Geeslin v. State Farm Lloyds
| Decision Date | 22 May 2008 |
| Docket Number | No. 03-05-00067-CV.,03-05-00067-CV. |
| Citation | 255 S.W.3d 786 |
| Parties | Mike GEESLIN, Commissioner of Insurance, and Texas Department of Insurance, Appellants v. STATE FARM LLOYDS, Appellee. |
| Court | Texas Court of Appeals |
Karen Pettigrew, Asst. Atty. Gen., Financial Litigation Div., Austin, for Appellants.
Susan G. Conway, Graves, Dougherty, Hearon & Moody, PC, Austin, for Appellee.
Before Chief Justice LAW, Justices WALDROP and HENSON.
This appeal concerns the validity of a rate order issued by the commissioner of insurance. The rate order was based on now-expired article 5.26-1 of the insurance code, which provided the procedure by which Texas homeowners insurance providers were to file their initial homeowners insurance rates with the Texas Department of Insurance ("TDI" or the "department") as required by Senate Bill 14 in 2003.1 Tex. Ins.Code Ann. art. 5.26-1 (West Supp.2004-2005). The rate order required State Farm Lloyds to reduce its filed homeowners insurance rates by twelve percent. State Farm Lloyds sought review in district court. Finding that article 5.26-1 was unconstitutional and that State Farm Lloyds's due process rights had been violated, the district court vacated the rate order. Appellants now seek reversal of the district court's judgment. We conclude that the portion of section 4 of article 5.26-1 setting out what insurers are required to prove on appeal to the commissioner ("the proof provision") is unconstitutional on its face and as applied to State Farm Lloyds. Therefore, we affirm the judgment of the trial court in part as to its findings that the provision of former Article 5.26-1, section 4, which requires an insurer to prove that a rate reduction would produce inadequate rates, is unconstitutional and that State Farm Lloyds's due process rights were violated. Because we further hold that the unconstitutional proof provision is severable, we sever that provision, reverse the trial court's judgment as to the constitutionality of the remainder of the statute, and remand to the department for further proceedings consistent with this opinion.
From 1991 through 2003, Texas insurance companies operated under a system of flexible rate setting, which allowed insurers to charge up to 30 percent more or less than a state-promulgated benchmark rate. House Research Organization, Bill Analysis, Tex. S.B. 14, 78th Leg., R.S. (2003). During that time period, in an effort to avoid regulation, insurance companies began shifting more and more of their business toward unregulated branches called Lloyd's companies. Id. Originally unregulated because they generally covered specialty risks at lower-than-standard rates, Lloyd's companies grew from about 20 percent of the market in 1991 to about 95 percent of the market in 2003. Id. Thus, by 2003, only five percent of the Texas homeowners insurance market was regulated. Id.; House Comm. Report, Tex. S.B. 14, 78th Leg., R.S. (2003). In this mostly unregulated market, Texas consumers were paying the highest premiums in the country, often for policies providing reduced coverage. Id.
To address these issues, the Texas Legislature passed Senate Bill 14, which amended the insurance code to establish a new system for regulating residential property insurance rates. Act of June 2, 2003, 78th Leg., R.S., ch. 206, 2003 Tex. Gen. Laws 907. Under the new system, insurers were required to file their rates with TDI, and TDI would then review and either approve or disapprove those rates.
The changes to the system of insurance regulation were implemented in three phases. Article 5.26-1, effective June 11, 2003, through September 1, 2004, established a one-time procedure for quickly bringing all Texas homeowners insurance providers under this new rate-regulation program. According to its terms, insurers were required to file their initial regulated rates with TDI within twenty days of the effective date of SB 14, June 11, 2003, and to implement the rates immediately. Tex. Ins.Code Ann. art. 5.26-1, § 2(a). Within forty days of the filing deadline, TDI was required to review and either approve or modify the initial rates. Id. art. 5.26-1, § 2(b).
After the initial filing, article 5.142, effective June 11, 2003, through December 1, 2004, provided temporary rate-regulation procedures. Id. art. 5.142 (West Supp. 2004-2005). Under the terms of article 5.142, insurers were required to file their rates with TDI and await the commissioner's approval before implementing these rates. Id. art. 5.142, § 5.
Finally, after December 1, 2004, article 5.13-2 allowed insurers to file rates and implement the rates immediately without prior approval. Id. art. 5.13-2, § 5 (West Supp.2005). Under this permanent file-and-use system, insurers can use proposed rates immediately, but TDI can review and either disapprove the rates before they go into effect or disapprove further use of the filed rates after they go into effect. Id. art. 5.13-2, §§ 5, 7.
State Farm Lloyds filed with TDI on June 26, 2003, submitting its then-existing rates as its initial rates. On August 18, 2003, TDI notified State Farm Lloyds of its determination that the rates must be reduced by twelve percent, stating that the rates "are not reasonable for the risks to which they apply." State Farm Lloyds appealed.
Pursuant to the terms of article 5.26-1, a hearing on State Farm's appeal was to be conducted before the commissioner. TDI noticed the case for hearing fifteen days from the date that State Farms Lloyds filed its appeal. In preparation for the hearing, State Farm Lloyds served discovery requests on TDI, including deposition notices, requests for documents, and interrogatories, seeking to determine how TDI had set the rate reduction for State Farm Lloyds. Although State Farm Lloyds's discovery requests were served pursuant to the department's rules of practice and procedure for contested cases, TDI refused to produce for deposition any of its employees with knowledge of relevant facts about TDI's rate reduction, denied all of State Farm Lloyds's requests for documents and interrogatories, and withheld the workpapers and exhibits of its testifying expert until after State Farm Lloyds prefiled its direct case, arguing that the case was a rate case, not a contested case, and, therefore, the contested case discovery rules did not apply. See 28 Tex. Admin. Code §§ 1.82-.84 (2003). After a pretrial hearing on August 25, 2003, TDI agreed to present one of its two designated testifying experts for a limited, one-and-a-half-hour deposition.
The commissioner heard the merits of the case on September 2 and 3, 2003. To prevail in its appeal under the terms of article 5.26-1, State Farm Lloyds was required to show by clear and convincing evidence that the rate reduction specified by TDI would produce inadequate rates. An inadequate rate was defined as a rate that is "insufficient to sustain projected losses and expenses" and "endangers the solvency of an insurer using the rate." Tex. Ins.Code Ann. art. 5.142, § 2(b)(2); see also id. art. 5.26-1, § 1(b) (). Following the hearing, the commissioner issued a final order affirming the department's rate reduction, stating in a single conclusion of law that the rates recommended by TDI would produce adequate base rates for State Farm Lloyds.
State Farm Lloyds sought judicial review in district court. The district court granted summary judgment in favor of State Farm Lloyds, declaring appellants' actions void and unenforceable, vacating the commissioner's rate order, and denying appellants' request to remand the case for further administrative proceedings. According to the district court, article 5.26-1 was unconstitutional on its face and as applied, violating the due course of law provision of the Texas Constitution and the due process clause of the United States Constitution. Article 5.26-1 was also unconstitutional, the court found, because it violated the takings provisions of both the Texas Constitution and the United States Constitution. Further, the court found that appellants had denied State Farm Lloyds due process by failing to follow the applicable contested case provisions of the Administrative Procedure Act ("APA") and TDI's own contested case rules. See Tex. Gov't Code Ann. §§ 2001.051-.178 (West 2000); 28 Tex. Admin. Code §§ 1.1-.90 (2003). The commissioner and TDI appealed to this Court.
The material facts are not in dispute, and the propriety of summary judgment is a question of law. Westcott Commc'ns, Inc. v. Strayhorn, 104 S.W.3d 141, 145 (Tex.App.-Austin 2003, pet. denied). We review the district court's summary judgment de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex.2005); Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex.2003). When the material facts are not in dispute, both parties move for summary judgment, and the district court grants one motion and denies the other, we review the summary judgment evidence presented by both sides, determine all questions presented, and render the judgment that the district court should have rendered. Texas Workers' Comp. Comm'n v. Patient Advocates of Tex., 136 S.W.3d 643, 648 (Tex.2004); FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex.2000).
When the constitutionality of a statute is challenged, we begin our review with a presumption of validity, Sax v. Votteler, 648 S.W.2d 661, 664 (Tex.1983), and the burden is on the party attacking the statute to establish its unconstitutionality. Texas Pub. Bldg. Auth. v. Mattox, 686 S.W.2d 924, 927 (Tex.1985); Robinson v. Hill, 507 S.W.2d 521, 524 (Tex.1974). In construing a statute, we presume that:
(1) compliance with the constitutions of this state and the United States is intended;
(2) the entire statute is...
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