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March 6, 1992

JOHN GARAMENDI, Commissioner of Insurance of the State of California, Defendant. ASSOCIATION OF CALIFORNIA INSURANCE COMPANIES, Plaintiff-in-intervention. UNITED STATES FIDELITY AND GUARANTY COMPANY, et al., Plaintiffs, v. JOHN GARAMENDI, Commissioner of Insurance of the State of California, Defendant.

The opinion of the court was delivered by: CHARLES A. LEGGE

 Plaintiffs Fireman's Fund Insurance Company ("Fireman's Fund"), United States Fidelity and Guaranty Company ("USF&G"), their affiliates, and plaintiff-in-intervention Association of California Insurance Companies ("ACIC") challenge the constitutionality of regulations enacted by the California Insurance Commissioner. Those regulations attempt to implement the insurance rate rollback provisions of Proposition 103, an initiative passed by California voters in 1988. Defendant John Garamendi, the Insurance Commissioner of California (the "Commissioner"), has moved to dismiss plaintiffs' claims as unripe, or alternatively to have this court abstain from exercising jurisdiction.



 On November 8, 1988 California voters adopted Proposition 103 ("Prop. 103"), an initiative on the subject of insurance and insurance premium rates. Prop. 103 required insurers in the following year to reduce their automobile and other property and casualty insurance premium rates to twenty percent below the rates in effect one year before the initiative was passed, unless the Insurance Commissioner found that an insurer was "substantially threatened with insolvency." Cal. Ins. Code § 1861.01(a), (b). After the first year, rates could be increased only with the prior approval of the Commissioner. Cal. Ins. Code § 1861.01(c). The initiative prohibits rates that are "excessive" or "inadequate." Cal. Ins. Code § 1861.05(a).


 The day after the initiative was passed, seven insurers and ACIC petitioned the California Supreme Court to declare the rate rollback and other provisions of Prop. 103 unconstitutional. In Calfarm Ins. Co. v. Deukmejian, 48 Cal. 3d 805, 258 Cal. Rptr. 161, 771 P.2d 1247 (1989), that court invalidated the provision allowing only those insurers "threatened with insolvency" to avoid the rollbacks, since solvent insurers could not obtain relief from confiscatory rates during the rollback period. Id. at 818-19. However, the court found the provision severable, and held that the general provision barring "inadequate" rates applied to rate regulation during the rollback period. Id. at 821-23. The court held that this met the constitutional requirement that insurers be allowed to earn a "fair and reasonable return," since a confiscatory rate was necessarily "inadequate" under the statute. Id. at 822-23.

 The court otherwise upheld the rollbacks in Prop. 103, subject to the right of an insurer to apply to the Insurance Commissioner for approval of a higher rate, and to demonstrate that the rolled back rates were confiscatory as applied to it. Id. at 825-26. An insurer who filed such an application would be allowed to charge the higher rate pending the Commissioner's ruling on the application. If the Commissioner later determined that the rate mandated by the initiative, or some rate less than the insurer charged, was all that was constitutionally required, the insurer would have to refund the excess premiums collected with interest.


 In response to the Calfarm decision, 460 insurers filed 4,089 applications for exemption from the rollback requirements. Over the next year and a half, then Commissioner Roxani Gillespie conducted hearings, made findings, and adopted regulations, but did not finally determine any insurer's rollback obligation.

 Insurers also filed over fifty lawsuits in California state courts, challenging many aspects of the Commissioner's effort to implement Prop. 103. The Chief Justice of the California Supreme Court, in his capacity as Chairperson of the Judicial Council, ordered these cases coordinated before one judge in the Los Angeles Superior Court. Plaintiff Fireman's Fund has participated in two of those actions, and plaintiff USF&G in a third.


 When Commissioner Garamendi took office, he gave notice of his intention to repeal the regulations adopted by his predecessor, because of alleged deficiencies *fn1" and because

 the present administrative approach to implementation of Proposition 103 offers little hope of processing the existing backlog of applications and threatens to engulf the Department in an [sic] tide of rate applications that are being filed at a rate faster than they are being processed.

 Cal. Regulatory Notice Reg. 91, No. 4-Z, p. 161, 163. At the same time, he proposed new regulations in order to:

 (1) accelerate the process by which rollback and rate applications are fairly adjudicated;

 (2) conform administrative policy more closely to the legislative policy articulated by the voters in adopting the initiative; and

 (3) provide a more workable, coherent, internally consistent framework for rate-regulation.

 Id. at 163-64.

 Between January and August 1991, the Commissioner held public hearings and received comments on the proposed regulations. The regulations were amended several times, and each time were recirculated for additional comments. By August, the administrative record had grown to almost 50,000 pages, most of it submitted by members of the insurance industry. On August 13, 1991 the Commissioner adopted the amended regulations on an emergency basis. Amended Proposed Regulations, File No. ER-19a (Cal. Dept. Ins., August 13, 1991) [hereinafter ER-19a]. *fn2" These are the regulations which plaintiffs challenge in this litigation.

 The regulations establish a three-stage process for determining insurers' rollback obligations. First, the ratemaking formula was defined by the regulations.

 Second, the values assigned to certain variables in the rate formula, and "generic issues" common to insurers, were determined after consolidated hearings (denominated RCD-1 and RCD-2) which were conducted in parallel with the hearings on the proposed regulations, and in which interested insurers and consumers participated. On August 14, 1991, after twenty-one days of hearings, the Commissioner made his RCD-1 and RCD-2 determinations in 132 pages of findings of fact. As required by the Office of Administrative Law (OAL), the original regulations were amended to reflect the substance of these findings on August 23, 1991. Emergency Regulations File No. ER-20 (Cal. Dept. Ins., Aug. 23, 1991) [hereinafter ER-20]. The OAL however, rejected the Commissioner's request to adopt these generic issues amendments as emergency regulations. Cal. Regulatory Notice Reg. 91, No. 38-Z, p. 1239. On October 7, 1991 Governor Pete Wilson overruled the OAL's decision and allowed adoption of the ER-20 regulations as emergency regulations. Cal. Regulatory Notice Reg. 91, No. 43-Z, p. 1478.

 This began the third stage in the process -- that is, company-specific hearings, at which each insurer's rollback liability would be determined by applying the formula. On October 16, 1991 the Commissioner issued orders to fourteen insurance groups, none of them parties here, indicating the amount he believed that each must refund to its policyholders, and giving each company the choice of paying that amount or contesting it at a hearing conducted under the California Administrative Procedure Act, Cal. Govt. Code § 11500, et seq. The first such hearing was noticed for December 16, 1991.

 On December 11, 1991 the first set of emergency regulations (ER-19a) expired, and the Commissioner filed a request to make them permanent (RH-291). While that request was pending, he submitted a request for readoption of the expired ER-19a regulations on an emergency basis (ER-19b). On January 10, 1992, the OAL disapproved the regulations, and refused to extend them as emergency regulations. The Commissioner amended the regulations in response to the OAL's objections, and re-filed them as emergency regulations (ER- 19c) on January 15, 1992. On January 17, 1992 the OAL issued a decision explaining why it had disapproved the proposed permanent regulations (RH-291). Cal. Regulatory Notice Reg. 92, No. 5-Z, p. 122. On January 23, 1992 the OAL disapproved the Commissioner's request to adopt the amended regulations (ER-19c) as emergency regulations, and on January 28, 1992 it issued a decision explaining the reasons for its disapproval. *fn3" Cal. Regulatory Notice Reg. 92, No. 7-Z, p. 185.

 The January 17 and January 28 decisions gave a number of reasons for rejecting the proposed regulations, most importantly that:

 Calfarm recognized the right of an individual insurer to demonstrate that a particular rate is confiscatory as to it and the insurer's right to establish a record for judicial review. Applicant's have both the right and responsibility under the statute and Calfarm to make their cases free of the restrictions of the model. Regulation section 2646.4 clearly precludes an individual insurer from offering proof, or evidence to show in a rate hearing that the model does not allow a fair and reasonable rate of return on investment. This has the effect of altering the statute and contradicts Calfarm.

 Cal. Regulatory Notice Reg. 92, No. 5-Z, p. 122, 127-28.

 On January 30, 1992 the Commissioner appealed to the Governor the OAL's refusal to permit adoption of the amended (ER-19c) regulations as emergency regulations. Cal. Regulatory Notice Reg. 92, No. 9-Z, p. 256. On February 10, 1992 the California Senate concurred in an Assembly resolution asking the Governor to overturn the OAL decision. On February 14, 1992 the Governor overruled the OAL decision, stating that while he agreed with the OAL's position, he was exercising his authority "in order to hasten final adjudication of substantive as well as procedural questions arising from Proposition 103." Cal. Regulatory Notice Reg. 92, No. 9-Z, p. 271, 274. The Governor stated that:

 I am compelled to do so because the process prescribed by the law permits unlimited appeals by the Commissioner and interminable delay for the public in reaching needed resolution by the courts of these important questions.

 OAL has scrupulously fulfilled its responsibility, but after more than three years of false starts and misuse of the regulatory process by the Department of Insurance and abuse of the process by insurers and their lawyers, the implementation of Proposition 103 is in shambles.

 . . . .

 As long as the resolution of the ultimate substantive questions arising from Proposition 103 is delayed by this preliminary procedural dispute, the fundamental problems cannot be resolved.

 . . . .

 There is only one reasonable recourse: either to demonstrate, in court, that these regulations, applied to a particular insurer, deny the insurer a fair hearing and a reasonable return, or to prove that the regulations are flexible enough to provide adequate individualized relief. What is needed is clear guidance from the courts on the validity of Proposition 103 rollback and rate regulation provisions as implemented by the Commissioner's regulatory methodology.

 Id. at 274-75.

 The effect of the Governor's decision was to reinstate the regulations as amended (ER-19c) for 120 days as emergency regulations. While the Governor was considering the appeal, the generic regulations (ER-20), originally rejected by the OAL and reinstated by the Governor on October 7, 1991 expired. On February 14, 1992, the Commissioner resubmitted those regulations to OAL, and on February 20, 1992 the OAL approved them as emergency regulations.


 In Calfarm, the California Supreme Court considered the practical difficulty of implementing Prop. 103, and concluded that:

 Much is necessarily left to the Insurance Commissioner, who has broad discretion to adopt rules and regulations as necessary to promote the public welfare. . . . No provision bars the commissioner from consolidating cases or issuing regulations of general applicability. Thus there is nothing here which prevents the commissioner from taking whatever steps are necessary to reduce the job to manageable size.

 48 Cal. 3d at 824 (citations omitted).

 Under the regulations for the rollback year, insurers may charge either the statutory twenty percent rollback rate or the minimum, nonconfiscatory rate, whichever is higher. Cal. Dept. of Ins., File No. ER-19c § 2645.3(a) (Jan. 15, 1992) [hereinafter Regs.]. For subsequent years, insurers may charge anything between the minimum and maximum permissible rate. Regs. § 2644.1. The minimum and maximum rates allow an insurer to recover its payout on policies, its costs of adjusting claims, and its fixed expenses, less certain ancillary income not derived from insurance premiums. This sum is then increased to cover state premium taxes and sales commissions, and to yield either a minimum or maximum after-tax profit that varies by mix of business, and is decreased to offset investment returns on premiums before payout and expenses.

 For the rollback period actual historical data is used, and the after-tax rate of return has been fixed at 10%. An insurer's allowable fixed expenses are limited by an "efficiency standard," equal to the industry average ratio of underwriting expenses to earned premiums, calculated separately for each line of insurance. Regs. §§ 2644.12, 2645.5. The regulations disallow expenses for political contributions; lobbying expenses; executive compensation in excess of prescribed limits, based on nationwide earned premiums; bad faith judgments; unsuccessful defense of discrimination claims; fines and penalties; and institutional advertising expenses, defined as advertising not aimed at obtaining business for a specific insurer or providing consumers with information pertinent to a decision whether to buy that insurer's product. Regs. §§ 2644.10(a)-(f), 2645.5(a).


 On September 3, 1991 plaintiffs Fireman's Fund and USF&G filed these lawsuits under 42 U.S.C. § 1983, challenging the constitutionality of the regulations on a number of grounds. ACIC's motion to intervene was granted, and its complaint-in-intervention was filed on October 24, 1991. Plaintiffs' claims fall into five general categories.

 First and foremost, plaintiffs claim that the regulations require them to charge premium rates so low that they amount to a taking of their property without just compensation, in violation of the Fifth Amendment, made applicable to the states by the Fourteenth (the "Takings" claim). *fn4"

 The second set of claims is directed at various components of the ratemaking formula defined by the regulations. Specifically, plaintiffs claim that the regulations treat their business expenses and federal tax benefits in a way that denies them substantive due process *fn5" and equal protection of the laws, *fn6" and violates the Commerce Clause, the McCarran Ferguson Act, and the Supremacy Clause (the "Rate Component" claims). *fn7"

 Plaintiffs also allege that the Commissioner has refused to approve their applications for prospective rate increases until they have ceased litigating over their rollback liability, allegedly denying them due process and penalizing them for exercising their First Amendment right to petition the government for the redress of grievances (the "Retaliation" claim). *fn8" The Commissioner denies this charge and contends that the Department of Insurance is simply unable to keep up with the thousands of applications that have been filed.

 Finally, plaintiffs claim that the regulations do not allow them to show that as applied to them, the resulting premium rates are constitutionally inadequate, denying them procedural due process (the "Due Process" claim). This claim arises from Regs. § 2646.4(e), which prohibits insurers from relitigating in their individual hearings matters already determined by the regulations. The individual company hearings are therefore limited to issues of whether the regulations are being correctly applied to the insurers, who allegedly may not then argue that the rates determined by the regulations are confiscatory. *fn9"

 Plaintiffs seek: (1) a declaration that the regulations are unconstitutional; (2) a permanent injunction against their use or enforcement; and (3) a permanent injunction ordering the Commissioner to consider their applications for prospective rate increases notwithstanding continued litigation over rollbacks.


 The Commissioner has moved to dismiss these actions, on the grounds that plaintiffs' claims are not ripe for adjudication, or in the alternative, that abstention is appropriate under the Burford, Younger, Pullman, and Colorado River doctrines (cited and discussed below).

 The motions were briefed, argued, and submitted for decision. This court has considered the moving and opposing papers, the extensive record, and the applicable authorities. The court concludes plaintiffs' claims must be dismissed, either because they are not ripe for constitutional adjudication or because of principles of abstention.



 In a challenge to administrative regulations, the purpose of the ripeness requirement is: "to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties." Abbott v. Gardner, 387 U.S. 136, 148-49, 18 L. Ed. 2d 681, 87 S. Ct. 1507 (1967). To determine whether such a controversy is ripe, the court should "evaluate both the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration." Id. at 149. This means that the agency action must be final, and that its impact on plaintiffs must be "sufficiently direct and immediate as to render the issue appropriate for judicial review." Id. at 152. In this case, both factors militate against a finding that all of plaintiffs' claims are ripe: the regulations are not final, and there is no certainty that they will be applied to plaintiffs in their present form.

 A. The Status of the Regulations

 The Governor reinstated the amended regulations (ER-19c) as emergency regulations. The generic regulations (ER-20), which contain components of the ratemaking formula, including the 10% rate of return, were approved by the OAL as emergency regulations on February 20, 1992. Emergency regulations cannot remain in effect for more than 120 days without extension approved by the OAL, or unless the OAL approves them as permanent.

 In its January 28 decision, the OAL disapproved the identical (ER-19c) regulations. The OAL lacks the Governor's discretionary authority, and is "constrained by the narrow compliance review standard set forth in Government Code § 11349.1." Cal. Regulatory Notice Reg. 92, No. 9-Z, p.271, 274. The Governor has stated unequivocally that "no further appeals on Proposition 103 regulations will be entertained by his Office." Id. at 275.

 Thus, it appears probable that the regulations will become ineffective 120 days from the Governor's February 14, 1992 decision, unless the Commissioner amends them to satisfy the OAL. Since the Commissioner and the OAL appear to differ on whether insurers have the right in their individual hearings to show that the rates mandated by the regulations are confiscatory as applied to them, this appears unlikely.

 Individual company hearings have not been scheduled for Fireman's Fund, USF&G, or any of ACIC's members during this 120 day period. Thus, it is uncertain whether the present regulations will be applied to plaintiffs. While a state court may eventually overrule the OAL's anticipated rejection of the regulations, this court will not speculate on the outcome of litigation that has not and may not commence. It is also possible that the Commissioner may amend the regulations to satisfy the OAL, and permit insurers to challenge the rates as confiscatory in their individual hearings. Whatever the outcome of the present disputes among the Commissioner, the Governor, and the OAL, most of plaintiffs' claims are unripe, and may in course of time become moot. Further, even if the regulations were now enforceable against plaintiffs, several of their claims would not be ripe for additional reasons.

 B. The Takings Claims

 The Commissioner argues that plaintiffs' takings claims are not ripe for adjudication until their company-specific hearings are held, and the rate-making process is complete. In New Orleans Pub. Serv., Inc. v. New Orleans, 491 U.S. 350, 105 L. Ed. 2d 298, 109 S. Ct. 2506 (1989) ("NOPSI "), the United States Supreme Court reaffirmed the holding of Prentis v. Atlantic Coast Line Co., 211 U.S. 210, 53 L. Ed. 150, 29 S. Ct. 67 (1908), that "ratemaking is an essentially legislative act," and that "to preserve the integrity of a unitary and still-to-be-completed legislative process," challenges to a rate order are unripe until the legislative process is complete. NOPSI, 491 U.S. at 371, 372. *fn10"

 As the California Supreme Court noted in Calfarm:

 The state and federal Constitutions are concerned not so much with the way in which the initial rates are set as with whether the rates as finally set are confiscatory. It is the result reached not the method employed which is controlling.

 48 Cal. 3d at 816 (quoting Federal Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 602, 88 L. Ed. 333, 64 S. Ct. 281 (1944)).

 Plaintiffs respond that the results of the company-specific hearings can already be predicted with mathematical certainty, since they involve only an application of the ratemaking formula to historical facts, and that they need not await the inevitable to seek relief, citing Regional Rail Reorganization Act Cases, 419 U.S. 102, 42 L. Ed. 2d 320, 95 S. Ct. 335 (1974):

 Where the inevitability of the operation of a statute against certain individuals is patent, it is irrelevant to the existence of a justiciable controversy that there will be a time delay before the disputed provisions will come into effect.

 Id. at 143. However, in that case, the Court continued:

 There are situations where, even though an allegedly injurious event is certain to occur, the Court may delay resolution of constitutional questions until a time closer to the actual occurrence of the disputed ...

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