THIS WEEK IN
Prepared by Norwood & Associates
Court Refuses to
Halt Emergency Regulations on Underwriting Guidelines
Superior Court Judge Raymond M. Cadei refused to halt implementation of emergency regulations by the Department of Insurance limiting the ability of insurers to use claims history for underwriting homeowners' insurance. The judge, however, set another hearing for August 22 to determine whether or not the Commissioner has any statutory basis for the regulations. Accordingly, insurers must now comply with the emergency regulations, which took effect on Monday.
The emergency regulations were originally the subject of an "advisory notice" issued by the Commissioner earlier this year purporting to clarify existing law regarding the use of loss history information in rating and underwriting. The bulletin prohibited underwriting based solely on the occurrence of a given number of losses. Insurers were directed to demonstrate that each loss used for underwriting purposes continues to bear a substantial relationship to risk of future loss. In addition, if the circumstances causing a loss have been remedied, that claim cannot be used for underwriting purposes, whether attributed to the property or to the insured.
Insurers successfully sued the Commissioner and obtained an injunction prohibiting implementation of the advisory notice because it was an "underground regulation" not adopted pursuant to the Administrative Procedures Act. The Commissioner responded by filing "emergency" regulations, which became effective Monday, based on the rejected advisory notice. Emergency regulations become effective immediately after approval by the Office of Administrative Law and short-circuit the public hearing and comment process.
Insurers challenged the regulations again this week on two grounds: (1) no emergency existed requiring immediate implementation of the regulations, and (2) there was no statutory authority for the regulations.
Insurers argued no emergency existed requiring immediate implementation of the regulations because there was no evidence large numbers of homeowners were unable to obtain insurance. The Commissioner, on the other hand, argued a crisis existed because the number of complaints to the Department has increased. The court concluded the Commissioner didn't have to prove a crisis existed, and that his opinion was sufficient. In any event, the Department said it was issuing permanent regulations today that would eventually supercede the emergency regulations.
It was with some irony that counsel for the insurers pointed out to the judge that the Commissioner might in fact be causing a crisis by promulgating these regulations. Safeco announced this week it was joining State Farm in placing a moratorium on new business. Safeco cited the implementation of the regulations as one of the reasons for its decision.
While the court concluded the Commissioner could find a "crisis" existed for justifying emergency regulations simply by saying so, he set another hearing on August 22 on what he called the "nub of the issue:" whether the Commissioner has the authority to issue the regulations at all. Pending legislation, SB 64 (Speier), that eventually would have provided the necessary statutory authority, failed to pass out of the Assembly Insurance Committee.
In deciding whether or not the Commissioner has the authority to issue regulations on underwriting guidelines, the court said it would "come down to an analysis of the entire statutory structure." The judge said he couldn't do that in one afternoon, and therefore set August 22 for a second hearing. The judge's comments caused some observers concern that he would find authority somewhere in the "entire statutory structure" for the regulations instead of taking a conservative stance that no one specific statute authorizes the Commissioner to regulate underwriting guidelines.
Fairness of Fees
Debated
Producer groups met with the Department of Insurance this week to discuss the Department's proposed across the board 10 percent fee increase. The producer groups expressed dismay the Department for a second time has increased fees across the board two-years in a row, despite recently enacted legislation to allow selective fee increases to achieve a fairer fee structure. Producers pay about 2/3rds of the Department's unrestricted revenue in license fees, while receiving only 1/3 of the Department's regulatory effort.
The Department acknowledged it failed to consider SB 940 (Speier), which was intended to establish an equitable fee structure for producers, when it proposed the fee hike. The Department also acknowledged it has not conducted a workload study required by the law. While the Department has delayed the announcement of the fee increase pending further discussions, it indicated it saw few alternatives other than to increase all fees across the board this year as well as another fee increase next year. Instead of rushing a workload study this year, the Department is suggesting a comprehensive review of all fees and workload assignments, with adjustments to various fees in the future.
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© Copyright 2003 by Norwood & Associates