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Association of California Insurance Companies v. Poizner

December 30, 2009


APPEALS from a judgment and an order of the Superior Court of Los Angeles County. James C. Chalfant, Judge. Affirmed. (Los Angeles County Super. Ct. No. BS109154).

The opinion of the court was delivered by: Mallano, P. J.


In 1988, the voters of California enacted an initiative measure designated on the ballot as Proposition 103. Proposition 103 required approval of insurance rate increases by the Insurance Commissioner of the State of California (Commissioner), provided for consumer participation in the administrative rate-setting process, and permitted the recovery of advocacy and witness fees and expenses (together referred to as compensation) under certain circumstances. This lawsuit involves the validity of the 2006 amendments to regulations permitting consumer interest interveners to obtain compensation for participation in the administrative rate-setting process where an order or decision is issued by the Commissioner on an insurer's rate-setting application without a formal rate hearing, where, for example, the matter was resolved by a settlement among the parties.

Plaintiffs, The Association of California Insurance Companies, The Personal Insurance Federation of California, The American Insurance Association, and The Pacific Association of Domestic Insurance Companies (Insurance Companies), filed a petition for a peremptory writ of mandate and complaint for declaratory and injunctive relief, claiming that because the amended regulations permit an award of compensation without a formal rate hearing, the regulations conflict with Insurance Code sections 1861.05 and 1861.10. (Unspecified statutory references are to the Insurance Code.) The trial court rendered a judgment upholding the validity of the regulations and denying the Insurance Companies' petition and requests for declaratory and injunctive relief. The trial court also issued an order awarding compensation to Intervenor, The Foundation for Taxpayer and Consumer Rights (FTCR). Insurance Companies appealed from the judgment and the order awarding compensation. As explained below, we affirm the judgment because the regulations are consistent with the governing statutes and reasonably necessary to effectuate the purposes of those statutes. We also affirm the trial court's award of compensation to FTCR because the trial court was authorized to award such compensation under section 1861.10, subdivision (b).


A. Statutory and Regulatory Framework

"In 1988, voters passed Proposition 103, which made `numerous fundamental changes in the regulation of automobile and other types of insurance.' (Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 812 . . . .) `Formerly, the so-called "open competition" system of regulation had obtained, under which "rates [were] set by insurers without prior or subsequent approval by the Insurance Commissioner . . . ."' (20th Century Ins. Co. v. Garamendi (1994) 8 Cal.4th 216, 240 . . . .) Proposition 103 altered this system by adding to the Insurance Code article 10 - `entitled "Reduction and Control of Insurance Rates." ([Ins. Code,] §§ 1861.01-1861.14.)' [Citation.]" (State Farm Mutual Automobile Ins. Co. v. Garamendi (2004) 32 Cal.4th 1029, 1035 (State Farm).) Article 10 (now comprised of sections 1861.01 through 1861.16) was added to division 1, part 2, chapter 9 of the Insurance Code (hereinafter chapter 9). Chapter 9 is now comprised of sections 1850.4 through 1861.16 of the Insurance Code. "This new article required, among other things, approval by the . . . Commissioner . . . for all insurance rate increases [citation], and `provide[d] for consumer participation in the administrative ratesetting process' (Walker v. Allstate Indemnity Co. (2000) 77 Cal.App.4th 750, 753)." (State Farm, supra, 32 Cal.4th at p. 1035, fn. omitted.)

Before Proposition 103, ratemaking and rate regulation for various classes of insurance were governed by the McBride-Grunsky Insurance Regulatory Act of 1947 as amended (McBride Act), set forth in chapter 9 of the Insurance Code. (Economic Empowerment Foundation v. Quackenbush (1997) 57 Cal.App.4th 677, 680 (Economic Empowerment Foundation).) "An administrative procedure to enforce the laws regulating insurance rates predated Proposition 103 and still exists. Section 1858, subdivision (a) states that any person aggrieved by a rate charged, rating plan, rating system, or underwriting rule may file a complaint with the Commissioner and request a public hearing. The Commissioner must review and investigate the matter and may conduct a public hearing. (§§ 1858, subd. (c), 1858.01, subds. (a) & (b), 1858.1, 1858.2.) If the Commissioner finds that a violation has occurred, the Commissioner must issue an order prohibiting the misconduct and may order other corrective action. (§ 1858.3.) Any finding or determination by the Commissioner under chapter 9 is subject to judicial review under the independent judgment standard, including a decision not to conduct a hearing. (§§ 1858.6, 1861.09.) Any failure to comply with a final order by the Commissioner gives rise to a monetary penalty, and the Commissioner may bring an action in the superior court to enforce collection. (§ 1859.1.) The [foregoing] provisions . . . all predated Proposition 103." (Farmers Ins. Exchange v. Superior Court (2006) 137 Cal.App.4th 842, 853 (Farmers Ins.).)

The laws regulating insurance rates before Proposition 103 "were widely viewed as ineffective" and public dissatisfaction with such laws was the "primary impetus for Proposition 103." (Farmers Ins., supra, 137 Cal.App.4th at p. 852.) "The stated purpose of [Proposition 103] was `to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace, to provide for an accountable Insurance Commissioner, and to ensure that insurance is fair, available, and affordable for all Californians.' (Stats. 1988, p. A-276, § 2.)" (Id. at p. 851.)

Accordingly, the uncodified findings and declaration of Proposition 103 stated that "`insurance reform is necessary. First, property-casualty insurance rates shall be immediately rolled back to what they were on November 8, 1987 . . . . Second, automobile insurance rates shall be determined primarily by a driver's safety record and mileage driven. Third, insurance rates shall be maintained at fair levels by requiring insurers to justify all future increases. . . . Insurance companies shall pay a fee to cover the costs of administering these new laws so that this reform will cost taxpayers nothing.' (Stats. 1988, p. A-276, § 1.)" (Farmers Ins., supra, 137 Cal.App.4th at pp. 852-853.)

Under Proposition 103, an insurer "which desires to change any rate shall file a complete rate application with the commissioner. . . . The applicant shall have the burden of proving that the requested rate change is justified and meets the requirements of this article [article 10 of chapter 9]." (§ 1861.05, subd. (b).) Thus, after November 8, 1989, "Proposition 103 institutes a permanent regulatory regime comprising the `prior approval' system, under which, in the words of Insurance Code section 1861.05, subdivision (a), the Insurance Commissioner must approve a rate applied for by an insurer before its use . . . ." (20th Century Ins. Co. v. Garamendi, supra, 8 Cal.4th at p. 243 (20th Century).) The Commissioner must notify the public of the insurer's application for a rate change. (§ 1861.05, subd. (c).) The application is deemed to be approved 60 days after public notice unless "(1) a consumer or his or her representative requests a hearing within forty-five days of public notice and the commissioner grants the hearing, or determines not to grant the hearing and issues written findings in support of that decision, or (2) the commissioner on his or her own motion determines to hold a hearing, or (3) the proposed rate adjustment exceeds 7% of the then applicable rate for personal lines or 15% for commercial lines, in which case the commissioner must hold a hearing upon a timely request." (§ 1861.05, subd. (c).)*fn1

The provisions of the Insurance Code enacted by Proposition 103 and which are key to this appeal are subdivisions (a) and (b) of section 1861.10, which provide: "(a) Any person may initiate or intervene in any proceeding permitted or established pursuant to this chapter [chapter 9], challenge any action of the commissioner under this article [article 10], and enforce any provision of this article. [¶] (b) The commissioner or a court shall award reasonable advocacy and witness fees and expenses to any person who demonstrates that (1) the person represents the interests of consumers, and, (2) that he or she has made a substantial contribution to the adoption of any order, regulation or decision by the commissioner or a court. Where such advocacy occurs in response to a rate application, the award shall be paid by the applicant."

As noted by the court in Calfarm Ins. Co. v. Deukmejian, supra, 48 Cal.3d 805 (Calfarm), Proposition 103 "does not establish a detailed method of processing and deciding rate applications. It contains a few provisions relating to public notice and participation (i.e., §§ 1861.05, subd. (c), 1861.06, 1861.07 & 1861.10),*fn2 but hearings are generally held in accordance with provisions of the Administrative Procedure Act. (See § 1861.08, which provides generally that `[h]earings shall be conducted pursuant to Sections 11500 through 11528 of the Government Code.') Much is necessarily left to the Insurance Commissioner, who has broad discretion to adopt rules and regulations as necessary to promote the public welfare. [Citations.]" (Calfarm, at p. 824; see also 20th Century, supra, 8 Cal.4th at p. 280 [Proposition 103 impliedly authorizes Commissioner to formulate regulations adopted in quasi-legislative proceedings].)

B. The 1995 Regulations

To implement sections 1861.05 and 1861.10, the Department of Insurance (Department) promulgated regulations in 1995, in subchapter 4.9 of chapter 5 of title 10 of the California Code of Regulations. The regulations set up procedures for persons to intervene or participate in proceedings on rate applications and other proceedings subject to chapter 9. (Cal. Code Regs., tit. 10, former §§ 2661.2, 2661.3 & 2661.4.) (If a 1995 regulation in title 10 of the California Code of Regulations was later amended, the 1995 version of the regulation is referred to as a "former regulation." The current version of a regulation is referred to as "regulation.")

A person wishing to intervene and become a party to a rate hearing was required to file a petition to intervene; if the petitioner intended to seek compensation in the proceeding, the petition was required to contain an itemized estimated budget for the participation. (Former reg. 2661.3, subds. (a) & (c).) "Interveners wishing to recover fees must first file a request for a finding of eligibility to seek compensation, which establishes that the intervenor represents the interests of consumers. (Cal. Code Regs., tit. 10, [former regs.] 2662.2, 2662.3, subd. (a).) Those found eligible to seek compensation must then file a request for an award of compensation, which details the intervenor's services and expenditures, and describes the intervenor's `substantial contribution' to the proceeding. (Cal. Code Regs., tit. 10, [former reg.] 2662.2, subd. (a).)" (Economic Empowerment Foundation, supra, 57 Cal.App.4th at p. 681.) "Compensation may be reduced to the extent that the intervenor's substantial contribution `duplicates' that of another party to the proceeding. (Cal. Code Regs., tit. 10, [former reg.] 2662.5, subd. (b).)" (Id. at p. 681.)

Regulation 2661.1, subdivision (b) defines "compensation" as "payment for all or part of advocacy fees, witness fees, and other expenses of participation and intervention in any rate hearing or proceeding other than a rate hearing." Former regulation 2662.1 stated that "[t]he purpose of this Article [article 14, titled `Intervenor's and Participant's Fees and Expenses'] is to establish procedures for awarding advocacy fees, witness fees and other expenses to intervenors and participants in proceedings, including proceedings other than rate hearings, before the Insurance Commissioner in accordance with Section 1861.10(b) of the Insurance Code."

Former regulation 2651.1, subdivision (h) defined "proceeding" as "any action conducted pursuant to Article 10 of Chapter 9 of Part 2 of Division 1 of the California Insurance Code, entitled `Reduction and Control of Insurance Rates.'" Former regulation 2661.1, subdivision (e) provided, "`Proceeding' . . . includes those proceedings set forth in Insurance Code Section 1861.10(a)." A "proceeding other than a rate hearing" was defined in former regulation 2661.1, subdivision (f) as "any proceeding, including those described in subdivision (e) above, conducted pursuant to Chapter 9 of Part 2 of Division 1 of the Insurance Code which is not a rate hearing as defined in this section." A "[r]ate hearing" included "any proceeding conducted pursuant to Insurance Code section . . . 1861.05." (Former reg. 2661.1, subd. (h).)

C. The 2006 Regulations

In September 2006, the Commissioner issued a Notice of Proposed Action and Notice of Public Hearing to amend the regulations "governing the prior approval process, including regulations governing consumer participation. The proposed regulations will modify those regulations contained in Subchapter 4.9 (Rules of Practice and Procedure for Rate Proceedings) in order to clarify that consumers who participate in the approval process after having filed a petition for hearing may seek an award of reasonable advocacy fees. [¶] For example, [former regulations] 2651.1 and 2661.1 contain definitions. The Department proposes to amend these definitions to clarify that a `proceeding' is established upon submission of a petition for a hearing by a consumer. . . . [¶] . . . In addition, the Department proposes to amend [regulation] 2662.3(a)(3) to expand the list of the types of documents that a consumer may use to prove that it has made a substantial contribution to the adoption of any order, regulation, or decision by the Commissioner." (Cal. Reg. Notice Register 2006, No. 38-Z, p. 1374.)

Regulation 2662.3, subdivision (b)(3) permits an intervenor or participant to show a substantial contribution with documents including but not limited to "stipulations or settlement agreements regarding the outcome or material issues in the proceeding, and decision or order by the Department or Commissioner concerning a petition for hearing or rate or class plan application issued without a formal hearing."

A more detailed Initial Statement of Reasons stated that the Commissioner "proposes to adopt and amend regulations to change the definitions related to `proceedings' and to establish an application withdrawal procedure following the filing of a petition for a hearing, so as to ensure that consumer representatives are eligible to seek compensation when they make a substantial contribution to any `order, regulation, or decision by the commissioner' prior to a formal hearing being granted or denied. The balance of the proposed amendments conform various provisions of existing regulations regarding compensation to intervenors in such proceedings to those changes." (Cal. Dept. of Insurance, file No. RH06092874, Initial Statement of Reasons (Sept. 22, 2006) p. 4.)

The Initial Statement of Reasons explained the necessity for the amendments: "It has been the Department's practice to encourage consumer representatives and applicants to resolve rate challenges informally so as to avoid engaging in lengthy formal hearings that benefit no one. Often during negotiations, insurers seek to withdraw their rate applications. In some instances, applicants have withdrawn their applications after a petition for a hearing has been filed and after the petitioner has expended substantial time and effort advocating its position through its advocates and experts. In these instances, the result of the informal process has been either no rate change, or a substantial alteration in the rate ultimately approved by the Commissioner. Such results benefit the public without the necessity of conducting a formal hearing. [¶] In several of these instances, either the challenge was settled by the parties or the case was dismissed as moot when the applicant chose to withdraw rather than proceed with its application and potentially be subject to a hearing. After extensive and careful consideration, the Commissioner determined that the petitioner made a `substantial contribution' to his decision concerning the rate applications even though no hearing was held. Recently, several insurers have objected to the Commissioner's authority to award compensation to petitioners who make a substantial contribution in these circumstances. . . . [¶] . . . [¶] [A] superior court recently ruled that the Commissioner was not authorized to award a petitioner a fee award. . . . [T]he Commissioner believes that the intervenor regulations should be amended to reflect the fact that once a petition for hearing has been filed, a proceeding has been established and that an insurer may not withdraw its rate application without approval of the Commissioner. Consumer representatives who make a substantial contribution to the outcome of that proceeding are entitled to compensation for their work, even if the proceeding concludes without a hearing." (Cal. Dept. of Insurance, file No. RH06092874, Initial Statement of Reasons, supra, p. 2.)

The superior court decision to which the Commissioner referred was an October 2005 ruling in American Healthcare Indemnity Company v. Garamendi (Super. Ct. L.A. County, No. BS094515) (American Healthcare). In American Healthcare, the trial court granted the insurers' petition for a writ of mandate seeking to vacate the Commissioner's award of compensation to FTCR. There, FTCR had filed petitions for a hearing and for intervention but the insurers withdrew their rate applications before any hearing on their applications, and no hearing was granted. The trial court determined that because FTCR's petition to intervene was not granted, FTCR was not a party to the proceeding and "there was no, and could not be, a substantial contribution made by [FTCR]," and the Commissioner therefore abused his discretion in awarding compensation to FTCR.

It was the Commissioner's view that section 1861.10, subdivision (b) "plainly mandates that `any person' who `represents the interests of consumers' and who `made a substantial contribution to the adoption of any order, regulation, or decision by the commissioner' is entitled to an award of compensation for reasonable advocacy fees and expenses. An insurer's attempt to withdraw its application in order to avoid paying compensation defeats the purpose of the statutes. . . . [¶] . . . [¶] In summary, the Commissioner believes that, as the voters intended, the scrutiny of consumer representatives is an important tool to ensure that applicants comply with the statutory and regulatory prohibition on `excessive, inadequate, and unfairly discriminatory' rates, or rates that otherwise violate the law, and that if consumer representatives are denied the ability to seek compensation when they make a substantial contribution in pre-hearing proceedings, such scrutiny would be discouraged and curtailed. [¶] Such a result contravenes the public policy underlying section 1861.10 and analogous intervenor compensation statutes of encouraging consumer participation in administrative and court proceedings, and thereby aiding regulators and courts in their decisions. [Citations.]" (Cal. Dept. of Insurance, file No. RH06092874, Initial Statement of Reasons, supra, p. 3.)

Both Insurance Companies and FTCR submitted written comments concerning the proposed amendments to the regulations. On November 3, 2006, FTCR petitioned the Commissioner to participate in the rulemaking proceeding for the purpose of representing the interests of consumers. FTCR's estimated advocacy fees and expenses of participation in the rulemaking proceeding were $36,025. On December 4, 2006, the Commissioner granted FTCR's petition and found that FTCR was eligible to seek compensation in Department proceedings for a term of two years, beginning July 14, 2006.

On November 6, 2006, the Department held a public hearing on the proposed amendments to the regulations regarding compensation to interveners. A representative of Insurance Companies spoke in opposition to the proposed ...

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