BILL ANALYSIS AB 1054 Page 1 Date of Hearing: April 28, 2009 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair AB 1054 (Coto) - As Amended: April 13, 2009 SUBJECT : Insurance: Proposition 103: CONSUMER REMEDIES KEY ISSUES : 1)As a threshold question, does this bill further the purposeS of PropOSITION 103 -- a requirement of any legislative amendment to that initiative? 2)IF THE INSURANCE COMMISSIONER MISTAKENLY OR INAPPROPRIATELY APPROVES INSURANCE RATES THAT ARE EXCESSIVE to consumers, SHOULD THE INSURANCE COMMISSIONER OR A COURT BE prevented - AS THIS BILL ARGUABLY MAY DO -- FROM CORRECTING THIS POTENTIAL INJUSTICE BY ORDERING INSURANCE COMPANIES THAT INAPPROPRIATELY PROFITED FROM THosE EXCESSIVE RATES TO REFUND THOSE Improper PROFITS TO CONSUMERS? 3)IN THIS INSTANCE INVOLVING IMPORTANT CONSUMER RIGHTS, SHOULD THIS LEGISLATION BE PERMITTED TO POTENTIALLY INTRUDE UPON ONGOING LITIGATION THAT SEEKS TO PROTECT CONSUMERS FROM ALLEGED IMPROPER RATES? FISCAL EFFECT : As currently in print this bill is keyed fiscal. SYNOPSIS This bill was very recently passed by the Insurance Committee on a 9-1 vote, and is now before this Committee because it may potentially affect the remedies available to consumers in insurance rate cases. Specifically, one provision of the bill expressly appears to seek to significantly limit a remedy provided to the courts in Proposition 103. Opponents of the measure contend that this provision in the bill would prevent either the Insurance Commissioner (IC) or a court from ordering refunds when rates charged by insurance companies and approved by the IC turn out, nonetheless, to be unfair and excessive. This area of the law has been the subject of substantial litigation, and this bill would appear to codify one court case that has considered the issue, while calling into question other cases, including ongoing cases. Additionally, a legislative AB 1054 Page 2 amendment to Proposition 103 can only be upheld as constitutional if it furthers the purposes of that initiative, and it is not at all clear that this bill furthers the purposes of Proposition 103. This bill appears to be very similar to AB 1051 (Calderon, 2008), which was never considered in this form by the Assembly, and which failed passage in the Senate Banking, Finance and Insurance Committee last year. This bill is supported by the Mercury Insurance Company who argues that it is unfair to penalize an insurer that is in compliance with rates approved by the IC. The bill is opposed by Consumer Watchdog and Consumer Attorneys of California who argue that by seeking to prevent potential refunds in this area, the bill limits the ability of consumers who have been overcharged by insurance companies from recovering the overcharge and, thus, increases the incentive for insurance companies to submit excessive, unfair or otherwise illegal rates in their rate applications in the hope the IC will fail to discover it. SUMMARY : Specifies that no retrospective adjustment of an approved rate may be ordered if the insurer has complied with the rate approval order of the IC, and provides that credit card expenses incurred by an insurer are not part of an "efficiency standard" adopted by the IC for rate making purposes. Specifically, this bill : 1)Specifies that in calculating an insurer's expenses for rate-making purposes, the efficiency standard adopted by the IC shall not include the costs paid by an insurer to a credit card issuer for premiums paid by a policyholder by credit card. 2)Provides that, if a rate approval by the IC is challenged, no retrospective adjustment of an approved rate may be awarded unless the challenger establishes that the insurer violated the approval order. 3)States findings and declarations that the amendments to Proposition 103 contained in the bill further the purposes of the initiative. EXISTING LAW : 1)Establishes, based upon an initiative statute adopted by the AB 1054 Page 3 voters in the November 1988 General Election (Proposition 103), a comprehensive system of rate regulation for property-casualty insurance rates. 2)Provides that no rate may be approved, or remain in effect, if it is excessive, inadequate, unfairly discriminatory, or otherwise in violation of certain insurance laws. 3)Provides that an insurer shall not charge a rate unless it has been approved by the IC - a "prior approval" system of rate regulation. 4)Requires an insurer to comply with a rate approval order of the IC, until such time as there is a new decision by the IC. 5)Provides, by regulation, that the IC may require a homeowners or auto insurer to file a new rate application if it has been at least 3 years since the insurer's rates have been approved. 6)Empowers the IC to adopt regulations to implement the rate regulation program. In this regard, the IC has adopted regulations that specify 1) the information an insurer must file in order to obtain approval of a rate, and 2) the rules that govern the IC's consideration of the application. In particular, the IC adopted "efficiency standards" that cap the amount of an insurer's actual expenses that can be built into the rate and passed along to policyholders. 7)Authorizes any person to sue to enforce the provisions of Proposition 103. 8)Provides that any Legislative amendment to the initiative statute must be passed by a vote of 2/3 of each house, and additionally must further the purposes of the initiative. COMMENTS : According to the author, this bill is needed to address two issues relating to Proposition 103. First, especially in the current economic crisis, the bill is designed to encourage insurers to allow policyholders to pay their premiums by credit card. While this payment method may not be ideal, it is far preferable to allow credit card payments than for policyholders to allow their coverage - especially auto insurance coverage - to lapse. As explained in more detail below, the IC's efficiency standards discourage insurers from allowing credit card payments. AB 1054 Page 4 Second, the bill is designed to ensure that insurers that comply with an approval order of the IC are not penalized if the IC or a court later second guesses the original decision of the IC. Efficiency standards : As part of the rate regulation process, the IC has adopted "efficiency standards." These standards cap the amount of an insurer's actual expenses that can be built into the rate that the IC approves. For example, assume the efficiency standard for a group of expenses is 30%. That means that no matter what an insurer's actual costs are for these expense items as a percentage of its requested rate, the most it can get credit for is 30%. Thus, if an insurer that already has actual costs of 32% wants to allow its policyholders to use credit cards to pay premiums, it cannot recoup the extra 2% that the credit card company will charge for the use of the card. This disincentive also holds true for an insurer that is below the efficiency standard. The regulations allow the insurer to build the full 30% into its rates, even if its actual costs are lower. Thus, if the insurer wants to allow use of credit cards, it can do so only by reducing profitability, and cannot build the added actual costs into its rates. This disincentive reduces the competition in the marketplace among carriers willing to allow policyholders to use credit cards to pay premium. Particularly in the auto insurance market, where the law mandates liability insurance for the benefit of the third-party, and not for the benefit of the insured, this lack of competition is contrary to established public policy. Retrospective Rate Adjustments : The law requires an insurer to comply with the IC's rate approval order. The insurer does not have the discretion to charge a different rate or use a different rating plan than what was approved by the IC. Further, the IC has the authority at any time to issue an order to an insurer requiring rates to be reduced if the IC believes that its approved rate is excessive. The issue posed by the bill is whether the IC or a court should be able to order an insurer to refund premiums that were not only properly charged, but in fact were approved by the IC. The author maintains that, while it is appropriate for a court to order the IC to change his or her rate approval order, it is not reasonable to require an insurer to refund amounts that it was legally obligated to charge. Main Judiciary Committee Issue : Proposition 103 created two AB 1054 Page 5 distinct avenues to challenge insurance rates that are approved by the IC, but nonetheless are excessive, unfair or otherwise inappropriate. First, the IC has the authority to review a previously approved rate, determine that it is excessive, and either change the rate prospectively, order a refund or both. The second way to challenge an approved insurance rate that is "excessive, inadequate, unfairly discriminatory or otherwise in violation" of Proposition 103 is through the courts. This bill, while allowing consumers to challenge prospective application of rates, appears to provide absolute immunity from retroactive damages - refunds - to an insurance company that charged consumers a rate that was excessive or otherwise illegitimate, but was nonetheless approved by the IC. In other words, this bill appears to prevent an insurance company from having to refund payments that either the IC or a court determines are excessive. This area of the law has been heavily litigated. Initially a court of appeals held that Proposition 103 did not permit private parties to challenge retroactively and in court a rate increase approved by the IC. (Walker v. Allstate Indemnity Co. (2000) 77 Cal.App.4th 750.) However, the California Supreme Court in a related worker's compensation case questioned the reasoning used by the court in Walker. (State Comp. Ins. Fund v. Superior Court (2001) 24 Cal.4th 930.) This bill would, despite the Supreme Court's more recent analysis, codify the holding in the Walker case. Proposition 103, as passed by the voters, provided that no rate may be approved, or remain in effect , if it is excessive, inadequate, unfairly discriminatory, or otherwise in violation of certain insurance laws. Proposition 103 also intended there be two avenues for relief for aggrieved insurers - IC review and court review. By allowing excessive rates to have remained in effect by not permitting a refund, this bill eliminates a key enforcement remedy - refunds. Moreover, this bill assumes that the IC will always have sufficient resources to review all rate charges and the factors that make up those charges that may be hidden in filings from insurance companies. Such an assumption could well cause consumers to pay excessive rates unnecessarily. Consumer Attorneys of California, which opposes the bill, is also concerned that the bill will apply not just to refunds for AB 1054 Page 6 excessive rate, but also to refunds due to inappropriate use of rating factors. (See Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, which held that an insurance company could not use an insured's prior lack of insurance to increase rates.) While the author has agreed to try and exempt the bill from covering these cases, the clear language of the bill appears to apply to both situations of excessive rates and inappropriate rating factors. Similar litigation is ongoing (see Safeco Ins. Co. of America v. Superior Court (#B213044, Los Angeles Superior Court) and could well be impacted by this legislation. Finally, as specified in the initiative, Proposition 103 may only be amended if the amendment furthers the purposes of the initiative. The question of whether this provision of the bill furthers Proposition 103 will undoubtedly be, should this bill pass, the subject to litigation. The Legislature has passed legislation amending Proposition 103, but to date no challenged legislative amendment has survived. (See Amwest v. Wilson (1995) 11 Cal.4th 1243; Proposition 103 Enforcement Project v. Quackenbush (1998) 64 Cal.App.4th 1473; FTCR v. Garamendi (2005)132 Cal.App.4th 1354.) This provision of the bill could well meet with that same fate. This bill appears to be very similar to AB 1051 (Calderon, 2008), which was never considered in this form by the Assembly, and which failed passage last year in the Senate Banking, Finance and Insurance Committee. Given the potentially reasonable concerns discussed above, the Committee may wish to discuss with the author his potential receptiveness to amending the bill to pertain just to the credit card provisions. ARGUMENTS IN SUPPORT : Mercury Insurance Company argues in support of the bill that the fees a credit card issuer charges have nothing to do with insurer efficiency. Rather, it is a service to policyholders who might not otherwise have access to insurance, and that it furthers Proposition 103's stated purpose to "ensure that insurance is fair, available and affordable." On the issue of refunds, Mercury writes: Current state law provides for specific steps for rate approval, including liberal provision for consumer participation in this process both before and after AB 1054 Page 7 approval by the Commissioner. Current law also specifies a simple administrative process consumers may access to challenge any rate in effect that was previously approved by the Insurance Commissioner. This bill does not affect either of those processes for consumers to challenge insurance rates. However, some court cases suggest that insurers whose rates have been approved by the Insurance Commissioner could be required to disgorge premiums lawfully collected under rates that have been previously approved. This puts an insurer in an impossible "Catch 22" situation: It potentially may be sued for charging rates the Insurance Commissioner has ordered it to charge and for which it could lose its certificate of authority to do business in California if it fails to charge them as approved. We do not believe it is appropriate for an insurer to secure approval of its rate, be legally obligated to apply that approved rate, but then still have that rate be deemed subject to disgorgement in private civil litigation. Insurance Code section 1858.07(b) already bars the Insurance Commissioner from penalizing an insurer for applying its approved rate; the same principle should apply to private party litigants as well. The provision being added to the law by this bill only applies following exhaustion of judicial review of the approval provided by Ins. Code section 1861.09 so that all existing rights to challenge an approval are preserved. 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 an lawfully secure 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 AB 1054 Page 8 prospective basis. ARGUMENTS IN OPPOSITION : Consumer Watchdog (CW), the successor organization to the original sponsors of Proposition 103, is opposed to the bill on a number of grounds. Each of its points are summarized below: With respect to the credit card provision, CW initially notes that it is difficult to understand exactly what the bill does. It recognizes that the proponents intend to obtain a price advantage in the event that the insurer opts to allow use of credit cards for premium payments, but CW does not believe the language makes sense in context of how the efficiency standards actually work. In addition, CW argues that there are insurers that already allow use of credit cards for premium payments, and therefore competition in the marketplace is working. Thus, it does not make sense to use a pricing mechanism that might result in higher premiums to provide an incentive to insurers to allow credit card use. CW argues in fact that use of credit cards saves an insurer money in other ways that offset the credit card issuer's charges. Finally, CW argues that the proposal's interference with the IC's authority to establish the rules governing rate regulation does not further the purposes of Proposition 103. With respect to the provision that limits retrospective rate adjustments, CW has several objections. Its primary argument has to do with a provision of Proposition 103 that has had little judicial review - the provision that states that a rate shall not "remain in effect" if it is excessive, inadequate, unfairly discriminatory, or otherwise in violation of the rate regulation chapter. In CW's view, even where a rate was properly approved, there was no questionable provision slipped into the rate that resulted in illegal charges, and the IC has not issued an order to the insurer to reduce rates, the rate being charged may still be illegal if it can be characterized in a lawsuit as "excessive" based on changes in the economics subsequent to the time the rate was initially approved. CW also believes that the IC's office is understaffed, and therefore it is possible for an insurer to place a questionable provision into its rate application, garner approval, and thereafter be protected from a lawsuit that seeks to challenge that illegal element of the application that was approved by the IC. CW makes a fiscal argument in connection with its position that AB 1054 Page 9 the bill does not further the purposes of Proposition 103. As stated above, to this point in time, no challenged legislative amendment to Proposition 103 has survived. CW points out that the most recent challenge to a legislative amendment - challenging SB 841 of 2003 (Statutes 2003, Chapter 169) - overturned the enactment, yet cost the state somewhere between $850,000 and more than a million dollars. It argues that this bill would fail the "further the purposes" test, thus wasting taxpayer money defending it. The Consumer Attorneys of California raise some of these same issues. They argue that ratemaking is based on projections of what the costs are going to be in the future, and if it turns out that costs were much lower than anticipated, a rate that looked appropriate when approved may well end up being excessive. A lawsuit seeking return of the excessive premium, they argue, is appropriate. Consumer Attorneys are also concerned that insurers are increasingly using systems and methodologies that affect the rate but are not included in the rate filing, and that the language in the bill would cover these practices and immunize the insurer even though the IC did not actually approve the challenged practice. REGISTERED SUPPORT / OPPOSITION : Support Mercury Insurance Company (sponsor) Opposition Consumer Attorneys of California Consumer Federation of California Consumer Watchdog Consumers for Auto Reliability and Safety Consumer Action Analysis Prepared by : Leora Gershenzon / JUD. / (916) 319-2334