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
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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
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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.
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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
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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
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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
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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
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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
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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