A ‘Get Out Of Jail Free’ Card For the Insurance Industry – Part 2

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The following op-ed (Part 2) by Harvey Rosenfield, the founder of Consumer Watchdog and the author of Proposition 103, was published in The Daily Journal of Los Angeles on Monday, November 16, 2010.  (Read Part 1 here.)

Twenty-two years ago, California voters overhauled the Insurance Code. Proposition 103 bars unfair practices and requires stringent regulation of auto, home and business insurance rates. To protect their reforms, the voters also gave themselves the unconditional right to bring civil suits against insurance companies that violated any provision of Proposition 103. But the industry now argues that the Insurance Code still bars such lawsuits – as if Proposition 103 had never passed.

The first appellate court to undertake a thorough analysis of the Proposition 103 statutory framework was Division One of the 2nd District, in Donabedian v. Mercury Insurance Co. (2004) 116 Cal.App.4th 968. The Insurance Commissioner and Consumer Watchdog filed lengthy amicus briefs on behalf of the plaintiff. State Farm and later 21st Century weighed in on behalf of Mercury.

The Donabedian court began with a review of Proposition 103's language and legislative history. It concluded that the Commissioner no longer had "exclusive jurisdiction": "'the voters vested the power to enforce the Insurance Code in the public as well as the Commissioner. As the plain text of Insurance Code sections 1861.03 and 1861.10 make[s] clear, Proposition 103 established a private right of action for [its] enforcement.'"

Next the Court turned its attention to the vestigial McBride statutes that Mercury argued immunized its unlawful surcharges. When McBride was enacted in 1947, Insurance Code Section 1860.1 conferred an antitrust immunity upon two or more insurance companies for engaging in a number of collusive practices that McBride explicitly permitted. In the Donabedian case, the insurers argued that Section 1860.1's meaning had changed after the passage of Proposition 103, so that it now immunized practices by a single company that are expressly unlawful under the Insurance Code. According to the industry, Proposition 103 gave the Commissioner the "authority" to approve and immunize conduct that is illegal under 103.

The Donabedian court rejected the insurers' construction, determining that the voters had retained Section 1860.1 because Proposition 103 still permitted some joint conduct. "It would make little sense if Proposition 103 – which subjects insurers to the Unfair Competition Law – were interpreted to preclude a civil action alleging a violation of that very Proposition," the court noted.

Donabedian's careful construction of the statutes leaves no room for the industry's argument that the vestigial McBride provisions provide immunity for "approved conduct." And the plain text of 1861.10(a) places no conditions or limitations on the right to go to court, with good reason. The voters were alert to the practical limitations of the Department of Insurance; a rule that rewarded "hide the ball" tactics would be poor public policy.

The record in Donabedian amply justifies the policy adopted by the voters. It showed that Mercury had unilaterally revised the definition of "persistency," so as to surcharge motorists who were not previously insured, but this was not disclosed in its public filings. Mercury claimed that departmental staff had ordered it to utilize persistency in the manner it did. To support its argument, Mercury submitted a few selected pages from what later turned out to be unofficial drafts of confidential departmental documents it had obtained. Not surprisingly, the Donabedian court declined to wade into this thicket by making a factual finding of "approval."

By contrast, Division Three's recent decision in MacKay dives right in, rejecting the statutory analysis of the Donabedian court and discerning the agency's approval of 21st Century's illegal surcharges from various actions by Department of Insurance staff.

First, Justice H. Walter Croskey, writing for the MacKay court, holds that Section 1860.1 can now be read to immunize unlawful practices by individual insurers that are "approved." The opinion rejects Donabedian's determination that the Proposition 103 voters retained the immunity because they left in place some McBride authority for joint conduct. Justice Croskey opines: "It is difficult to believe that Insurance Code [S]ection 1860.1 is currently intended to serve the purpose it served in 1947."

MacKay also proclaims, for the first time in California, that the "filed rate doctrine" applies to insurance companies. That doctrine holds that when an agency exercises "exclusive jurisdiction" over an industry, civil challenges to approved rates are barred. It's beyond dispute that the California Commissioner no longer has exclusive jurisdiction: that's the holding of the 1992 Supreme Court decision in Farmers. And other courts, as well as the California Attorney General, have concluded that the filed rate doctrine does not apply to Proposition 103. But MacKay not only imposes the doctrine, it extends it beyond rates to immunize from civil suit practices that are explicitly unlawful, such as surcharging policyholders for lack of "prior insurance."

Having established a new "approval" immunity for the insurance industry, the court turns to the record, opening the Pandora's Box that the voters and the Insurance Commissioner have tried to keep closed.

A review of the correspondence and regulatory filings inserted in the appellate record shows that in 1997, 21st Century withdrew its improper definition of persistency, only to resubmit it – in the wrong file – a few months later. Then, in 2003, it submitted a lawful definition of persistency, which the agency approved. But the company continued to utilize the unlawful definition, claiming that a department rate analyst verbally authorized it to do so. The opinion itself relies in part on the testimony of a former agency employee who at the time of her deposition worked primarily as a consultant for the industry, and on the "vague" recollection of a department employee – also not a lawyer – that "direction from executive staff filtered down through to us that the accident verification [rule] was allowable." Yet MacKay concludes that 21st Century's surcharges were at all times unequivocally approved by the Department.

As for the crucial provision of Proposition 103, Section 1861.10(a), authorizing consumers to invoke the state's consumer protection laws to go to court, MacKay dismisses it in a footnote, misconstruing an opinion the same panel issued in 2006. In that case, brought by Consumer Watchdog, Justice Croskey interpreted the language "any person may…enforce" Proposition 103 to be limited to Unfair Competition Law actions. (Farmers Insurance Exchange v. Superior Court (2006) 137 Cal.App.4th 842.)

The MacKay decision raises some profound questions concerning the role of each branch of government.

First, MacKay is a dramatic and dangerous u-turn in the state's insurance law. That California voters intended to accord themselves the right to hold insurance companies accountable in the courts cannot be disputed.

In an amicus brief filed in an identical lawsuit against State Farm, the Insurance Commissioner stated: "like all administrative agencies, the Department must balance its statutory responsibilities with the available resources when exercising its discretion to deploy its prosecutorial authority…the voters saw fit to…allow private attorneys general to apply their resources and technical skill to ferret out and challenge those violations of law that pass through the Department's administrative review without either detection or action." The Commissioner concluded that "an original private right of action exists for violations of the Insurance Code, whether or not the alleged violation concerns an insurer's rate or class plan approved by the Department." The MacKay opinion emasculates an important tool for the enforcement of the law.

Second, MacKay seriously undermines the integrity of the regulatory process established by the voters and implemented by numerous regulations. As Ralph Nader and I wrote in the ballot pamphlet back in 1988, Proposition 103 established a "permanent, independent consumer watchdog system [that] will champion the interests of insurance consumers." That system is characterized by a transparent regulatory process, open to public scrutiny at every step, that relies principally on rule making and the Administrative Procedures Act.

In creating an immunity based on evidence of agency "approval" that occurs outside the purview of the public, MacKay deprives the public of its right to participate in the process. It also invites enormous regulatory mischief. It will become standard practice for insurers to flood the agency with disclaiming correspondence, seek verbal "okays" from departmental staff, and, if sued, depose agency employees in a wide-ranging search for ant faint indicia of "approval" – all of which happened in MacKay. The burden on the Department will be overwhelming.

Third, the court has not met its sacred obligation to zealously safeguard the people's initiative process. The industry's concerns about exposure to civil suits for misconduct have been the subject of debate by many commentators, including some in the judicial branch. But 21st Century and other insurers sponsored a competing ballot measure in 1988 that would have preserved the McBride era bar on lawsuits, and it was defeated. The voters have clearly spoken, and the responsibility of the judicial branch is to enforce the law as written.

Unfortunately, a few days before the MacKay opinion was published, the plaintiff and 21st Century settled, and the case has been orphaned: no petition for review was filed. Yesterday, Consumer Watchdog filed a request that the Supreme Court order review of MacKay on its own motion.

Whether insurance companies are immune from civil suit is a matter of enormous importance – not just to consumers, but also to the Commissioner and the industry. And with stark conflicting decisions within the Courts of Appeal, this is a matter that deserves review by the state Supreme Court.

Harvey Rosenfield, the founder of Consumer Watchdog, is the author of Proposition 103.

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