On December 5, 2024, Consumer Watchdog sent a letter to California’s Office of Administrative Law (“OAL”) objecting to the Department of Insurance’s (“the Department”) use of the Administrative Procedure Act’s “ratemaking” exemption in connection with its “catastrophe modeling” regulations. Normally, when a state agency is promulgating official regulations, the final step before the regulations become effective is review by OAL, during which OAL assesses whether a set of regulations is necessary, authorized, clear, and consistent with other regulations. However, certain types of regulations are considered “exempt” from that review process, including, as relevant here, a “regulation that establishes or fixes rates, prices, or tariffs.” (Gov. Code § 11340.9, subd. (g).)
In submitting its catastrophe modeling regulations to OAL on November 13, 2024, the Department claimed that the entire set of regulations was subject to the ratemaking exemption, and therefore asked OAL to simply “file and print” the regulations with the Secretary of State without further review. Consumer Watchdog’s December 5 letter called for OAL to closely scrutinize the Department’s regulations to determine whether the Department’s claim of exemption is credible. (Read Consumer Watchdog’s Letter to OAL here.)
Consumer Watchdog’s letter challenged, in particular, two of the regulations the Department claimed to be exempt – the regulation concerning insurer commitments to write more policies in wildfire prone areas (proposed section 2644.4.8), and the regulation establishing a “pre-application required information determination” (“PRID”) process (proposed section 2648.5). Consumer Watchdog argued that neither regulation directly concerned establishing or fixing a rate, nor did the regulations concern “integral parts” of the ratemaking process (which some case law has found to be sufficient – see, e.g., Vector Resources, Inc. v. Baker (2015) 237 Cal.App.4th 46, 56).
Specifically, Consumer Watchdog stated that the PRID process is an optional, non-binding process in which a “model advisor” will preliminarily determine the information an insurer using the model in question must submit in a rate application. Given that a PRID process is not required before an insurer seeks to use a model in its rate application, the process is neither itself fixing rates nor is it an integral part of ratemaking.
Similarly, the insurers’ commitments section is optional as well – no insurer is required to make any commitment in order to get a new rate application approved. While a commitment is a prerequisite to using a catastrophe model, insurers likewise need not use a catastrophe model to get a new rate application approved. Thus, like the PRID process, this regulation is neither fixing rates itself nor a necessary prerequisite to the approval of rates.
“Particularly now, when the insurance industry has fomented insurance shortages across the state and is threatening further widespread economic disruption unless Commissioner Lara rolls back current regulatory requirements, it is crucial that the APA’s bedrock protections against arbitrary government action be respected,” Consumer Watchdog wrote in its letter. “At minimum, the Office of Administrative Law should reject the Department’s reliance on the ratemaking exemption to excuse OAL review of Sections 2644.4.8 and 2648.5.”
The Office of Administrative Law is expected to determine whether the Department’s regulations should be published or rejected by the end of this year. The OAL file number is 2024-1113-01.
