SAN FRANCISCO, CA, Jan. 19, 2017 --The California Supreme Court is expected to issue a decision by month’s end in ACIC v. Jones, a case challenging the authority of the California Department of Insurance to require insurers selling homeowners insurance to include mandatory items in every estimate of replacement cost. 

Whatever decision the Supreme Court issues is likely to have a significant impact on the powers of the Commissioner—and the heads of all other administrative agencies in California—to impose new regulatory requirements not vetted in or approved by the Legislature, said IIABCal General Counsel Steve Young.

Attorneys for both the insurance industry and the Department of Insurance were peppered with difficult questions from the justices during the Nov. 1 oral argument, which focused not only on the express terms of the applicable statutory law, but also on the larger enforcement powers of the insurance commissioner.  

Observers indicated it was not possible, on the basis of the questions asked, to know how the Court might rule.  However, because two lower courts ruled against CDI, the mere decision by the High Court to take this case on appeal—when no action would have preserved the lower court rulings—has given pause to the industry, Young said.

At issue are regulations promulgated in June 2011 by then-Commissioner Steve Poizner that required every “replacement cost” estimate to be based on identical mandatory criteria.  In addition, insurers or their broker-agents were required to provide detailed documentation showing how the mandatory factors are applied to produce the replacement cost estimate, and were prohibited from making any communications to applicants or policyholders regarding replacement cost estimates that did not conform to the Commissioner’s methodology.

All broker-agents who sell residential property insurance policies were required to complete a one-time-only three-hour continuing education (CE) class on estimating replacement cost, and insurance companies were required to provide written training to their broker-agents on how to comply with whatever methodology the insurer selected to conform to the new requirements.

The litigation did not challenge the Commissioner’s authority to impose the CE requirement; that requirement is expressly authorized by Insurance Code Section 1749.85.  But it did challenge the authority for the requirement that insurance companies adhere to one mandatory system for calculating “replacement cost.”

California Department of Insurance lawyers have argued their regulations are authorized by Insurance Code Section 790.03, which prohibits unfair insurance practices.  CDI lawyers have asserted that any insurer not using the proposed methodology are engaged in an unfair and deceptive practice, without any showing that other practices were in fact unfair or deceptive.  The Commissioner’s legal argument was flatly rejected by Los Angeles County Superior Court Judge Gregory Alarcon, and his decision was affirmed and upheld by the Second District Court of Appeals in a written opinion issued in April 2015.

Young said the case is hugely significant because of the Commissioner’s expansive interpretation of his powers under the Unfair Insurance Practices Act (UIPA). 

That Act enumerates and prohibits over two dozen specific acts defined to constitute an unfair or deceptive practice in the business of insurance.  Section 790.06 permits the Commissioner to add other offenses to the list of prohibited acts—but only if he issues an order to show cause, and meets the burden of proving that a particular behavior not already enumerated in the statute is unfair or deceptive.  Any such order ensuing from an administrative law judge can then be appealed in court.

However, CDI did not follow that procedure in this case.  Instead, the Commissioner’s lawyers simply declared that any insurer not using all of the factors identified by the Commissioner for calculating a replacement cost estimate had, by virtue of that admission, committed a new unfair or deceptive act—without regard to the accuracy of the estimate actually provided.

“The Department of Insurance for some time has, in our view, illegally been attempting to unilaterally and dramatically expand the scope of the UIPA in order to apply its liberal enforcement powers, including the ability to impose gigantic fines,” Young said.  “Multiple commissioners have sought to utterly circumvent the Legislature, and also ignored the plain requirements of § 790.06.

“The trial court and the court of appeals both found that the Department had done precisely that in this instance, and we hope the Supreme Court will shut the door once and for all on this unfortunate practice.”