court ruling. Under the Appellate Court ruling, any insurance company that wants to raise or lower its rates, would, under Prop. 103, proceed with a filing request to CDI which could take up to 18 months or longer for approval, amendment, or denial. But wait. Didn’t the author of Prop. 103 also write a section into the initiative that allows consumer groups, like FTCR, to intervene on any insurance filing or procedure by any insurance company before CDI?

The answer is yes. So, not only can FTCR or any qualified group under the Prop. 103 definition intervene in proceedings, they also get hourly wages and reimbursement for expenses while participating in the proceedings—all paid for by insurance companies appearing before CDI. Since Prop. 103 narrowly passed by 51 percent in 1988, such groups have collected more than $2 million in intervenor fees through CDI, which are paid for by insurance companies—even when some of those companies wanted rate reductions!

Now comes the double-enrichment. If and when the filing for a rate change is granted to an insurance company, under the Appellate Court ruling, the author of Prop. 103 and his partners can sue the company a second time stating they believe the rate that was approved is illegal. It’s a double lottery windfall for the so-called consumer groups, and a giant bite out of the wallets of consumers who eventually will have to pay all of the exorbitant, unnecessary costs.

Mercury Insurance Company has asked the Appellate Court for a rehearing on the Donabedian case. If denied, the company will take the case to the California Supreme Court.

Meanwhile, Rosenfield has also filed a similar brief in another similar lawsuit, Poirer v. State Farm Mutual Auto Insurance Company. Although the case is similar, there are some differences. Vanessa Wells, State Farm’s legal counsel in the Poirer case, is confident that at some point the courts will realize the damage a plaintiff’s verdict would bring to the highly regulated insurance business.

“As a matter of both law and public policy, there is no question that a decision that would allow every Department of Insurance-approved rate filing to be challenged in front of a jury would be as much anti-consumer as it would be anti-insurer,” Wells said. “We are confident the courts will recognize that consumers need a healthy and competitive insurance industry in the state and a decision that creates regulatory gridlock by the courts will lead to neither industry health nor competition.”

Dan Dunmoyer is president of the Personal Insurance Federation of California (PIFC). Since its inception, the PIFC’s membership has grown from two to five companies that write more than 43 percent of the homeowners, auto and earthquake lines of insurance sold in the State of California.