November 7, 2005

The California Supreme Court ordered to “de-publish” a Court of Appeal ruling–AIA vs. Garamendi–touted by insurance companies as limiting the regulatory authority of the Insurance Commissioner. The case held that the commissioner had no power under Proposition 103 to adopt regulations to stop the insurance industry from engaging in abusive “use it and lose it” homeowners insurance practices.

The order to “de-publish” the case by the Supreme Court means that the case cannot be cited or relied on by any party in a lawsuit or by a court in any other case.

Insurance companies had sued to invalidate Department regulations that prohibited insurers from employing the “use it and lose it” system to deny homeowners insurance coverage. The Court of Appeal agreed with insurers, tossing out the Commissioner’s regulations.

Insurance companies have been using the Court of Appeal decision to try to evade accountability for other improper practices by arguing that the Commissioner has no power to regulate abusive homeowners insurance underwriting practices.

The Foundation for Taxpayer and Consumer Rights joined the Department of Insurance in a complaint against Farmers Insurance, seeking to stop the company from improperly surcharging or nonrenewing homeowners. In response to the investigation into their company, Farmers’ lawyers cited the Court of Appeal ruling in AIA vs. Garamendi, claiming that the Commissioner has no authority to stop the insurance company from overcharging homeowners. According to FTCR, the Supreme Court’s decision undermines insurers’ efforts to remain above the law, opening the door for enforcement actions against rogue insurers and likely leading to new rules clamping down on bad behavior in the insurance industry.

The “use it and lose it” system has been controversial because it allowed insurance companies to refuse to renew customers after they file an insurance claim, regardless of whether the insurer paid the claim or if the claim was entirely legitimate and did not increase future risk. Consumer groups and Commissioner Garamendi have sought to end the practice. The industry has successfully fought legislative proposals and had pointed to the AIA vs. Garamendi ruling to block regulatory enforcement actions.

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Insurance Journal West November 7, 2005
November 7, 2005
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