If You Wanna Make the Rules, You Have to Follow the Rules
Or, as Bob Dylan would have it: "To live outside the law you must be honest." A case in point:
Now-departed California Insurance Commissioner John Garamendi -- from whom almost nothing has been heard since he became Lieutenant Governor in January -- had something of an obsession with the legal distinction between insurance "agents" and insurance "brokers." To oversimplify a bit, an insurance "agent" represents and is paid (typically via commission) by an insurance company while an insurance "broker" represents and is paid (typically on a fee for services basis) by the prospective insurance buyer. Never the twain should meet, in the view of Mr. Garamendi, and he was particularly touchy about any situation in the insurance producer might be seen as acting in both capacities, or receiving compensation as if acting in both capacities. (For an example from 2004, see Decs&Excs' previous report on the case of Krumme v. Mercury Insurance.)
During 2005, Commissioner Garamendi's interest in agent/broker compensation issues took the form of a set of proposed regulations that would have rigorously defined the "fiduciary obligations" of producers concerning compensation and disclosure of compensation, and would have imposed draconian penalties for failure to make the mandated disclosures, whether or not the insurance customer was harmed in any way. (More on those proposals here.) That effort ultimately reached a state of suspension, without the adoption of any final rules and with the Department taking a "wait and see" attitude while the leading agents' and brokers' organizations worked on a self-regulatory approach.
Stymied in his efforts to impose regulation by the usual means -- involving notices, public comment, formal hearings and other such time-consuming acknowledgments of the right to Due Process of Law -- Mr. Garamendi found a method to streamline the process. The Department was pursuing administrative action against American Reliable Insurance Company and one of its agents, Superior access Insurance Services, alleging improper compensation practices under existing law. American Reliable entered into an agreed settlement of that proceeding. The settlement agreement was somewhat unusual in that it included a long narration concerning issues of law and purported to identify 11 specific situations in which a producer would be deemed to be an "agent" and thereby prohibited from charging the insurance buyer a broker's fee.
Ordinarily, that settlement would be binding only between the parties themselves -- the Department of Insurance, American Reliable and Superior Access -- but the former Commissioner perceived an opportunity to leverage a broader impact from the deal. To that end, he unilaterally declared that the settlement was not merely a settlement -- it was to be deemed a "Precedential Decision" of the Department of Insurance. That is, without notice or a hearing or the taking of evidence, the settlement was to become the equivalent of new regulations binding on all licensees of the Department, not merely the parties who actually agreed to it.
Agents' and brokers' representatives responded to the outgoing Commissioner's gambit this past December by filing a petition with the state Office of Administrative Law seeking to have the precedential effect of the American Reliable settlement vacated. The particulars of their arguments will be of interest mainly to connoisseurs of the finer points of administrative law, but the larger point was fairly straightforward: there are specific circumstances under the law in which an agency decision can be made "precedential," and a stipulated settlement is not among them.
Today, Insurance Journal reports that the insurance producers' position has been vindicated:
The California Department of Insurance (CDI) has been handed a procedural setback in its effort to crack down on agents charging broker fees. This week, the California Office of Administrative Law (OAL) determined that former Insurance Commissioner John Garamendi acted illegally last year when he deemed a settlement with an insurer accused of allowing its agents to improperly charge broker fees to insureds a precedential decision, giving the settlement the force of law.
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IBA West [The Insurance Brokers and Agents of the West] argued that while litigated decisions by the insurance commissioner may be adopted as a precedential decision, mere settlements cannot. . . .
'He [Garamendi] 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,' said IBA West General Counsel Steve Young.
Young warned if CDI's use of the procedure was not overruled, it could be used against licensees 'on any subject in which the Department of Insurance 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.'
The OAL agreed, citing a 1999 report by the California Law Revision Commission. 'As the Law Revision Commission comments make clear, there are two ways for agencies to make new law or policy: 1) APA rulemaking or 2) administrative adjudication which has been designed a precedential decision. The Department did not employ either method.'
New Insurance Commissioner Steve Poizner has not yet displayed the same degree of intensity of focus as his predecessor did on these issues. The Department has the option to appeal the OAL decision or to commence some alternative, APA-compliant proceeding in order to produce a statewide rule, but has not announced any specific plan.
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FOR FURTHER READING:
Insurance Journal's original report on the petition to the Office of Administrative Law, which includes a more detailed description of the terms of the American Reliable settlement, is available here.
