BILL ANALYSIS                                                                                                                                                                                                    



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          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