BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Michael J. Machado, Chair
AB 1051 (Calderon) Hearing Date: June 18, 2008
As Amended: May 8, 2008
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor(05/29/08):46-27/Pass
Asm. Appr. (05/23/08):11-04/Pass
Asm. Ins. (04/25/08):07-02/Pass
SUMMARY Defines "unfairly discriminatory", and provides that
when a rate is challenged in court, the court's ruling cannot be
applied retroactively for purposes of regulation of automobile
insurance.
DIGEST
Existing law
1. Proposition 103 vests responsibility for approving insurance
rates in the Insurance Commissioner (IC). (Insurance Code
Section 1861.05(b));
2. The public is given notice of an insurer's application(s), and
the application(s) is deemed approved 60 days following public
notice, unless the a consumer requests a public hearing within
45 days of notice and the IC grants a public hearing on the
application(s). The IC may, on his/her own motion, determine
that a hearing is necessary and must hold a hearing, if a
requested rate increase exceeds 7 percent in the personal lines
upon timely request by anyone. In any event, a rate application
is deemed approved following 180 days from receipt unless
various circumstances, such as, most notably, the commencement
of a hearing, apply. (Insurance Code Section 1861.05(a));
3. The public has full rights of participation in the approval
process, including the awarding of advocacy fees and expenses
for its participation. (Insurance Code Section 1861.10(a) and
(b));
AB 1051 (Calderon), Page 2
4. The IC's action on a rate application is also subject to
judicial review. (Insurance Code Sections 1858.6 and 1861.09)
Consumers can and do intervene and participate in that process
as well, and have been awarded advocacy fees and expenses for
that further participation.
5. The public may also independently initiate a proceeding to
challenge an insurer's existing rate. (Insurance Code Section
1861.10(a)) This provision ensures that Proposition 103's
mandate that an excessive, inadequate, unfairly discriminatory,
or otherwise illegal rate cannot "remain in effect" (Insurance
Code Section 1861.05(a)) can be enforced by either the IC or the
public;
6. Insurance Code Section 1861.05 provides, among other things,
that rates shall not be unfairly discriminatory. It was added to
the Insurance Code in 1988 by Proposition 103. The unfair
discrimination standard was previously found in Section 1852(a)
of the Insurance Code, a provision which was repealed by Prop
103. The term is not defined in either Section 1861.05 or in its
predecessor Section 1852(a);
7. For purposes of workers compensation, Section 11732.5 provides
that a rate is unfairly discriminatory "if, after allowing for
practical limitations, price differentials fail to reflect
equitably the difference in expected losses and expenses";
8. Although there are a few issues remaining as to the appropriate
application of Proposition 103, the above scheme was upheld by
the California Supreme Court in the CalFarm/Deukmejian case and
as applied to the one-time only rate rollback process mandated
by Proposition 103 in 20th Century/Garamendi. The general
parameters of the IC's and the public's participation in the
rate approval process or the challenging of an existing rate are
now clear;
9. An insurer's failure to abide by the IC's final rate order is
punishable by a fine up to $250,000 (Insurance Code Section
1859.1) and loss of the insurer's certificate of authority.
(Insurance Code Section 1861.14);
10. The IC, pursuant to Insurance Code Section 1861.05(b) has
promulgated detailed regulations defining how insurers may apply
for a rate change. Such applications are in the form of two
elements; (a) rate applications deal with the overall rate
AB 1051 (Calderon), Page 3
level; and (b) class plan applications deal with the
distribution of rate in the form of premium. This is determined
by the insurer's use of mandatory and optional rating factors
promulgated by the IC under Insurance Code Section 1861.02(a).
An insurer is forbidden by law to use any but the promulgated
rating factors, and an insurer must give primary weight to the
three mandatory factors.
This bill
1. Would prohibit any retrospective adjustment of an approved
filing from being awarded, unless the person challenging the
filing establishes that the insurer has not complied with
the approval;
2. Would define "unfairly discriminatory rates," to mean means
rates defined as "unfairly discriminatory" in Section
11732.5;
3. Would provide various findings and declarations that the
support the contention that this bill furthers the purpose
of Proposition 103.
COMMENTS
1. Purpose of the bill. This bill would add clarity and
consistency to the proper use of an approved rate, preserving
the consumer participation process, and assuring that an insurer
is not held retroactively liable for a return of premium
provided that it has met the terms of the Commissioner's final
order as contained in any lawfully secured rate approval. As a
result of this bill, an insurer cannot be held retroactively
liable so long as it met the terms of any rate approval the
Commissioner orders, but the bill would not constrain the
ability of a private party to challenge an insurer's rate on a
prospective basis.
2. Background . This bill follows up on a still unresolved matter
involving Allstate Insurance. In this case, Allstate and other
insurers were put on notice in June 2006 pursuant to Insurance
Code Section 1861.05 (a) that its current homeowner rates were
AB 1051 (Calderon), Page 4
excessive and should be reduced immediately. All other
insurers, except Allstate, lowered their rates in response to
the IC's notice. The IC put the company on notice again in May,
2007 that its current rates were excessive and that the IC would
take all corrective action, including ordering refunds to
policyholders of excessive premiums paid, if it were determined
that in fact Allstate's rates were too high. The IC's effort to
compel retroactive rate adjustment has not yet been resolved.
No refunds have been ordered. It is not clear whether the IC
will order refunds at a later date.
It is also not clear whether the IC has the authority to order
retroactive rate adjustments and refunds.
This bill proposes a definition of "unfairly discriminatory"
where none exists in current law. Consequently, regardless of
the language of the proposed definition, any new definition is
likely to be more restrictive than currently allowed under a
broad application of Proposition 103. Under Proposition 103 DOI
currently looks both at the mathematics (actuarial data) of the
rate and at its application. Under Proposition 103 the IC would
not allow an insurer to apply a rate inconsistently, even if the
rate mathematically reflected the cost of providing the
coverage.
Suppose, for example, that an insurer had a rate for mileage
verified motorists under AB 2800 (pending in this committee),
but it offered that discount only in Northern California because
it was trying to reduce its overall business in Southern
California. Under the IC's current interpretation of Proposition
103, this rate may be disapproved as being unfairly
discriminatory. Under the Section 11732.5 definition the IC
would be unable to disapprove an application adopting this rate,
even if the rating plan called for discriminatory application of
the rate, if the rate itself mathematically reflected the cost
of covering the risks.
Under existing law, an insurer's rate may be deemed by someone
as "excessive, inadequate, or unfairly discriminatory" within
the meaning of Insurance Code Section 1861.05(a). These are
somewhat subjective standards, and they were assigned by
Proposition 103 to the discretion of the IC. The intent of the
legislation is not to bar a public or private challenge to the
insurer's properly approved rate or class plan (either through
the administrative process or in a private legal action), but to
make clear that, because an insurer is required, on pain of
AB 1051 (Calderon), Page 5
harsh penalties, to follow its approved rating plan, it cannot
be held retroactively liable for having done so -- it can only
be ordered to change its rate on a go-forward basis consistent
with Proposition 103's mandate that improper rates and premiums
cannot "remain in effect."
Sponsors contend that there is no authority in any prior
approval rating system either in California or elsewhere in the
country for a regulated entity to be penalized or
retrospectively charged for following its properly approved
rate. See Powerex and McLiechy cases. The Insurance Code
arguably deprives the IC of the ability to impose any penalty on
an insurer for following its approved rating plan. Insurance
Code Section 1858.07(b). However, opponents disagree.
3. Support . Mercury Casualty Company (sponsor) states, AB 1051
reinforces the definition of the term "unfairly discriminatory"
because it would assure that the statutory understanding
presently found in other portions of the Insurance Code are
incorporated into the definition that is applied by the IC in
rate proceedings. Additionally, AB 1051 would provide certainty
to the results of the IC's rate approval process as provided
under Proposition 103.
The Personal Insurance Federation of California states that AB
1051 would provide clarity and consistency to the rate approval
process established by Proposition 103 and the authority of the
IC in approving rate filings. AB 1051 provides certainty for an
insurer who, under the existing law, has a legal obligation to
apply only the rate as approved by the IC, and therefore should
not be subject to retroactive liability by relying on that which
it is required by law to do.
4. Opposition . Consumer Watchdog (formerly The Foundation for
Taxpayer and Consumer Rights) argues that AB 1051 would lead to
higher insurance rates for California consumers and businesses
by changing the terms under which the IC can review rates
governed by Proposition 103. The legislation would also prevent
refunds when insurers illegally overcharge customers. AB 1051
would take away the IC's power to hold companies like Allstate
accountable for charging excessive rates. AB 1051 says that once
a rate is approved, refunds cannot be ordered, no matter how out
of date the rate might be and no matter how long the insurer has
frozen an unfair or excessive rate in place by fighting attempts
to make its rates appropriate and compliant with the law. This
directly contradicts the aforementioned requirement in
AB 1051 (Calderon), Page 6
Proposition 103 that "no rate shall ? remain in effect which is
excessive, inadequate, unfairly discriminatory?" [Section
1861.05, emphasis added].
Consumer Attorneys of California contends this bill would codify
one court's interpretation of a policyholders' ability to
challenge excessive rates in court. Further, it would frustrate
the purposes of Proposition 103 in three ways. First, it would
prevent policyholders charged rates that are both demonstrably
excessive and based on demonstrably false assumptions from
obtaining refunds for the excessive rates they've paid. Second,
it would make it more difficult for policyholders who are
surcharged for an unlawful reason-such as their credit history,
race, income level or lack of prior insurance-to obtain refunds
of the unlawful surcharge. Third, it would define "unfair
discrimination" in a manner not intended by Proposition 103, and
that would nullify a provision of Proposition 103.
The Department of Insurance (DOI) contends that AB 1051 could
leave consumers with no adequate remedy where the DOI or a court
determines a rate to be excessive, and would also preclude
additional assessments if a rate is found to be inadequate. This
proposed change is extremely problematic for consumers. While it
is exceedingly rare that the DOI will approve a rate, and that
rate is subsequently found to be excessive, no insurer should be
allowed to continue to charge excessive rates in violation of a
legally binding determination that they are overcharging
consumers. This provision would provide an incentive to drag out
administrative proceedings as there would be no harm to the
insurer. In addition, policyholders would be harmed by
continuing to pay a rate that may be found to be excessive with
no recourse.
5. Questions.
Is the proposed definition of "unfairly discriminatory"
appropriate? DOI currently interprets the Proposition 103
definition of "unfairly discriminatory" in two ways. First, it
prohibits an insurer from using a rate that doesn't
mathematically reflect the cost of covering the risk. Equally
important, perhaps more important, it also prohibits an insurer
from using a mathematically correct rate in a discriminatory
manner by offering it to some customers and not to others.
The proposed definition would mean that DOI would only be
allowed to consider the mathematics (actuarial data) of a rate.
AB 1051 (Calderon), Page 7
DOI would not be allowed to consider how the rate is applied.
Adoption of this standard in the Proposition 103 context,
therefore, could result in insurers being allowed to apply rates
in discriminatory ways so long as the rates themselves were
mathematically correct.
6. Suggested Amendments.
a. Given the potentially limiting effect of the
proposed definition of "unfairly discriminatory", the
committee may wish to strike this definition all together
and rely on existing law.
Strike Section 2 (amends to Section 11580.06 of
the Insurance Code) from the bill.
Additionally, the committee may wish to strike the
corresponding findings Section 3, subdivisions (a)
through (d) inclusive.
b. Opponents argue that this bill would allow illegal
activities to go unabated by DOI and would restrict DOI's
ability to enforce the law. The committee may want to
amend this bill to make it clear that amendments to
1861.05 (e) apply only to court cases and do not effect
the DOI's ability to enforce the law.
Amend Page 3, Lines 30 through 39 inclusive, as
follows -- (e) Any rate approved by the
Insurance Commissioner may be challenged as
provided in this chapter. However, no retrospective
adjustment of an approved filing which was not
previously imposed by the Department of Insurance
may be awarded by a court unless the person
challenging the filing establishes that the insurer
has not complied with the approval. "Rate filing"
includes the filed rates, premiums, and rating.
This amendment would preserve whatever authority the IC
may have to order refunds and reduced rates before or
after a court action.
POSITIONS
Support
Insurance Brokers and Agent's of the West (IBA West)
AB 1051 (Calderon), Page 8
Mercury Casualty Company (sponsor)
Pacific Association of Domestic Insurance Companies
Personal Insurance Federation of California
The Alliance of Insurance Agents & Brokers
The National Association of Mutual Insurance Companies
Oppose
California Reinvestment Coalition
Consumer Action
Consumer Attorneys of California
Consumer Watchdog (formerly The Foundation for Taxpayer and
Consumer Rights)
Department of Insurance
United Policyholders
Consultant: Michael Miiller (916) 651-4102