Association launches attack on Garamendi regulations

California’s Insurance Brokers and Agents of the West (IBA West) has launched a legal attack on what it is calling California Insurance Commissioner John Garamendi’s attempt to illegally redefine agent and broker definitions.

The association filed a petition with the California Office of Administrative Law (OAL) in late September, asking that agency to declare that Garamendi acted illegally in attempting to designate a recent settlement with American Reliable as a precedential decision of the California Department of Insurance (CDI).

CDI announced its settlement with American Reliable in July of certain accusations regarding allegedly illegal brokers fees. Within the settlement agreement, the Commissioners lawyers inserted a lengthy laundry list of factors that, in IBA West’s view, are sufficient to reclassify brokers as agents-in-fact of insurance companies, according to the association. That could subject virtually every insurance broker in California to unjustified liabilities, the association indicated.

“The American Reliable settlement agreement, in our view, grossly misstates the current law of California on important issues of agent versus broker capacity,” said IBA West General Counsel Steve Young. However, he indicated the greater concern is the attempt “to give these distorted opinions the force of law by wrongly attempting to designate them as a precedential decision.”

According to Young, the Commissioner used a relatively obscure provision of the California Code to give a private settlement agreement force of law that others must comply with without going through the typical channels of creating regulation.

IBA West’s petition, drafted by Steve Hirsch, a partner in the San Francisco law firm of Keker & VanNest, asks 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 settlement agreement as a precedent.

The petition argues that the California Government Code requires agencies to reach formal decisions that are fully adjudicated at some level before they may designate any such decisions as a precedent to be applied in future cases against other parties.

“What Garamendi has attempted to do here is really quite outrageous, in my opinion,” Young said. “He was effectively holding a gun to a licensee’s head behind closed doors, forcing it to agree to a lengthy manifesto written by his lawyers, and then attempted to use a relatively obscure and limited provision in the Government Code to give these opinions the force of law.”

The settlement agreement was a private contract, not something that should be applied to the entire industry, Young said. Young added that if the Commissioner’s use of that tactic is not overruled, he could apply it in the future to any insurer, broker-agent, or other licensee on any subject in which the DOI desired to make new law — without having to persuade the legislature and governor of the merit of its proposals, or having to comply with the minimum due process requirements of the California Administrative Procedures Act in promulgating regulations.

A copy of the Petition, filed Sept. 27, is available at http://
www.ibawest.com/pdf/Articles/OALPetition092806.pdf.

Joining Hirsch in submitting the petition on behalf of IBA West was Gene Livingston, a Sacramento attorney.

IBA West expects the OAL’s review of its petition will take several months, noting that OAL will have to issue public notice of the petition, allow time for public comments, review comments and allow IBA West to respond following the comment period.

IBA Wet represents firms in California, Washington, Oregon and Alaska.