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Association of California Ins. Companies v. Jones

California Court of Appeals, Second District, First Division

April 8, 2015

DAVE JONES, as Commissioner, etc., Defendant and Appellant.


APPEAL from a judgment of the Superior Court of Los Angeles County No. BC463124, Gregory Wilson Alarcon, Judge.

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Kamala D. Harris, Attorney General, Paul D. Gifford, Assistant Attorney General, W. Dean Freeman and Lisa W. Chao, Deputy Attorneys General, for Defendant and Appellant.

Amy Bach, Daniel Wade; Kerr & Wagstaffe and Ivo Michael Labar for United Policyholders, Scripps Ranch Civic Association and Rancho Bernardo Community Counsel as Amici Curiae on behalf of Defendant and Appellant.

Greenberg Traurig, Gene Gordon Livingston, Gregory Sperla and Stephen E. Paffrath for Plaintiffs and Respondents.



This appeal asks us to decide whether the Insurance Commissioner (Commissioner) had authority to promulgate California Code of Regulations, title 10, section 2695.183 (the Regulation) under the authority delegated to him by the Unfair Insurance Practices Act (UIPA), Insurance Code sections 790 through 790.15.[1] The trial court found that he did not. We agree and affirm.


The Regulation

The Regulation at issue here involves homeowners insurance, and specifically replacement coverage in the event of a covered event like a fire.[2] In

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general, there are three kinds of replacement cost coverage. Each requires an

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insurer to pay replacement costs up to a limit defined in the policy or up to a

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set amount above the policy limit.[3] If the cost of repairing or rebuilding a home damaged or destroyed by a covered event exceeds that limit, the homeowner has to pay the difference. Section 2051.5, subdivision (a) defines replacement cost, in pertinent part, as “the amount that it would cost the insured to repair, rebuild, or replace the thing lost or injured, without a deduction for physical depreciation, or the policy limit, whichever is less.”

The Regulation was promulgated in 2010 in response to complaints received from homeowners who lost their residences in the wildfires in Southern California in 2003, 2007, and 2008. These complaints arose when homeowners learned that they did not have enough insurance to cover the full cost of repairing or rebuilding their homes because when they bought their homeowners insurance, the estimates of replacement value were too low.[4]

The introductory sentence of the Regulation prohibits a “licensee” from “communicat[ing] an estimate of replacement cost to an applicant or insured

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in connection with an application for renewal of a homeowners’ insurance policy that provides coverage on a replacement cost basis” that does not satisfy the content and format provisions in the Regulation. Subdivision (a) of the Regulation states, among other requirements, that an estimate of replacement cost “shall include expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety” and requires in subdivision (a)(1) through (4) that the estimate include the cost of labor, building materials and supplies, overhead, profit, demolition, debris removal, permits, and architect’s plans, and in subdivision (a)(5) that the licensee “consider[]" 11 designated “components and features of the insured structure.”

The estimate must itemize “the projected cost” of each expense listed in subdivision (a)(1) through (4), and the assumptions as to the components listed in subdivision (a)(5). (Reg., subd. (g)(2).) A copy of the estimate and any update of the estimate “must” be given to the applicant. (Reg., subds. (g)(1), (h).) Subdivision (e) requires that “reasonable steps” be taken to “verify... sources and methods used to generate the estimate of replacement cost” “no less frequently than annually.” The Regulation also imposes recordkeeping obligations on the licensee. (Reg., subd. (i).)

Of particular significance to the issue before us is subdivision (j) of the Regulation. It provides that “communicat[ing] an estimate of replacement value not comporting with divisions (a) through (e)” to an applicant for homeowners insurance “provid[ing] coverage on a replacement cost basis, ” or any renewal thereof, “constitutes making a statement with respect to the business of insurance which is misleading and which by the exercise of reasonable care should be known to be misleading, pursuant to Insurance Code section 790.03.”

Representatives from plaintiffs, the Association of California Insurance Companies and the Personal Insurance Federation of California (Associations), submitted comments and testified in the May 17, 2010 “homeowners insurance hearing, ” which preceded promulgation of the Regulation. During that hearing, they stated that the Commissioner lacked authority to define new unfair business practices. They questioned whether the administrative record supported the Commissioner’s assertion that there was a high volume of homeowner complaints “specifically about the fact that that they were not provided certain information that they needed to make an informed decision about what insurance coverage limitation they have, ” or that the “underinsured problem” was caused by lack of knowledge. Among other comments, they decried the expense of compliance with the Regulation and predicted that the Regulation would discourage carriers from providing insurance.

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The declaratory relief proceedings

On June 8, 2011, the Associations filed a declaratory relief action. There, they sought a declaration that the Regulation was invalid because the Commissioner lacked authority to “regulate the underwriting of homeowner insurance”; section 790.03 did not authorize “the imposition of a single, detailed method for estimating the replacement cost of houses”; and the Regulation violated insurance companies’ free speech rights under the First Amendment of the United States Constitution.

After the Associations’ motion for judgment on the pleadings was denied, the parties agreed that the case could be tried based on the rulemaking file, written briefs, and oral argument without oral testimony. Trial and oral argument were held on February 4, 2013.

The Associations’ arguments

In their trial brief, the Associations argued that in response to comments at the administrative hearing about the Commissioner’s lack of authority to promulgate the Regulation, the Commissioner cited section 790.10, part of the UIPA and section 1749.85, but that neither provided any such authority. In essence, they argued that the Commissioner’s reliance on section 790.10 ignored the language and structure of the UIPA, which at trial they characterized as “unique, ” particularly its use of the terms “defined” and “determined.” Section 1749.85 merely authorized promulgating standards for calculating replacement cost estimates prepared by appraisers.

Section 790.10 provides: “The commissioner shall, from time to time as conditions warrant, after notice and public hearing, promulgate reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article.” The Associations conceded that section 790.10 gave authority to the Commissioner to “administer” the UIPA, but argued that it did not give him authority to define unfair business practices.

More specifically, section 790, part of the UIPA provides: “The purpose of this article is to regulate trade practices in the business of insurance in accordance with the intent of Congress as expressed in the Act of Congress of March 9, 1945 (Public Law 15, Seventy-ninth Congress), by defining, or providing for the determination of, all such practices in this State which constitute unfair methods of competition or unfair or ...

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