Best’s News & Research Service - April 13, 2015 10:56 AM (EDT)
California Court Says State Lacked Authority to Issue Replacement Cost Consumer Protection Rules
LOS ANGELES //BestWire// - A California state appellate court has ruled the California insurance commissioner lacks the authority to promulgate rules regulating the terms of homeowners' replacement coverage negotiations.
The ruling by the Court of Appeal of the State of California, Second Appellate District upholds an earlier trial court verdict in the case. The case had been filed by the Association of California Insurance Companies and the Personal Insurance Federation of California against California Insurance Commissioner Dave Jones in 2011 over a rule that required all replacement cost estimates to be based on specific standards and required insurers, agents and brokers to document the sources and the methods used to calculate replacement cost estimates (Best's News Service, June 29, 2011).
Appeals Court Judge Helen Bendix agreed with the industry groups that Jones did not have authority to promulgate a regulation under authority granted him in the Unfair Insurance Practices Act, which set specific requirements when estimating replacement costs as part of any application or renewal for homeowners' insurance.
The California Department of Insurance was disappointed with the ruling. "The court invalidated what the department feels is a very important consumer protection regulation that would prevent insurers from providing misleading and incomplete estimates of home replacement costs when insurers issue policies," Deputy Insurance Commissioner Byron Tucker told Best's News Service. The CDI is evaluating its options to determine how it will proceed with the case, he said.
Former Commissioner Steve Poizner issued the regulation in 2010 just before his departure from the job. He did so in response to complaints from homeowners who lost their residences after the wildfires in South California in 2003, 2007 and 2008, the ruling said. Homeowners learned they did not have enough insurance to cover the cost of repairing or rebuilding their homes because replacement value estimates made when buying their policies were too low.
The regulations prohibit a licensee from "communicating an estimate of replacement cost to an applicant or insured in connection with an application for renewal of a homeowners' policy that provides coverage on a replacement cost basis." The ruling focuses on language in the regulation that says giving a homeowners' insurance applicant an estimate of replacement value that does not comport with standards set in the rule is misleading.
Industry groups, including the ACIC and the Personal Insurance Federation of California, testified in a May 2010 hearing that the commissioner lacked the authority to define new unfair business practices. They claimed the regulation was costly and would ultimately discourage insurers from providing insurance.
The associations argued the regulations were invalid because they made replacement costs estimates that did not comply with the regulation to be "unfair and deceptive," even though they were not defined in section 790.03 in the UIPA, which defines unfair or deceptive practices.
The associations also claimed the Department of Insurance's reliance on section 790.10 of the UIPA as the status for authority to promulgate the rules was invalid, because while it gave the commissioner authority to implement the UIPA, it did not give him authority to define unfair business practices.
The CDI argued it had authority to promulgate a rule defining specific types of misleading statements and did have authority to promulgate a rule prohibiting misleading statements from being communicated to homeowners' insurance buyers.
In her ruling, however, Bendix said the commissioner's reliance on section 790.10 renders other parts of the UIPA unnecessary and said he could always argue that conduct not meeting standards in a regulation promulgated under the cover of the commissioner's power to administer under section 790.10 would be misleading. "That is precisely what the commissioner has done here," she wrote.
Bendix wrote legislative changes to the law indicated Jones had no authority to promulgate the regulation and their omission in failing to include replacement cost estimates in the UIPA's list of unfair practices was deliberate. "Our ruling today is limited to one conclusion — that the UIPA has not as of yet given the commissioner authority to regulate the content and format of replacement cost estimates," Bendix wrote.
(By Thomas Harman, associate editor, BestWeek: Tom.Harman@ambest.com)