Court Upholds Industry Lawsuit: CDI’s Homeowners Regulations Illegal

Charges by the California Department of Insurance that the California homeowners insurance industry arbitrarily nonrenews or raises rates on homeowners who file one claim or make an inquiry about their coverage is little more than a political scare-tactic with no basis in fact. A telephone poll by the Personal Insurance Federation of California of insurance companies that write more than 90 percent of homeowners insurance policies in California found that only 1/2 of 1 percent of policyholders are nonrenewed in a typical year and that percentage is shrinking.

The real reasons for nonrenewal can range from non-payment of a premium to needed repairs or hazards not being remedied within a specified time. To say insurers are arbitrarily nonrenewing policies when a claim is filed causes concern amongst policyholders who can and should file a claim when they have a loss.

In June 2003, PIFC joined the American Insur-ance Association and Association of California Insurance Companies–representing more than 95 percent of the homeowners’ insurance market–and filed a lawsuit against CDI in Sacramento Superior Court. The suit challenged the legality of “Advisory Notice” regulations issued by CDI on April 24, 2003 mandating new underwriting and claims handling requirements by all homeowners insurers in California.

The lawsuit was filed to ask the courts to determine if the “Advisory Notice” regulations were illegal by ignoring and exceeding current law. Unfortunately, the insurance commissioner perceived the lawsuit as a personal attack.

On August 22, 2003, the Superior Court agreed with the lawsuit argument by stating: “the petition for writ of mandate is granted on the ground that respondent Commissioner of Insurance exceeded his authority when he promulgated the challenged emergency regulation, Title 10, C.C.R., section 2361, because the regulation is inconsistent with the governing statutes in the Insurance Code.”

The commissioner appealed the ruling. On Feb. 28, 2005, the California Third Appellate District Court of Appeal agreed with Superior Court Judge Raymond M. Cadei and the argument made by the insurance industry.The court said, “the Insurance Code provides no express authority for regulating the underwriting of homeowners’ insurance, nor can such expansive authority be implied. Unlike automobile insurance, homeowners insurance is subject to only a few restrictions, all clearly set forth in the Insurance Code. Reading the Insurance Code to give the Commissioner broad authority to regulate underwriting beyond these specific provisions is inconsistent with the legislative scheme as a whole. Accordingly, the regulation is invalid.”

The irony of CDI’s illegal regulation is if CDI had succeeded in promulgating the new rules, 90 percent of all policyholders who rarely file an insurance claim would have been forced to subsidize 10 percent of the homeowners who routinely file claims.

Another issue that needs further scrutiny is the claim by CDI that the collection of claims information from 2001-2003 led to “thousands of complaints” regarding the alleged nonrenewal of policies.

The facts speak for themselves concerning CDI’s charge of unprecedented increases in the number of justified complaints relating to cancellation, nonrenewal and availability of homeowners insurance from 2001-2003. CDI claimed:

However, PIFC researched the CDI Web site and found the following:

Nowhere in the data is there any reference to “thousands” of homeowners who were arbitrarily nonrenewed.

Another bone of contention has been the frenzied actions of CDI following the 2003 Southern California fires. According to CDI there were well over 18,000 claims filed (the insurance industry’s tally was 19,100) following the wildfires. CDI conducted 11 town hall meetings throughout the fire stricken areas in 2004 pleading with fire survivors to file complaints with the department to get help with their homeowners insurance claims.

The insurance commissioner spiced the rhetoric with rancorous charges that fire survivors were deliberately underinsured and that the insurance industry would nonrenew, refuse claims payments, raise rates or cancel policies arbitrarily.

CDI received 676 total requests for assistance. Again, where are the “thousands” of complaints charging the insurance industry with arbitrary nonrenewals?

Rebuilding is underway in Southern California today from San Bernardino to San Diego. Hundreds of homes are under construction and hundreds more have already been rebuilt. Empty lots may signify that many families have moved, are going to build elsewhere, or have decided to rebuild larger and more custom homes on their property.

The “Advisory Notice” regulations also accused insurers of arbitrarily raising rates after a homeowner files one or more claims. Insurers must justify every rate charged to every customer in every situation and cannot use the rate until it is approved by CDI. Under California law, insurers must justify each rate charged by submitting detailed actuarial and statistical company data to CDI for approval.

To conduct insurance business in California, insurance companies must abide by the insurance laws and must rely on the regulator to do the same. Insurance companies have the same concern for their policyholders as the insurance commissioner purports to have for his constituents. No company in any business can survive by not serving its customers, and the insurance industry is no different. The first obligation of insurers is to pay the claims of their customers. Commissioner Garamendi must stop the scare-tactics and regulate the insurance industry under the laws he was elected to uphold.

Topics Lawsuits California Carriers Legislation Claims Wildfire Homeowners Market