20th Century Ins. Co. v. Garamendi

• Decision Date: 18 August 1994
• Docket Number: No. S032502,S032502
• Citation: 8 Cal.4th 216,32 Cal.Rptr.2d 807,878 P.2d 566
• Court: California Supreme Court
• Parties: , 8 Cal.4th 440D, 878 P.2d 566 20TH CENTURY INSURANCE COMPANY et al., Plaintiffs and Respondents, v. John GARAMENDI, as Commissioner, etc., Defendant and Appellant. 20TH CENTURY INSURANCE COMPANY et al., Plaintiffs and Respondents, v. John GARAMENDI, as Commissioner, etc., Defendant and Appellant; Voter Revolt, Intervener and Appellant. HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY et al., Plaintiffs and Respondents, v. John GARAMENDI, as Commissioner, etc., Defendant and Appellant.

Page 807

32 Cal.Rptr.2d 807

8 Cal.4th 216, 8 Cal.4th 440D, 878 P.2d 566

20TH CENTURY INSURANCE COMPANY et al., Plaintiffs and Respondents, v. John GARAMENDI, as Commissioner, etc., Defendant and Appellant.

20TH CENTURY INSURANCE COMPANY et al., Plaintiffs and Respondents, v. John GARAMENDI, as Commissioner, etc., Defendant and Appellant;

Voter Revolt, Intervener and Appellant.

HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY et al., Plaintiffs and Respondents, v. John GARAMENDI, as Commissioner, etc., Defendant and Appellant.

No. S032502.

Supreme Court of California,

In Bank.

Aug. 18, 1994.

As Modified on Denial of Rehearing

Sept. 29, 1994.

Page 820

Strumwasser & Woocher, Michael J. Strumwasser, Fredric D. Woocher and Susan L. Durbin, Santa Monica, for defendant and appellant.

Joseph Lawrence, Acting City Atty., Santa Monica, Martin T. Tachiki, Barry A. Rosenbaum and Kimery A. Shelton, Deputy City Attys., as amici curiae on behalf of defendant and appellant.

Karl M. Manheim, Hall & Phillips, Hall & Associates, John R. Phillips, Edward P. Howard and Leon Dayan, Los Angeles, for intervener and appellant.

Norma P. Garcia, San Francisco, as amicus curiae on behalf of intervener and appellant and defendant and appellant.

John R. Bollington, Woodland Hills, Thelen, Marrin, Johnson & Bridges, Gary L. Fontana, Curtis A. Cole, Wynne S. Carvill, Hilary N. Rowen, John L. Kortum, Morrison

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& Foerster, Marc P. Fairman, Michael M. Carlson, San Francisco, Latham & Watkins, Mark S. Pulliam, Katherine A. Lauer, San Diego, Barger & Wolen, Kent R. Keller, Robert W. Hogeboom, Steven H. Weinstein, John C. Holmes and Lawrence F. Krutchik, Los Angeles, for plaintiffs and respondents.

Judith K. Mintel, Bloomington, IL, Heller, Ehrman, White & McAuliffe, Paul Alexander, Vanessa Wells, Palo Alto, Munger, Tolles & Olson, Allen M. Katz, Los Angeles, Craig Berrington, David Snyder, Nancy Siegel, Washington, DC, Thomas Aceituno, Nielsen, Merksamer, Parrinello, Mueller & Naylor, Steven A. Merksamer and John E. Mueller, Sacramento, as amici curiae on behalf of plaintiffs and respondents.

MOSK, Justice.

At the November 8, 1988, General Election, the voters approved an initiative statute that was designated on the ballot as Proposition 103. The measure made numerous fundamental changes in the regulation of automobile and other forms of insurance in California. Formerly, the so-called "open competition" system of regulation had obtained, under which "rates [were] set by insurers without prior or subsequent approval by the Insurance Commissioner...." (King v. Meese (1987) 43 Cal.3d 1217, 1221, 240 Cal.Rptr. 829, 743 P.2d 889.) Under that system, "California ha[d] less regulation of insurance than any other state, and in California automobile liability insurance [was] less regulated than most other forms of insurance." (Id. at p. 1240, 240 Cal.Rptr. 829, 743 P.2d 889 (conc. opn. of Broussard, J.).) The initiative contained, among others, provisions relating to the rollback of rates for insurance within its coverage for the period extending from November 8, 1988, through November 7, 1989. (For purposes here, a rate is the price or premium that an insurer charges its insureds for insurance.)

It scarcely needs mention that the regulation of the insurance industry is squarely within the state's police power. "What [has been] said about the police power--that it 'extends to all the great public needs' and may be utilized in aid of what the legislative judgment deems necessary to the public welfare, [citation]--is peculiarly apt when the business of insurance is involved--a business to which the government has long had a 'special relation.' " (California Auto. Assn. v. Maloney (1951) 341 U.S. 105, 109, 71 S.Ct. 601, 603, 95 L.Ed. 788.)

In Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 258 Cal.Rptr. 161, 771 P.2d 1247 (hereafter sometimes Calfarm ), we upheld, inter alia, Proposition 103's provision requiring rate rollbacks.

In this proceeding, we review the implementation of Proposition 103's rate rollback requirement provision by the Insurance Commissioner. The incumbent is John Garamendi, the first person elected to the office. His predecessor was Roxani M. Gillespie, who was appointed thereto.

Specifically, we decide appeals and cross-appeals from a judgment of the Los Angeles County Superior Court in three consolidated cases in Judicial Council Coordination Proceeding No. 2419, entitled "Proposition 103 Implementation Cases." We transferred the cause, which was then pending in No. B074704 in the Court of Appeal, Second Appellate District, to ourselves because it "presents issues of imperative public importance requiring prompt resolution" by this court "and justifying a departure from normal appellate processes." (Cal.Rules of Court, rule 27.5(b).) The cases are as follows.

1. 20th Century Insurance Company et al. v. Garamendi (Super.Ct. S.F. County, 1991, No. 938470, trans., Super.Ct. L.A. County, 1992, No. BC046216) (hereafter 20th Century I ). This action concerns, inter alia, the validity of rate regulations adopted by the Insurance Commissioner as to rollbacks both on their face and as applied. The regulations in question include regulations strictly so called: rules generally applicable to all insurers formulated by the commissioner in quasi-legislative proceedings in File No. RH-291. They include as well regulations incorporating "generic determinations": findings relating to all or at least several insurers made by the commissioner in consolidated hearings conducted in accordance with quasi-adjudicatory procedures and then adopted by him as regulations--specifically,

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findings arising from (1) File No. RCD-1, concerning exposure basis, reserve strengthening, executive compensation, efficiency standards, etc.; and (2) File No. RCD-2, concerning rate of return, leverage factor, projected yield, etc. This action also concerns the constitutionality of Proposition 103's rate rollback requirement provision both on its face and as applied. The parties include 20th Century Insurance Company and 21st Century Casualty Company (hereafter collectively 20th Century) as plaintiffs (and, formerly, petitioners) and the commissioner in his official capacity as defendant (and, formerly, respondent).

2. 20th Century Insurance Company et al. v. Garamendi (Super.Ct. L.A. County, 1992, No. BS016789) (hereafter 20th Century II ). This action involves, among other issues, the validity of the rate regulations both on their face and as applied and also the validity of a rollback order issued by the Insurance Commissioner against 20th Century pursuant thereto. The parties include 20th Century as petitioners and the commissioner in his official capacity as respondent. By leave of court, Allstate Insurance Company (hereafter Allstate) and Voter Revolt, the proponent of Proposition 103, are interveners, the former on 20th Century's side, the latter on the commissioner's.

3. Hartford Steam Boiler Inspection and Insurance Company et al. v. Garamendi (Super.Ct. L.A. County, 1991, No. BC023983). This action concerns, inter alia, the validity of the rate regulations incorporating generic determinations, both on their face and as applied, relating to the issue of "leverage," i.e., the "surplus" or available capital that backs up premiums. It appears that the insurance industry's surplus is greatly represented by appreciating assets (such as stocks and bonds), as opposed to depreciating assets (such as plant and equipment). Over-leverage (or undercapitalization) threatens insolvency: there is insufficient surplus to back up premiums. By contrast, under-leverage (or overcapitalization) threatens undue profit: there is surplus beyond what is useful to back up premiums--surplus surplus--which inflates the insurer's capital base and any rate set thereon to the disadvantage of its insureds, while at the same time it produces investment income from appreciating assets. This action was bifurcated as to the leverage issue and consolidated with 20th Century I and 20th Century II with regard thereto. The parties include Hartford Steam Boiler Inspection and Insurance Company (hereafter Hartford) and the State Farm Insurance Companies (hereafter State Farm), together with scores of other insurers, as plaintiffs and petitioners and the commissioner in his official capacity as defendant and respondent.

I. PROPOSITION 103 AND CALFARM

Among other things, Proposition 103 added the following sections to the Insurance Code.

Insurance Code section 12900.

This provision makes the Insurance Commissioner an elected official.

Insurance Code section 1861.01.

Subdivision (a) is the rate rollback requirement provision. "For any coverage for a policy for automobile and any other [specified] form of insurance ... issued or renewed on or after November 8, 1988, every insurer shall reduce its charges to levels which are at least 20% less than the charges for the same coverage which were in effect on November 8, 1987."

Subdivision (b) defines the procedural mechanism for relief from the rate rollback requirement provision. "Between November 8, 1988, and November 8, 1989, rates and premiums reduced pursuant to subdivision (a) may be only increased [sic: read, "may be increased only"] if the commissioner finds, after a hearing, that an insurer is substantially threatened with insolvency."

Subdivision (c) institutes the "prior approval" system. "Commencing November 8, 1989, insurance rates ... must be approved by the commissioner prior to their use."

Insurance Code section 1861.05.

Subdivision (a) articulates the substantive standard of the "prior approval" system. "No rate shall be approved or remain in effect which is excessive, inadequate, unfairly discriminatory or otherwise in violation of [specified law]. In considering whether a rate is excessive, inadequate or unfairly discriminatory, no consideration shall be given

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to the...