SANTA ANA, CA, Aug. 18, 2016 — An Orange County Superior Court Judge has rejected an attempt by California Insurance Commissioner Dave Jones to impose a $27 million penalty on Mercury Insurance for “broker fees” charged by AIS over a decade ago.

Judge Gail Andler, in an order signed Aug. 12, ruled not only that procedures followed by the California Department of Insurance violated the insurer’s due process rights, but also that CDI had wrongfully fined the company on the basis of an erroneous legal conclusion—that brokers’ fees collected by AIS constituted “premium.”

“Even if AIS charged a ‘broker fee’ as a matter of course, that would not make such fees premium, as they were not ‘paid for certain insurance for a certain period of coverage,” Judge Andler wrote in her ruling. “… Here, Mercury did not require the ‘broker fee’ as a condition for issuing its insurance, and did not collect any portion thereof. 

“Moreover, as the AIS fee was charged separately, and without regard to what insurer was ultimately selected [by the consumer being served by AIS], even from the consumer's perspective the fee was not part of the cost of obtaining a policy from Mercury — it was part of the cost of using AIS to obtain insurance from any number of potential insurers. The interpretation of "premium" which was the basis for the decision at issue is thus incorrect,” the judge said.

The CDI enforcement action arose out of actions Mercury took over a decade ago to offer its producers the option of doing business with the insurer as an “agent,” or as a “broker.”  Under longstanding CDI policy, brokers are given wide latitude to charge fees, either in lieu of or in addition to, any commission paid by the insurer; by contrast, agents may charge fees only for services that are in addition to and beyond the scope of, what the insurer expects or requires its agents to do as agents for the company.

Mercury was successfully sued by policyholders, in a case that became known an Krumme v. Mercury, who alleged that Mercury “brokers”—whose agreement with the insurer conferred binding authority and was almost identical to “agent” agreements—were de facto agents who should not have been charging fees.  CDI brought this enforcement action as a companion to that civil litigation.

CDI has long taken the position that if an improper fee is charged by an agent, that fee must be imputed to the insurer and treated as “premium,” which then potentially makes the insurer liable for failing to premium tax on the amount of the fee, for failing to include the fee in the rate filings that must be approved in advance of use by CDI, and for unfair rate discrimination unless all consumers are treated equally.

“The most significant implication of this decision, apart from its financial benefit to Mercury, is the Court’s determination that the fees charged in this case could not be regarded as part of the premium,” said IIABCal General Counsel Steve Young.  “On the facts of this case, it is difficult to argue with the Court’s conclusion, or to regard this as anything but a major loss for the Department.”

The Court remanded the enforcement action back to the CDI for proceedings that would follow the procedures and legal standards articulated by the Court.  CDI could do that, or could appeal the trial court’s decision.

Here is a press release the insurer issued this week on the decision.   Here is the Superior Court’s written order.