Fireman's Fund Ins. Co. v. Quackenbush, 92-15861

• Citation: 87 F.3d 290
• Decision Date: 05 August 1996
• Docket Number: No. 92-15861,92-15861
• Parties: 96 Cal. Daily Op. Serv. 4326, 96 Daily Journal D.A.R. 7037, 96 Daily Journal D.A.R. 9443 FIREMAN'S FUND INSURANCE COMPANY, Plaintiff-Appellant, and The American Insurance Company; National Surety Corp.; Associated Indemnity Corporation, et al., Plaintiffs, v. Chuck QUACKENBUSH, Commissioner, California Insurance Companies, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 290

87 F.3d 290

96 Cal. Daily Op. Serv. 4326, 96 Daily Journal

D.A.R. 7037,

96 Daily Journal D.A.R. 9443

FIREMAN'S FUND INSURANCE COMPANY, Plaintiff-Appellant and The American Insurance Company; National Surety Corp. Associated Indemnity Corporation, et al., Plaintiffs, v. Chuck QUACKENBUSH, Commissioner, California Insurance Companies, Defendant-Appellee.

No. 92-15861.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 13, 1996.

Decided June 18, 1996.

As Amended on Denial of Rehearing Aug. 5, 1996.

Thomas A. Swanson, General Counsel, Fireman's Fund Insurance Co., Novato, California; David M. Balabanian, Terry J. Houlihan, Stephanie N. Simonds, McCutchen, Doyle, Brown & Enersen, San Francisco, California, for plaintiffs-appellants Fireman's Fund et al.

William W. Palmer, General Counsel, Reid A. McClaran, Chief Counsel, Robert B. Hagedorn, Brian G. Soublet, Senior Staff Counsel, Department of Insurance; Michael J. Strumwasser, Fredric D. Woocher, Raleigh H. Levine, Strumwasser & Woocher, Santa Monica, California, for defendant-appellee Chuck Quackenbush, Commissioner, California Insurance Companies.

Appeal from the United States District Court for the Northern District of California, Charles A. Legge, District Judge, Presiding. D.C. No. CV-91-2854-CAL.

Before: SCHROEDER, D.W. NELSON and KOZINSKI, Circuit Judges.

D.W. NELSON, Circuit Judge:

Appellants Fireman's Fund and related insurance companies ("Fireman's Fund" or "the insurers") brought this action against Appellee John Garamendi, ¹ Insurance Commissioner for the State of California ("the Commissioner"), alleging that regulations promulgated by the Commissioner pursuant to an insurance rate rollback initiative violated the Takings, Commerce, Due Process, Equal Protection and Supremacy Clauses, as well as the First Amendment and the McCarran-Ferguson Act. 15 U.S.C. §§ 1011-1015. The district court dismissed the claims as unripe, and invoked the Younger, Burford, and Colorado River abstention doctrines as additional bases for postponing resolution of the issues. We affirm the decision of the district court.

FACTUAL AND PROCEDURAL BACKGROUND

On November 8, 1988, California voters passed Proposition 103, which required insurers to reduce premium rates to twenty percent below the rates in effect the previous year and to maintain those rates for one year; after that year, insurers would be permitted to increase their rates only after having received the prior approval of the Commissioner. On November 9, a group of insurers petitioned the California Supreme Court to declare portions of Proposition 103 unconstitutional; in the resulting decision, Calfarm Ins. Co. v. Deukmejian, 48 Cal.3d 805, 258 Cal.Rptr. 161, 771 P.2d 1247 (1989), the Court held unconstitutional a provision in the initiative which provided that only those insurers "threatened with insolvency" might be exempt from the rollback, but found that provision severable, and otherwise upheld the proposition. 48 Cal.3d at 818-19, 821-26, 258 Cal.Rptr. 161, 771 P.2d 1247. The Calfarm court emphasized that individual insurers must be permitted to petition the Insurance Commissioner for approval of higher rates, and to make a showing that the rollback rate was confiscatory as applied to them. Id. at 825-26, 258 Cal.Rptr. 161, 771 P.2d 1247. Subsequently, 460 insurers filed 4,089 applications for exemption from the rollback requirements and instituted 50 lawsuits; the Chief Justice of the California Supreme Court, in his capacity as Chairperson of the Judicial Council, ordered the cases consolidated before a single judge in the Los Angeles Superior Court.

The Commissioner promulgated regulations for implementing Proposition 103 and evaluating insurance company rates for the rollback year (1988-89); ² these regulations strictly govern the manner in which an insurer's losses, expenses and profits are to be calculated. They provide that in calculating a firm's losses, actual loss data from 1989 is to be used. Cal.Code Regs. tit. 10 § 2645.4. Fixed expenses are established at the lower of either actual expenses incurred in 1989, or an amount calculated using an efficiency standard. ³ Certain expenses, however, such as those for political contributions and lobbying, must be excluded from the calculus. Cal.Code Regs. tit. 10 § 2644.10.

In determining an insurer's allowable profit, the regulations establish the after-tax rate of return as 10%; they further establish for various lines of insurance the appropriate capital base, as calculated by a fixed leverage ratio, ⁴ to which that rate of return is to be applied. Cal.Code Regs. tit. 10 § 2645.6(a), (b). However, when an insurer has operated on less surplus than is prescribed by the leverage ratios established in the regulations, its actual leverage ratio shall be used. Cal.Code Regs. tit. 10 § 2645.6(c).

Moreover, the regulations provide that insurers are entitled to petition the Commissioner for a hearing in which they might either demonstrate that the established rate is confiscatory, or seek approval of higher rates; they may not, however, challenge any of the generic determinations, such as the efficiency standards or leverage ratios, set forth in the regulations. Cal.Code Regs. tit. 10 § 2646.4.

The Commissioner made a preliminary determination of Fireman's Fund's rollback obligation and issued an order to show cause why Fireman's Fund should not be liable for the projected amount. Fireman's Fund then challenged the regulations in the district court, alleging that because the generic determinations contained therein require the exclusion of certain expenses, thus treating those expenses as profit, the firms' profit bases are artificially enlarged and their rollback obligations are thereby increased. Fireman's Fund made a similar argument with respect to the leverage ratios, arguing that when generic determinations rather than actual capital figures are used, the capital base is artificially diminished; consequently, when the appropriate rate of return is multiplied by that capital base, the allowable profit will be reduced as well. The insurers argued that the disallowed expenses in conjunction with the decreased capital base will ultimately have the effect of producing a final rate that is confiscatory. They further maintained that these provisions constituted Takings, Due Process, Equal Protection, First Amendment, Commerce and Supremacy Clause as well as McCarran-Ferguson Act violations. The district court dismissed the claims as unripe, and invoked various abstention doctrines as additional bases for refusing to pass upon Fireman's Fund's claims. The insurers now appeal.

STANDARD OF REVIEW

Ripeness is a question of law reviewed de novo. Dodd v. Hood River County, 59 F.3d 852, 857 (9th Cir.1995).

Whether the requirements for abstention have been met is reviewed de novo. Agriesti v. MGM Grand Hotels, Inc., 53 F.3d 1000, 1001 (9th Cir.1995). When the requirements for abstention have been met, the district court's decision whether to abstain is reviewed for abuse of discretion. United States v. Rubenstein, 971 F.2d 288, 294 (9th Cir.1992).

DISCUSSION

I. Ripeness of the Takings Claims

The district court held that constitutional challenges to rate-making formulas must await their application and the determination of the final rate: "[I]t is only the result and not the rules themselves that is put to a constitutional test." Fireman's Fund v. Garamendi, 790 F.Supp. 938, 949 (N.D.Cal.1992). Relying upon Federal Power Comm'n v. Hope Natural Gas and Duquesne Light Co. v. Barasch, the Commissioner makes a similar argument before this court, maintaining that the methodology employed in rate-making proceedings is irrelevant. See Federal Power Comm'n v. Hope Natural Gas, 320 U.S. 591, 602, 64 S.Ct. 281, 287-88, 88 L.Ed. 333 (1944) ("[I]t is the result reached not the method employed which is controlling. It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry ... is at an end.") (citations omitted); see also Duquesne Light Co. v. Barasch, 488 U.S. 299, 314, 109 S.Ct. 609, 619, 102 L.Ed.2d 646 (1989) ("[A]n otherwise reasonable rate is not subject to constitutional attack by questioning the theoretical consistency of the method that produced it.... Errors to the detriment of one party may well be canceled out by countervailing errors or allowances in another part of the rate proceeding.").

The Commissioner's reliance upon Hope Natural Gas and Duquesne, however, is misplaced, and demonstrates a misunderstanding of Fireman's Fund's claims; indeed, adhering to the Commissioner's very broad proposition would eviscerate the distinction between facial and as-applied challenges. Where it is alleged that a challenged provision will inevitably have an unconstitutional effect, the Supreme Court has in some cases permitted review even when the impermissible consequences have not yet occurred. See Duke Power Co. v. Carolina Envtl. Study Group, 438 U.S. 59, 81-82, 98 S.Ct. 2620, 2634-35, 57 L.Ed.2d 595 (1978) (holding that facial challenge was ripe because actual occurrence of nuclear accident would not advance the court's ability to deal with legal issues and all parties would be adversely affected by delayed resolution); Regional Rail Reorganization Act Cases (Blanchette v. Connecticut General Ins. Corp.), 419 U.S. 102, 143, 95 S.Ct. 335, 358, 42 L.Ed.2d 320 (1974) (holding that "[w]here the inevitability of the operation of a statute against certain individuals is patent, it is irrelevant to the existence of a justiciable controversy that there will be a time delay before the disputed provisions will come into effect."); see also Yee v. City of Escondido, 503 U.S. 519, 534, 112 S.Ct. 1522, 1532, 118 L.Ed.2d 153 (1992) (holding that a challenge to a rent control ordinance was ripe, even where no rent increases had been...