The California Supreme Court, in a 7-0 decision, affirmed the authority of the California Insurance Commissioner against a major insurance industry legal challenge to his regulatory authority. The case involves regulations pertaining to homeowner insurance policies, but will have application to his regulatory authority in all areas of insurance, including Workers’ Compensation policies.
The back story to this case involves wildfires, which are a fact of life in California. After the 1991 Oakland Hills fire and 2003 Southern California wildfires, legislators discovered an additional aspect of the danger wildfires pose to homeowners – underinsurance. Homeowners discovered that their coverage fell well short of what they needed – sometimes by hundreds of thousands of dollars – to rebuild their homes.
Guaranteed replacement coverage was the norm as recently as the 1990s, but only a limited number of homeowners qualified for such a product – and only a small subset of insurers even offered it. The Legislature took several steps to address the divergence between homeowners’ expectations of insurance coverage and the actual scope of coverage.
Between 1992 and 2005, the Legislature took several steps to address the divergence between homeowners’ expectations of insurance coverage and the actual scope of coverage. The California Insurance Commissioner adopted regulations accordingly, resolving this problem which became effective on June 27, 2011.
The insurance industry, led by the Association of California Insurance Companies and the Personal Insurance Federation of California, filed its lawsuit a few weeks before the regulation took effect, challenging the Insurance commissioner’s authority to adopt these regulations. The trial court invalidated the Regulation on the ground that the Commissioner exceeded his authority. And the Court of Appeal affirmed. But the Supreme Court reversed and ruled the insurance commissioner has broad discretion to adopt rules and regulations as necessary to promote the public welfare in the case of the Association of California Insurance Companies vs Dave Jones as Commissioner of the CDI.
The replacement cost regulation reviewed by the Supreme Court is codified at California Code of Regulations, title 10, section 2695.183. The Regulation does not require an insurer to set or recommend a policy limit or to provide an estimate of the cost to rebuild or replace a home. But if the insurer does choose to opine on replacement costs, the Regulation specifies how that estimate is to be calculated and communicated.
It pointed out that in 1959, the Legislature enacted the Unfair Insurance Practices Act (UIPA) (Ins. Code, § 790 et seq.). Its purpose is to regulate trade practices in the business of insurance “by defining, or providing for the determination of, all such practices in this State which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined.” Empowered by authority granted in the UIPA, the Commissioner may investigate those engaged in the business of insurance.
The UIPA also grants the Commissioner rulemaking power: “The commissioner shall, from time to time as conditions warrant, after notice and public hearing, promulgate reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article.” With respect to this provision, the Court noted “What authority the Legislature conferred here appears to be quite broad.”
“In this instance, the Commissioner undertook an investigation into the widespread problem of underinsurance and, in particular, the disconnect between a homeowner’s expectation and the actual scope of insurance coverage purchased. Based on that investigation, he determined that an incomplete replacement cost estimate – i.e., an estimate that fails to account for all of the costs necessary to rebuild the structure – qualifies as ‘a specific kind of misleading statement,’ and that regulation of any misleading statement “is authorized by the broad statutory prohibition against false and misleading statements’ in section 790.03, subdivision (b).”