Declarations and Exclusions

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.

    * * *

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. 

~~~

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.

Dangling Propositions

Sure, it's already the second week of February, but it's never too late to wish Decs&Excs readers a Happy New Year with our first post of 2006 -- and an interesting year it looks to be for followers of California insurance issues, beginning with a resurgence of interest in insurance rate regulation under Proposition 103 and looking ahead to the selection of a new Insurance Commissioner in November's election.  There will be more to say on the race for Commissioner shortly, but we'll begin our year with an update on our old friend, Prop 103.

By way of background: Proposition 103 was a ballot initiative passed by the voters of California in November, 1988.   It was one of five competing initiatives on the ballot -- two sponsored by the insurance industry, two sponsored by consumer advocates and a fifth sponsored by a single insurance company -- proposing to change the way insurance business was done in the state, with a particular focus on containing the cost of automobile insurance.  Insurers' proposals focused on shifting California to a "no-fault" system of auto-related compensation while the consumer advocates' proposals emphasized rate controls and mandatory rate reductions.   When the dust settled on election night, one of the consumerists' initiatives -- Proposition 103 --  had emerged the victor.

A principal feature of Prop 103 was imposition of a mandatory rollback of auto insurance rates: insurers were required to reduce their rates to what they had been on November 8, 1987, and then to cut those rates by 20%.   The California Supreme Court promptly declared that portion of the initiative to be unconstitutional, on the ground that it violated due process requirements by depriving insurers of the opportunity, permitted to every other business enterprise, to at least attempt to obtain a reasonable return on investment. 

Most of the other provisions of the initiative survived judicial scrutiny, including three provisions that continue to affect California property and casualty insurance today.  Those provisions

• Shifted the state from an "open rating" system, in which insurance rates were set in the open market, to a "prior approval" system, under which a particular insurance rate can only be charged if it is first reviewed and approved by the Department of Insurance;

• Provided that automobile insurance rates should be set based primarily on three factors: the insured's driving record, the number of miles the insured drove annually, and the insured's years of experience; and

• Changed the office of Insurance Commissioner from an appointed post, selected by the Governor, to an elected position.

John Garamendi became California's first elected Insurance Commissioner in 1990.  When he leaves that post at the end of this year, he will have filled it for 8 out of the 16 years that it has been an elective position.  Throughout that time, he has declared his ambition to make the Department of Insurance "the nation's premier consumer protection agency."  A few days before Christmas 2005, he announced the introduction of new regulations to eliminate insurers' reliance on location -- so-called "ZIP Code rating" -- in setting automobile insurance rates.   Here is a report on the new regulations from Insurance Journal:

California Insurance Commissioner John Garamendi has announced that he will introduce new regulations next week that require insurers to base auto rates primarily on a driver's record and not on ZIP code.

According to the commissioner, he wants to fulfill the intent of voter-enacted Proposition 103 and to establish fairness and equity in automobile insurance rating system that has engendered controversy since the proposition took effect in 1988.

'When Proposition 103 was approved, it dealt with the basic fairness of how automobile insurance rates are set in California,' Garamendi said. The proposition created three mandatory factors on which auto rates had to be set: driving record; how many miles driven; and how long the person has been driving.

However, shortly [sic] after the proposition passed, a new insurance commissioner, Chuck Quackenbush, allowed 16 optional factors to also be used when setting auto rates.  [Quackenbush was elected in 1994, and the changes were made in 1996 -- gmw.]  Whether or not it was the intent, those optional factors were allowed to have more weight than the mandatory factors, Garamendi said. That lead to 'irrational rates in all areas across the state,' he said.

The Commissioner oversaw a "workshop" on his proposed regulations on January 12, and formal hearings are scheduled to take place in San Francisco on February 24.  An array of material related to the proposals is available on the Department's web site, including the proposed text [PDF] of the regulation.  The rule most resembles something out of a high school Algebra text, but its intended effect is simple: the three mandatory rating factors from the original Proposition must be applied in decreasing order of importance, and they may not be outweighed by any of the "optional" rating factors, such as the location at which the insured vehicle is principally garaged. 

Watching the issue from afar, RiskProf Martin Grace professes perplexity over the Commissioner's aversion to ZIP codes:

Some of the arguments in favor of Prop 103 are strange.   For example, consumer advocates all seem to be upset by industry efforts to assign people to risk categories in a way that more accurately reflects their risk.   This is what insurers do.  Low risks get low prices and high risk get higher prices.  One bugaboo in California is the use of zip codes which Prop 103 implies cannot be a rating factor.   The Proposition basically requires rates to be made based on the driver’s record, the number of miles driven annually, and the driver’s experience.   Thus, the environment (zip code or neighborhood) in which one drives is immaterial.    Many see this as a way to prevent red lining, but it is possible that certain neighborhoods have higher risks of property damage or crime.   Shouldn’t an insurer be able to take this into account?   What if the population density of the zip code was associated with a higher probability of a traffic accident?   Shouldn’t the insurer be able to take this into account?    What about the people in low risk zip codes?   The state, by prohibiting discrimination based on zip codes, is taxing people who live in rural areas to subsidize those who live in urban areas.   This doesn’t make sense, but there is strong aversion to zip codes by consumer advocates.

Partly in response to the Commissioner's latest moves, George Joseph, founder of Mercury Insurance, submitted drafts of a new initiative measure that he hoped to qualify for the November 2006 ballot.  Those proposals would have countered the Commissioner and locked in the ability of insurers to use location as a primary rating factor.  It would also have permitted discounting of premium for the benefit of those who maintain uninterrupted auto insurance over a long period of time, even if the coverage has been maintained through different companies.  (Another of Proposition 103's changes was imposition of a blanket ban on discounting or rebating on insurance premiums.)

Response to Joseph's proposals was predictable: howls of outrage and promises of counter-initiatives.  (See also Sacramento attorney Jonathan Stein's comments.)  Whether because they were not spoiling for another fight with Harvey Rosenfield and his minions or for reasons of their own, many insurers kept conspicuously mum about the Joseph initiatives and on January 28 Mr. Joseph let it be known that he dropping his initiative efforts for the time being in the face of a dearth of industry-wide support.

Yesterday's Los Angeles Times business section featured a front page profile of Mr. Joseph, in terms that a RiskProf would likely endorse, and highlights an intriguing wager the insurance man is prepared to offer:

In World War II, he navigated a B-17 bomber through 50 combat missions. After the war, he earned a degree in mathematics and physics from Harvard.  And the company he launched in 1962, Mercury General Corp., pioneered the use of ZIP Codes and other data in fine-tuning auto insurance rates.

So when California Insurance Commissioner John Garamendi recently announced plans to overhaul the way car insurance is priced — making motorists' driving records the No. 1 factor — it was almost as if he had proposed making two plus two equal five, at least to Joseph's way of thinking.

Insurance rates should be based on the statistical chances of a customer's filing a claim, the 84-year-old Joseph believes.  Armed with years of empirical evidence, Mercury and most of the state's other insurers have concluded that the best way to calculate those odds is to look at where a driver lives — specifically, his or her ZIP Code.

            * * *

[Having withdrawn his ballot initiative,] Joseph remains coy about his next move, declining to commit to challenging Garamendi's effort at upcoming hearings or in court.

But he clearly has not been deterred from his views.

He said private polling showed strong support for continuous-coverage discounts, even when voters were told that the insurance industry was backing them.  And he said the consumer benefits of Proposition 103 have been overblown.

Rosenfield and others credit the law with saving California drivers more than $23 billion, but Joseph said insurance rates are down since the late 1980s because of safer vehicles, anti-theft devices and a state court ruling that cut down on accident-related suits.

Beaming as he pointed to a thick spreadsheet, Joseph noted that in 1988, 50% of Mercury's property claims in California also involved bodily injury claims.  In 2004, he said, that number had fallen to 36%.

'I will bet $1 million that you can't prove to a qualified actuary that Prop. 103 has saved people anything like $23 billion,' he said.  'If Garamendi believes it's true, if Harvey believes it's true, that offer is open.'

Any takers?

Consumer Complaints, Gripe for the Picking

"One of these days, I want to burn down an insurance company -- just so they'll have to make a claim!"
-- Comedian Alonzo Bodden, on NBC's Last Comic Standing

The spirit of entrepreneurship is alive and well and coming to an insurance regulator near you. Insurance Journal reports today on the launch of an online service offering consumers a pathway for the presentation of complaints to state insurance regulators:

A new Web site, with the provocative name of 'InsuranceGripe.com,' has been launched to help consumers complain to their respective insurance departments about an insurance related problem.

'The site was created specifically to walk consumers through the process of collecting the proper information, preparing a letter and sending the letter to the appropriate address,' said the bulletin. The service is provided free of charge.

"Free" is always a good selling point, and there is no reason to object to rendering consumers assistance when they believe they have a grievance with their insurer, agent or broker, but is that service really the point at Insurancegripe? No, not really.

Insurance Journal seems to have taken a press release at face value. In an article dated August 2, The Business Review of Albany, New York, inquired further:

Insurancegripe.com was created by Rich Pagano, an Albany-based Web-site designer, and Rick Weidman, an insurance industry veteran from Bethlehem, Pa. The site simplifies the process of complaining to a state insurance department and then gives the customers the option of switching carriers or agents. Pagano and Weidman will then sell the leads to agents.

After a few years, they hope to have enough data on customer service to sell to insurance carriers.

'I've been in insurance business for 24 years and one of the things I've noticed is that there is not a lot of customer market research,' Weidman said. 'There are a handful of consultants, but they charge a lot of money.'

(Underscoring added.)

While posturing itself as a consumer assistance service -- the service provided being little more than the preparation of a letter that the consumer can then submit to his or her state insurance department -- Insurancegripe is reasonably open about its real motivations. The site's FAQ page includes this disclosure, clothed in the rhetoric of "we're just here to help":

So, if you don't charge me anything, how do you make money?

When you provide information via the complaint, this information remains confidential unless you specifically request us to do something with it.... such as refer you to an insurance agent. We then take the complaint information that you have provided and aggregate it with all of the other complaints and use it to improve the services of the companies that you have complained about. We do sell the anonymously pooled information to the companies you have complained about. However, we will never release your personal information, unless you have requested us to do so.

In some cases, consumers may be unhappy with their insurance company or insurance agency, and they would like to switch their insurance to someone else. At your request, we can attempt to refer you to a different insurance agency to replace your insurance company. But, only at your request.

(Underscoring added.) A link in the main page sidebar also leads to Insurancegripe's New Insurance Coverage page, explaining the availability of a referral service:

In some cases, consumers are not satisfied with the quality of service they receive from their existing insurance company or agency, and they are interested in speaking to someone else about purchasing their insurance from a different insurance company or agency. If you have indicated YES to this question when completing your fact sheet, someone from a respected insurance agency will contact you directly within the next five business days.

We have negotiated with several National Wholesale Insurance Agencies to respond to your needs quickly, and we will continue to monitor the quality of service you receive from them to insure your satisfaction.

Generally, we are unable to provide individuals with alternatives to their WORKERS COMPENSATION or HEALTH CARE benefits issues because they are generally coverage’s, [sic] which are provided through their employer.

(Emphasis in original.) That grammatically peculiar final paragraph that doesn't exactly build confidence, but informed consumers will surely draw their own conclusions.

UPDATE: "Emergency" Homeowners Underwriting Regulations Voided by Court; Insurance Commissioner Vows to Fight On

The Sacramento Superior Court has granted the petition to issue a writ of mandate voiding the "emergency" regulation adopted by the California Department of Insurance to disallow the use of claims database information in making underwriting decisions -- particularly decisions to cancel or non-renew policies -- on homeowners insurance policies. The court concluded that Insurance Commissioner John Garamendi exceeded his authority in adopting the regulation.

While the Court's actual order is not available online, its tentative ruling is available. That ruling most likely reflects the grounds that will be invoked in the final order.

The Commissioner has vowed to continue his fight against the contested underwriting practices, and is supporting legislation paralleling the terms of the invalidated regulation. The tone of this battle is reflected in the Commissioner's press release responding to the Court's ruling:

It is clear the insurance industry does not have the best interests of the California consumer in mind. Well, I do. And I'm going to make sure that this abuse and discrimination is not allowed to continue.

[And my thanks to Connecticut attorney/blogger Doug Simpson of Unintended Consequences for his link to my earlier post on this story. Doug comes from a background in insurance regulation, and his blog focuses on "the collision of law, networks and disruptive technologies" in a variety of contexts. You will note its addition to the links at left.]

Department of Insurance in Court Over Emergency Homeowners Insurance Regs

There appears to be nothing up on the California Department of Insurance Web site yet, but I have received an e-mailed copy of a press release issued by the Department this morning. Commissioner Garamendi will be attending (or perhaps already has attended) a hearing in the Superior Court in Sacramento on several insurers' application for a preliminary injunction to stay the implementation of the "emergency" regulation previously noted here. A statement by the Commissioner will follow. (What that statement will be obviously depends on the nature of the Court's ruling.)

I will update this story, either here or in a subsequent post, as information reaches me.

UPDATE [4:37 pm, 8/22/03]:

The Commissioner's latest press release just arrived via e-mail, indicating that the judge hearing this case has taken the matter under submission with a decision to be issued later. Not a terribly unusual move in a hotly contested and potentiall controversial case. Commissioner Garamendi's statement -- which may or may not be accurate, but which I am not in any position to check against the record at the moment -- is as follows:

Today at this hearing the judge has delayed his decision and we're pleased with that. It is incomprehensible, it is beyond understanding, and it is beyond belief the argument that was made in the court today, ... that (the insurance industry) has the right to use inaccurate, out of date, erroneous information in pricing and underwriting homeowners insurance in the State of California.

There is no way that this Commissioner is going to allow that to happen. If the court (ultimately) rules against us and our emergency regulations, which are designed to protect the consumers of California from abusive insurance industry practices, we will appeal, and we will take every angle, every step possible to protect the consumers from an outrageous practice that the insurance industry has come to use in this state.

Further updates as information becomes available, most likely sometime next week . . . .

Commissioner Garamendi Issues "Emergency" Regulation for Homeowners Insurance Underwriting

Effective July 23, 2003, the California Department of Insurance adopted a new regulation, on an “emergency” basis, restricting the extent to which insurers can rely upon current losses or coverage inquiries in making decisions concerning the underwriting, renewal or non-renewal of homeowners insurance policies. The new regulation, which is codified as section 2361 of Title 10 of the California Code of Regulations, declares, consistent with prior law, that insurers may only make underwriting decisions

based upon conditions of the individual risk which present an increased risk of loss and which present an increased risk of loss when compared to other risks eligible for coverage under the insurer’s underwriting guidelines.

10 Cal.Code.Regs. 2361(c), italics added.

The regulation goes on to require, in essence, an individually articulable reason for any underwriting decision, traceable to specific circumstances that can be shown to present an unacceptable increase in risk, and does not permit reliance on collective information or claims history databases as the sole reason for any under writing decision. Subsection (e) of the new regulation provides:

An insurer shall gather adequate information to determine that an increased risk of loss exists before a loss, loss exposure, or an inquiry with respect to coverage can be used as grounds for an adverse underwriting decision. . . .
[A]n insurer cannot rely solely on information obtained from an insurance-support organization. If the information is from an insurance-support organization, the insurer shall obtain further relevant information in addition to the material obtained from the insurance-support organization. Sources for this information may include the insurance application or supplemental application, telephone inquiry, written inquiry, and physical inspection.

Full text of the regulation can be found in PDF format here. The Commissioner’s factual findings, much of it based on media reports, in support of the emergency regulation are available in PDF format here.
Comment on the new regulation, and on its place in Commissioner Garamendi’s publicly stated agenda, is found in the extended version of this post, to which you can click through immediately below.