California Court Ruling Undermines Insurance Commissioner’s Authority

June 14, 2004

A ruling by the California Court of Appeals undermines state regulation and the authority of the insurance commissioner by essentially declaring rate filings approved by the Department of Insurance as invalid according to the Property Casualty Insurers Association of America (PCI).

In Mercury v. Donabedian, the plaintiff alleges that Mercury Insurance Company’s use of “persistency” as a rating factor violated a Proposition 103 provision that said that the absence of prior automobile insurance coverage, in and of itself, shall not be a criterion determining automobile insurance premiums. Mercury responded that its rates had been approved by the insurance commissioner, who has exclusive jurisdiction over ratemaking. The trial court agreed with Mercury and granted the company’s motion for a demurrer.

However, on March 11, the California Court of Appeals reversed the trial court’s ruling saying that the Department of Insurance did not preclude Donabedian from pursuing his lawsuit against Mercury for violating a section of Proposition 103.

“The ruling of the California Court of Appeals could make every trial court in California an additional regulator, which would be terrible public policy, not only for insurance companies and regulators, but for policyholders as well,” said PCI Senior Vice President, Industry and Regulatory Affairs Robert L. Zeman in his letter to the National Association of Insurance Commissioners (NAIC). “To our shock and dismay we have learned the California Department of Insurance filed an amicus brief in support of the position that courts should be allowed this authority. ”

Zeman said that in previous NAIC National meetings the Industry Liaison Committee and Class Action Litigation Working Group have discussed and expressed concerns about cases where courts have asserted themselves as regulators, questioning the regulatory authority of elected or appointed insurance regulators.

“The NAIC asked that the industry notify them of any cases where the courts have asserted themselves as regulators, particularly where the possibility exists that NAIC or individual commissioners could weigh in to support the exclusive authority of state insurance regulation for the good of insurance consumers,” Zeman said. “The point of this letter is to do just that.”

According to Zeman, the case has been appealed and there are related cases before various California courts of appeal that may ultimately reach the California Supreme Court.

“Whether or not there is an opportunity for amicus action by the NAIC or commissioners down the road remains to be seen,” Zeman said. “PCI believes that in light of previous discussions of this important issue during key NAIC working groups that you want to be aware of the terrible decision from the California Court of Appeals.

Discussion of the case took place at the Industry Liaison Committee meeting at NAIC Meeting in San Francisco.

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