Attorney General v. Commissioner of Ins.

• Decision Date: 03 January 2008
• Citation: 450 Mass. 311,878 N.E.2d 554
• Parties: ATTORNEY GENERAL v. COMMISSIONER OF INSURANCE & another.<SMALL><SUP>1</SUP></SMALL>
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

878 N.E.2d 554

450 Mass. 311

ATTORNEY GENERAL v. COMMISSIONER OF INSURANCE & another.¹

Supreme Judicial Court of Massachusetts, Suffolk.

Argued September 5, 2007.

Decided January 3, 2008.

Monica Brookman, Assistant Attorney General (Glenn Kaplan & Aaron Lamb, Assistant Attorneys General, with her) for the plaintiff.

John G. Ryan, Special Assistant Attorney General (Julie D. McAlarney with him) for the defendant.

Cameron F. Kerry, Boston (A.W. Phinney, III, & Jennifer Alcarez with him) for the intervener.

The following submitted briefs for amici curiae:

Stephen D'Amato for Citizens for Homeowners Insurance Reform.

Robert A. O'Leary, Eric T. Turkington, Cleon H. Turner & Sarah K. Peake, Provincetown, pro se.

Peter S. Rice & Jeffrey S. Strom, Boston, for Property Casualty Insurers Association & another.

Present: MARSHALL, C.J., GREANEY, SPINA, COWIN, & CORDY, JJ.

CORDY, J.

On June 30, 2006, the Commissioner of Insurance (commissioner) released her decision and order on the 2005 rate filings of the Massachusetts Property Insurance Underwriting Association (MPIUA), finding, with two exceptions, that the components underlying its proposed rates for basic property and casualty insurance were "reasonable or fall within a range of reasonableness" (June 30 decision). In light of this finding, the commissioner conditionally disapproved MPIUA's proposed rates; advised MPIUA of what would be reasonable with respect to the rate components she rejected; and invited MPIUA to make a revised filing within thirty days, which, if it met her requirements, would be approved.²

On August 11, 2006, after MPIUA had submitted a revised filing, the commissioner approved the revised rates, declaring them not "excessive, unfairly discriminatory or inadequate" (August 11 decision). The rates were to be effective October 1, 2006.³

The Attorney General, who had opposed approval of the proposed rates during the hearings preceding the commissioner's June 30 decision, sought judicial review in the Supreme Judicial Court for Suffolk County of several aspects of the August 11 decision. A single justice reserved and reported the case to the full court without decision.

In her appeal, the Attorney General contends that the rates approved by the commissioner exceed the cap on rate increases set by statute, G.L. c. 175C, § 5(c), and disputes the commissioner's interpretation of a 2004 amendment to that statute — which directs her to consider predicted hurricane losses and costs of catastrophe reinsurance "notwithstanding" the statutory rate cap for large share territories — as authorizing her to approve rates that exceed that cap.⁴ The Attorney General also contends that (1) in approving the rates, the commissioner failed explicitly to consider the loss experience of insurers in the voluntary market, as required by G.L. c. 175C, § 5(b); (2) the commissioner abused her discretion in approving predicted hurricane losses based on the computer generated models relied on by MPIUA; and (3) the Attorney General was entitled to notice, a hearing, and a right to cross-examine witnesses on MPIUA's revised filing before the commissioner approved it.

We affirm.

1. Rate approval framework. MPIUA is an association of all property and casualty underwriters in Massachusetts. Pursuant to G.L. c. 175C, it operates the Massachusetts residual market for property and casualty insurance, with the goal of providing basic property insurance to eligible participants who are otherwise unable to obtain insurance in the voluntary market.⁵ See G.L. c. 175C, §§ 4(a), 5(b); Hudson v. Massachusetts Prop. Ins. Underwriting Ass'n, 386 Mass. 450, 452-454, 436 N.E.2d 155 (1982) (reviewing history of MPIUA). MPIUA supplies "homeowners insurance" coverage to residential property owners, and has increasingly provided such coverage to homeowners located in the coastal sections of Massachusetts where the voluntary market for insurance has receded.

When MPIUA seeks to increase the rates it charges for insurance, it must file the proposed increases with the commissioner in accordance with G.L. c. 174A and G.L. c. 175C, § 5(b). The commissioner does not set MPIUA's rates; rather, she must approve them if they fall within a range of reasonableness, Massachusetts Med. Serv. v. Commissioner of Ins., 344 Mass. 335, 339, 182 N.E.2d 298 (1962), and otherwise satisfy the requirements of the General Laws.⁶ The commissioner may not approve rates that are "excessive, inadequate or unfairly discriminatory." G.L. c. 174A, § 5(a)(2). MPIUA bears the burden of establishing that its proposed rates fall within a "range of reasonableness." Travelers Indem. Co. v. Commissioner of Ins., 362 Mass. 301, 305, 285 N.E.2d 442 (1972). The commissioner can approve MPIUA rates only after proper notice and a hearing, subject to the adjudicatory procedures of G.L. c. 175C, § 5(b).

In considering the reasonableness of MPIUA's proposed rates, G.L. c. 175C, § 5(b), requires that the commissioner give consideration, in addition to all other relevant factors, "to the loss experience of insurers in the voluntary market, as well as the experience of the association and to the intent of this chapter to make basic property insurance available at reasonable cost to eligible applicants in large share territories." Large share territories are those in which MPIUA has a large market share; small share territories are those in which MPIUA has minimal market share and consumers have a choice among providers. See G.L. c. 175C, § 1. The rates in dispute in this appeal are those that apply to "large share territories."

Section 5(c) establishes a statutory cap on rate increases applicable to large share territories. It is undisputed that (for the time period at issue) the cap on rate increases for those territories, calculated in accord with the formula set out in § 5(c), was 5.9 per cent. The rate increases sought by MPIUA in its 2005 filings exceeded this cap.

Section 5 (c), as appearing in St.2004, c. 436, § 3, also provides that "notwithstanding" the cap on rate increases, "the commissioner shall consider the effects of predicted hurricane losses and the cost of catastrophe reinsurance on the rates charged by voluntary market reinsurers and the cost of catastrophe reinsurance and the predicted hurricane losses on the association approving rates for homeowners insurance in all territories."

2. The commissioner's hearing and decisions. In its 2005 filings, MPIUA sought an over-all increase of 12.5 per cent in the rates for homeowners multi-peril insurance, and 6.4 per cent in the rates for dwelling fire and extended coverage insurance. It sought no increase in commercial fire and allied lines coverage. The proposed increases varied across territories, with increases greater than those allowed under the rate cap in three large territories: a 25 per cent increase in territory 37— made up of the counties of Barnstable, Dukes, and Nantucket — a 20 per cent increase in territory 33 — the city of New Bedford — and a 9.5 per cent increase in territory 32 — the city of Fall River. After providing notice, the commissioner held hearings in accord with G.L. c. 30A, § 14. Experts and other witnesses testified in favor of and against the proposed rates, and were cross-examined extensively during twenty days of evidentiary hearings, after which the parties submitted briefs.⁷

In connection with reviewing MPIUA's proposed rates, the commissioner was required to interpret and apply the amended language of § 5(c). In her decision she reviewed the history leading up to the 2004 amendment and interpreted what, in her words, might initially appear to be its "opaque" language, in light of what she understood the Legislature intended to accomplish. The commissioner concluded that § 5(c) authorized her "to approve, in her discretion, a proposed rate for a large share territory that exceeds the statutory cap" of 5.9 per cent "but only to the extent that the amount of the increase in excess of the cap ... is based solely on `the effects of predicted hurricane losses and the cost of catastrophe reinsurance on rates charged by voluntary market insurers and the cost of catastrophe reinsurance and the predicted losses'" on the MPIUA.⁸

She found further that increases exceeding the cap in the three large territories reflected and were justified by the impact of "predicted hurricane losses and the costs of reinsurance." She also noted that the MPIUA had tempered its proposed increases: the proposed rates being lower than the rates "indicated" by the results of hurricane modeling,⁹ and not including any profit factor, although such a factor is a common component of insurance ratemaking. See Century Cab Inc. v. Commissioner of Ins., 327 Mass. 652, 663, 100 N.E.2d 481 (1951).

The commissioner also determined that it was appropriate to use computer generated models (rather than historically based calculations) to predict hurricane losses insofar as the use of such models had become widespread in the insurance industry. The models estimate average losses based on probabilistic simulations of 10,000 to 100,000 years of hurricanes, whereas historical data is substantially more limited.

In its rate filings, MPIUA relied on two specific computer generated mathematical models to predict hurricane losses: one created by the Air Worldwide Corporation (AIR) and the other by the Risk Management Solutions (RMS). MPIUA averaged the results generated by each of the two models, creating a blended estimate. Based on testimony that the AIR and RMS models are widely utilized by insurers, reinsurers, rating agencies, governments, and others, the commissioner found their use by MPIUA to be reasonable.¹⁰

As noted above, at the conclusion of the rate-approval proceedings, the commissioner conditionally disapproved the rate filings, based on concerns with respect to two rate components. First, although the proposed rate included the cost of reinsurance, MPIUA had...