California Insurance Commissioner John Garamendi has said often that he considers the Department of Insurance to be above all a consumer protection agency. While that proposition is open to debate, there can be no doubt that Commissioner Garamendi has campaigned tirelessly to protect consumers, particularly personal lines insurance buyers, from what he perceives to be insurance industry abuses . . . even when he lacks the authority to do so.
A case in point is the Commissioner's steadfast opposition to what he calls "use it and lose it" underwriting, the alleged practice of insurers of declining to renew policies, or of renewing only with a significantly increased premium, when the insured so much as inquires concerning a possible claim or, worse, actually presents one. So strongly does the Commissioner feel about these alleged practices that he first tried to prohibit them in April 2003 without the benefit of any actual statute or regulation, through what was termed an "Advisory Notice" to insurers. The Notice began:
The purpose of this advisory notice is to direct your attention to those laws concerning the appropriate use of loss history information in the rating and underwriting of residential property insurance in California. The CDI has received numerous complaints from homeowners and tenants who have been treated unfairly by insurance companies, particularly in the gathering and use of loss information in the underwriting process.
The Department then simply notified insurers that it deemed the various complaints to be justified, and demanded they cease their existing practices. When insurers challenged the Notice and purported enforcement activities as "underground regulation," the Commissioner promulgated an "Emergency Regulation" in July 2003 to the same effect. Again, insurers filed a legal challenge, and succeeded in obtaining a ruling in the trial court that the Commissioner had over-stepped his statutory authority. The Commissioner and Department appealed, and the Third District Court of Appeal in Sacramento has affirmed the trial court's decision:
The Commissioner and CDI appeal, contending the regulation was within the Commissioner’s authority and consistent with various provisions of the Insurance Code. We disagree. The Insurance Code provides no express authority for regulating the underwriting of homeowners insurance, nor can such expansive authority be implied. Unlike automobile insurance, homeowners insurance is subject to only a few restrictions, all clearly set forth in the Insurance Code. Reading the Insurance Code to give the Commissioner broad authority to regulate underwriting beyond these specific provisions is inconsistent with the legislative scheme as a whole. Accordingly, the regulation is invalid.
A valid regulation, the Court reminds us "must be within the scope of the authority conferred by the enabling statute or statutes. No matter how altruistic its motives, an administrative agency has no discretion to promulgate a regulation that is inconsistent with the governing statutes. . . . In reviewing the validity of a regulation, our function is to inquire into its legality, not its wisdom."
The Commissioner was unable to satisfy the Court that any of the statutes on which he relied actually authorized the imposition of the emergency regulation.
The Commissioner contends that the use of loss history that has no substantial relationship to future risk 'may impermissibly affect rates charged by insurers and lead to insurance that is unfair, unavailable, and unaffordable.' The Commissioner believes he has the authority to determine, by regulation, when loss history has no substantial relationship to future risk. The Commissioner points to no express statutory authority for this regulatory power.
In fact, the Court notes, the Insurance Code includes a number of specific grounds on which a decision not to renew a policy is prohibited: the presentation of a claim is not among them. While the Legislature has expressed its policies in an array of statutes, none of them "indicate any legislative concern with the use of claims or loss history, nor can they be read as providing implied authority for the Commissioner to regulate the use of loss history in homeowners insurance underwriting." No matter how well-intentioned, the emergency regulation was not authorized and must be declared unenforceable.
The Commissioner's initial response to the decision suggests he intends to fight on:
The court decision is now being reviewed by my Department's attorneys. We will determine the next step on the emergency regulations after they have completed their work. In the meantime, I will continue our ongoing efforts to protect homeowners. Last year we achieved partial relief with a new law that protects homeowners against use it and lose it practices when natural disasters occur. We will continue to explore new ways to legislate fairness for consumers.
It is clear that the industry must end this harmful practice. Insurers cannot ultimately succeed if they erode the trust of their customers and penalize them for using a product as it was designed. That's why I'm fighting this battle, and it's not over yet.
The decision in American Insurance Association v. Garamendi (Feb. 28, 2005), Case No. C045000, can be accessed at these links in PDF and Word formats.
[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]
Elsewhere: Insureds' advocate J. Craig Williams endorses the Commissioner's position. (This also serves to remind me that I have somehow omitted his weblog, May it Please the Court, from the links list, a condition that I have now remedied. He is podcasting, too.)
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