So what now? 

Observers expected 2017 to produce two landmark cases establishing parameters on the legal authority of the California Insurance Commissioner to use the California Unfair Insurance Practices Act to create new categories of “unfair and deceptive acts” in the business of insurance, and impose massive monetary fines against broker-agents and other CDI licensees.

The first of these two cases was decided last week, in ACIC v Jones, when the California Supreme Court unanimously ruled that the Insurance Commissioner could use his regulatory powers to create wholly new categories of unfair insurance practices. 

The case has now been remanded to lower courts for consideration of additional legal issues, but if this result holds, the California Department of Insurance could arguably make new law whenever it wanted in the future without needing legislative approval.

While insurers themselves face arguably the greatest peril from these cases, they also have the potential to dramatically affect broker-agents.

At issue, narrowly, were regulations—promulgated in June 2011 by then-Commissioner Steve Poizner in response to numerous claims by homeowners that they were “underinsured” after suffering total losses in wildfires—requiring 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.

Nothing in the California Insurance Code expressly authorizes CDI to create or enforce such factors.  The Commissioner’s lawyers circumvented that problem by asserting that the Unfair Insurance Practices Act (UIPA) gives the Commissioner broad “interpretative” power to prohibit unfair and deceptive acts in the business of insurance, and that any insurer not using any other method to calculate replacement cost estimates would commit a deceptive act solely by failing to follow all of the Commissioner’s mandates—regardless of whether the estimate itself is accurate or not. 

Both a trial court and the court of appeal ruled against CDI.  The rare decision by the California Supreme Court in 2015 to take the case on appeal signaled its predisposition to overturn that result.  And the unanimous opinion issued by the High Court stressed its “deference” to the presumed expertise of the insurance commissioner in applying his interpretative powers under the statute. 

The Court’s opinion dealt with the “facial authority” of the Commissioner to promulgate these regulations; i.e., whether UIPA, on its face, authorized the regulations.  The plaintiffs in the case had challenged the regulations on additional (non-UIPA) grounds, including a claim that the rules violate insurers’ First Amendment rights by prohibiting them from communicating with customers on this subject in any way not controlled by the Commissioner. 

The lower courts never evaluated those claims, having invalidated the regulations solely on UIPA grounds.  As a result of the Supreme Court decision, the case is now “remanded” (sent back to the lower courts) for consideration of the other legal issues. 

IIABCal was alone, among the various insurer and producer organizations, in working with then-Commissioner Poizner on the regulations.  As a direct result of IIABCal efforts, the regulations contain a number of provisions designed to insulate producers from liability under the new regulations. 

Whether the regulations, if ultimately implemented as drafted, reduce the widespread “underinsurance” phenomenon is an open question.  Many observers believe that the regulations are unlikely to deter certain insurers (historically in the captive-agency delivery system) from deliberately underestimating replacement cost—in order to attract premium—knowing that “total losses,” which are almost the only time the replacement cost estimate comes into play, occur only rarely. 

Meanwhile, a related set of legal issues is now being adjudicated in a separate case, PacifiCare v. Jones, now pending in part in Orange County Superior Court.  The case has been bifurcated into separate parts; some have yet to be tried, but others are already being appealed. 

In that case, lawyers for Commissioner Jones are interpreting their powers under the Unfair Insurance Practices Act in ways that are not only unprecedented but also Draconian in their scope.  

The litigation against the Commissioner was brought after he disregarded a lengthy judgment and ruling of an administrative law judge in an enforcement hearing against PacifiCare, a health insurer that had been accused of violating several provisions of the California Insurance Code.   

The Commissioner unilaterally issued a new decision predicated upon a “radically new” interpretation of the Unfair Insurance Practices Act crafted by his lawyers, which increased the fine on the insurer ten-fold (to $173 million), and then used a provision in the Administrative Procedures Act to designate the new interpretation as a legal “precedent” that could be applied against any licensee of the Department—including any agent or broker. 

PacifiCare and others in the insurance industry, including IIABC, contend that the Commissioner is wrong in asserting: 

(1)   that violation of any provision in the California Insurance Code constitutes a violation of the Unfair Insurance Practices Act (§§ 790.03, et al.) and supports the imposition of UIPA penalties;

(2)   that any act taken by a licensee is “knowing”—one of the legal conditions precedent for invoking UIPA enforcement powers—even in the complete absence of intent or even actual knowledge;

(3)   that misrepresentation of pertinent facts, which UIPA prohibits, can include omission of a statutory notice in a form, and that any incorrectly paid claim constitutes misrepresentation of a pertinent fact;

(4)   that in imposing thousands of dollars in penalties for each incorrectly paid claim, the CDI is not bound by Constitutional prohibitions against excessive fines;

(5)   that a single error (if repeated solely because of automation) can constitute a “general business practice” (one of the other conditions precedent for UIPA liabilities); and

(6)   that the Commissioner may create new prohibited acts under UIPA without holding a public hearing as expressly required by the Insurance Code. 

Senior officials in the Jones Administration have publicly admitted that the decision in PacifiCare permits regulators to compel massive larger settlements from licensees accused of wrongdoing.  

The trial court has ruled against the Commissioner’s expansive interpretations of his powers, and it is that ruling that is now being appealed.  An industry-wide coalition is giving consideration to filing an amicus brief to help the appellate court understand the danger and illegality of this tactic; we are the only p/c producer group defending broker-agent rights in this case. 

Until all of the issues in both of these cases are fully and finally litigated, it is impossible to evaluate the true impact of what the Supreme Court decided last week, but the unanimous decision in ACIC v Jones certainly appears to dramatically expand the Commissioner’s power to expand his ability to micromanage insurance licensees, and the pending outcome of the PacifiCare litigation could effectively force licensees to agree to one-sided settlements in order to avoid potentially ruinous fines and intrusive regulatory intervention.

For more information:

Here is the Supreme Court’s opinion.

Here is the text of the regulations.

Steve Young
Senior Vice President & General Counsel
IIABCal