Fireman's Fund Ins. Co. v. Garamendi, C-91-2854-CAL

Decision Date13 April 1992
Docket NumberC-91-2855-CAL.,No. C-91-2854-CAL,C-91-2854-CAL
Citation790 F. Supp. 938
CourtU.S. District Court — Northern District of California
PartiesFIREMAN'S FUND INSURANCE COMPANY, et al., Plaintiffs, v. John GARAMENDI, Commissioner of Insurance of the State of California, Defendant. Association of California Insurance Companies, Plaintiff-in-intervention. UNITED STATES FIDELITY AND GUARANTY COMPANY, et al., Plaintiffs, v. John GARAMENDI, Commissioner of Insurance of the State of California, Defendant.


Terry J. Houlihan, David M. Balabanian, Christopher Van Gundy, McCutchen, Doyle, Brown & Enerson, San Francisco, Cal., Donald A. Newman, Thelen Marrin, Johnson & Bridges, Los Angeles, Cal., for plaintiffs-intervenors in No. C-91-2854-CAL.

Kent Keller, Barger & Wolen, J. Russell Stedman, Robert Hogeboom, Steven H. Weinstein, Los Angeles, Cal., for plaintiffs in No. C-91-2855-CAL.

Michael Strumwasser, Susan L. Goodkin, Susan L. Durbin, Frederic D. Woocher, Strumwasser and Woocher, Santa Monica, Cal., for defendant.


LEGGE, District Judge.

Plaintiffs Fireman's Fund Insurance Company ("Fireman's Fund"), United States Fidelity and Guaranty Company ("USF & G"), their affiliates, and plaintiff-in-intervention Association of California Insurance Companies ("ACIC") challenge the constitutionality of regulations enacted by the California Insurance Commissioner. Those regulations attempt to implement the insurance rate rollback provisions of Proposition 103, an initiative passed by California voters in 1988. Defendant John Garamendi, the Insurance Commissioner of California (the "Commissioner"), has moved to dismiss plaintiffs' claims as unripe, or alternatively to have this court abstain from exercising jurisdiction.


On November 8, 1988 California voters adopted Proposition 103 ("Prop. 103"), an initiative on the subject of insurance and insurance premium rates. Prop. 103 required insurers in the following year to reduce their automobile and other property and casualty insurance premium rates to twenty percent below the rates in effect one year before the initiative was passed, unless the Insurance Commissioner found that an insurer was "substantially threatened with insolvency." Cal.Ins.Code § 1861.01(a), (b). After the first year, rates could be increased only with the prior approval of the Commissioner. Cal.Ins. Code § 1861.01(c). The initiative prohibits rates that are "excessive" or "inadequate." Cal.Ins.Code § 1861.05(a).


The day after the initiative was passed, seven insurers and ACIC petitioned the California Supreme Court to declare the rate rollback and other provisions of Prop. 103 unconstitutional. In Calfarm Ins. Co. v. Deukmejian, 48 Cal.3d 805, 258 Cal. Rptr. 161, 771 P.2d 1247 (1989), that court invalidated the provision allowing only those insurers "threatened with insolvency" to avoid the rollbacks, since solvent insurers could not obtain relief from confiscatory rates during the rollback period. Id. 48 Cal.3d at 818-19, 258 Cal.Rptr. 161, 771 P.2d 1247. However, the court found the provision severable, and held that the general provision barring "inadequate" rates applied to rate regulation during the rollback period. Id. at 821-23, 258 Cal. Rptr. 161, 771 P.2d 1247. The court held that this met the constitutional requirement that insurers be allowed to earn a "fair and reasonable return," since a confiscatory rate was necessarily "inadequate" under the statute. Id. at 822-23, 258 Cal.Rptr. 161, 771 P.2d 1247.

The court otherwise upheld the rollbacks in Prop. 103, subject to the right of an insurer to apply to the Insurance Commissioner for approval of a higher rate, and to demonstrate that the rolled back rates were confiscatory as applied to it. Id. at 825-26, 258 Cal.Rptr. 161, 771 P.2d 1247. An insurer who filed such an application would be allowed to charge the higher rate pending the Commissioner's ruling on the application. If the Commissioner later determined that the rate mandated by the initiative, or some rate less than the insurer charged, was all that was constitutionally required, the insurer would have to refund the excess premiums collected with interest.


In response to the Calfarm decision, 460 insurers filed 4,089 applications for exemption from the rollback requirements. Over the next year and a half, then Commissioner Roxani Gillespie conducted hearings, made findings, and adopted regulations, but did not finally determine any insurer's rollback obligation.

Insurers also filed over fifty lawsuits in California state courts, challenging many aspects of the Commissioner's effort to implement Prop. 103. The Chief Justice of the California Supreme Court, in his capacity as Chairperson of the Judicial Council, ordered these cases coordinated before one judge in the Los Angeles Superior Court. Plaintiff Fireman's Fund has participated in two of those actions, and plaintiff USF & G in a third.


When Commissioner Garamendi took office, he gave notice of his intention to repeal the regulations adopted by his predecessor, because of alleged deficiencies1 and because

the present administrative approach to implementation of Proposition 103 offers little hope of processing the existing backlog of applications and threatens to engulf the Department in an sic tide of rate applications that are being filed at a rate faster than they are being processed.

Cal. Regulatory Notice Reg. 91, No. 4-Z, p. 161, 163. At the same time, he proposed new regulations in order to:

(1) accelerate the process by which rollback and rate applications are fairly adjudicated;
(2) conform administrative policy more closely to the legislative policy articulated by the voters in adopting the initiative; and
(3) provide a more workable, coherent, internally consistent framework for rate-regulation.

Id. at 163-64.

Between January and August 1991, the Commissioner held public hearings and received comments on the proposed regulations. The regulations were amended several times, and each time were recirculated for additional comments. By August, the administrative record had grown to almost 50,000 pages, most of it submitted by members of the insurance industry. On August 13, 1991 the Commissioner adopted the amended regulations on an emergency basis. Amended Proposed Regulations, File No. ER-19a (Cal.Dept.Ins., August 13, 1991) hereinafter ER-19a.2 These are the regulations which plaintiffs challenge in this litigation.

The regulations establish a three-stage process for determining insurers' rollback obligations. First, the ratemaking formula was defined by the regulations.

Second, the values assigned to certain variables in the rate formula, and "generic issues" common to insurers, were determined after consolidated hearings (denominated RCD-1 and RCD-2) which were conducted in parallel with the hearings on the proposed regulations, and in which interested insurers and consumers participated. On August 14, 1991, after twenty-one days of hearings, the Commissioner made his RCD-1 and RCD-2 determinations in 132 pages of findings of fact. As required by the Office of Administrative Law (OAL), the original regulations were amended to reflect the substance of these findings on August 23, 1991. Emergency Regulations File No. ER-20 (Cal.Dept.Ins., Aug. 23, 1991) hereinafter ER-20. The OAL however, rejected the Commissioner's request to adopt these generic issues amendments as emergency regulations. Cal.Regulatory Notice Reg. 91, No. 38-Z, p. 1239. On October 7, 1991 Governor Pete Wilson overruled the OAL's decision and allowed adoption of the ER-20 regulations as emergency regulations. Cal.Regulatory Notice Reg. 91, No. 43-Z, p. 1478.

This began the third stage in the process — that is, company-specific hearings, at which each insurer's rollback liability would be determined by applying the formula. On October 16, 1991 the Commissioner issued orders to fourteen insurance groups, none of them parties here, indicating the amount he believed that each must refund to its policyholders, and giving each company the choice of paying that amount or contesting it at a hearing conducted under the California Administrative Procedure Act, Cal.Govt.Code § 11500, et seq. The first such hearing was noticed for December 16, 1991.

On December 11, 1991 the first set of emergency regulations (ER-19a) expired, and the Commissioner filed a request to make them permanent (RH-291). While that request was pending, he submitted a request for readoption of the expired ER-19a regulations on an emergency basis (ER-19b). On January 10, 1992, the OAL disapproved the regulations, and refused to extend them as emergency regulations. The Commissioner amended the regulations in response to the OAL's objections, and refiled them as emergency regulations (ER-19c) on January 15, 1992. On January 17, 1992 the OAL issued a decision explaining why it had disapproved the proposed permanent regulations (RH-291). Cal.Regulatory Notice Reg. 92, No. 5-Z, p. 122. On January 23, 1992 the OAL disapproved the Commissioner's request to adopt the amended regulations (ER-19c) as emergency regulations, and on January 28, 1992 it issued a decision explaining the reasons for its disapproval.3 Cal.Regulatory Notice Reg. 92, No. 7-Z, p. 185.

The January 17 and January 28 decisions gave a number of reasons for rejecting the proposed regulations, most importantly that:

Calfarm recognized the right of an individual insurer to demonstrate that a particular rate is confiscatory as to it and the insurer's right to establish a record for judicial review. Applicant's have both the right and responsibility under the statute and Calfarm to make their cases free of the restrictions of the model. Regulation section 2646.4 clearly precludes an individual insurer from offering proof, or evidence to show in a rate hearing that the model does not allow a fair and reasonable rate of return on investment. This has the

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