Maryland Fire Underwriters Rating Bureau v. Insurance Commissioner

• Decision Date: 05 January 1971
• Docket Number: No. 197,197
• Parties: MARYLAND FIRE UNDERWRITERS RATING BUREAU et al. v. INSURANCE COMMISSIONER of Maryland.
• Court: Maryland Court of Appeals

Page 258

260 Md. 258

272 A.2d 24

MARYLAND FIRE UNDERWRITERS RATING BUREAU et al. v. INSURANCE COMMISSIONER of Maryland.

No. 197.

Court of Appeals of Maryland.

Jan. 5, 1971.

Alan N. Gamse and Norman P. Ramsey, Baltimore, for appellants.

Richard G. McCauley, Asst. Atty. Gen. (Francis B. Burch, Atty. Gen., Baltimore, on the brief), for appellee.

Argued before HAMMOND, C. J., and McWILLIAMS, FINAN, SINGLEY and DIGGES, JJ.

SINGLEY, Judge.

This is an appeal from judgments entered in the Baltimore City Court in favor of Maryland's Insurance Commissioner in three proceedings which challenged the validity of orders entered by the Commissioner denying requests for authority to increase certain insurance rates.

Late in 1968, and early in 1969, three insurance rating bureaus, Maryland Fire Underwriters Rating Bureau, Multi-Line Insurance Rating Bureau and Transportation Insurance Rating Bureau (the Rating Bureaus) had made virtually identical but not simultaneous filings with the Commissioner in support of a proposed increase of 10.5% in premiums to be charged on home-owners insurance policies, assuming no change in deductible options. The filings were made under our Insurance Code, Code (1957, 1968 Repl.Vol.) Art. 48A (the Act). The purpose of the Act's Subtitle 16, which deals with rates, is stated in § 241:

'The purpose of this subtitle is to promote the public welfare by regulating insurance rates to the end that they shall not be excessive, inadequate or unfairly discriminatory, and to authorize and regulate cooperative action among insurers in rate making and in other matters within the scope of this subtitle. * * *'

The Act, after providing again in § 242(b)(1)(ii) that 'Rates shall not be excessive, inadequate or unfairly discriminatory' continues in § 242(b)(1) (iii):

'Due consideration shall be given to past and prospective loss experience within and outside this State, to the conflagration and catastrophe hazards, to a reasonable margin for underwriting profits and contingencies, or dividends, savings or unabsorbed premium deposits allowed or returned by insurer to their policyholders, members or subscribers, to past and prospective expenses both countrywide and those specially applicable to the State, and to all other relevant factors within and outside this State; and in the case of fire insurance rates consideration shall be given to the experience of the fire insurance business during a period of not less than the most recent five-year period for which such experience is available.'

It was this section of the Act upon which the Rating Bureaus chose to rely.

In essence, what the filings did was to make use of an accepted actuarial technique. Tables had been prepared which showed the actual experience of companies which wrote homeowners insurance in Maryland during the years 1961-1966, both inclusive. Earned premiums were then adjusted retrospectively to reflect changes in rates which had taken place, whether increases or decreases, in 1961, 1963 and 1965. No account was taken, however, of a 'civil disorder loading' authorized by the Commissioner in 1968. ¹ Losses actually experienced were then adjusted for each year to reflect a trended cost factor. Finally, a catastrophic windstorm loss factor was developed by extrapolation, since there was no experience available for homeowners policies, and resort was had to the losses sustained by companies writing policies of fire and extended coverage insurance. The result produced an average loss ratio, i. e., adjusted losses as a percentage of adjusted earned premiums, of 65.6% for the six year period. The filings asserted that 60% was the 'balance point,' i. e., that losses in excess of that percentage made underwriting unprofitable.

In accordance with the provisions of § 242(c)(4) of the Act the filings would have been deemed to meet the requirements of the Act after 15 days unless disapproved by the Commissioner, or unless the time were extended. ² There were several extensions of the 15 day period during which the Rating Bureaus supplied additional information in response to the Commissioner's requests. Finally, after the last extension had expired, the Rating Bureaus notified the Commissioner that the increased rates would be put into effect on 1 June 1969.

On 3 June, the Commissioner issued an order scheduling a hearing on a date subsequent to 16 June, to determine whether the new rates were 'excessive, inadequate or unfairly discriminatory,' which § 242(d)(3) permits after a filing has become effective. At the hearing on 25 June, the only testimony of consequence was that of Eugene Graham, who held the position of Actuary Three in the State Insurance Department. Mr. Graham testified in support of a table which he had prepared, covering the five year period 1962-1966, both inclusive, using the figures submitted by the Rating Bureaus respecting premiums actually earned and losses actually incurred. After adjusting losses by the use of a factor of 12.5% to reflect rising construction costs, Graham developed an average loss ratio of 55.9% for the five year period.

Mr. Graham reached the conclusion that even if the Rating Bureau's 'filing in itself was not deficient, and the sixty percent loss ratio balance was correct, then it is the contention of the Property Division of the Insurance Department that the rates that went into effect on June 1st, 1969, are excessive.'

The Rating Bureaus offered no testimony in support of their filings, relying at the time on the contentions that the Commissioner had not met the burden of proof and the order scheduling the hearing was procedurally defective. The latter contention was seemingly abandoned. At the conclusion of the hearing, the Commissioner issued his finding and order. ³

'Pursuant to the power vested in me under Article 48A of the Annotated Code of Maryland (1968 Replacement Volume), I, Newton I. Steers, Jr., as Insurance Commissioner for the State of Maryland do hereby find that the filing made by the Maryland Fire Underwriters Rating Bureau on December 27, 1968 as amended by replies to requests by the Insurance Department for additional information, fails to meet the requirements of Article 48A in that:

1. The filing did not reflect the Civil Disorder Loading approved by this Department on July 25, 1968.

2. The filing included an allowance for catastrophic losses which was not justified.

3. The filing simply asserted an expense allowance of 40% and gave no breakdown or any support whatever to show that such expense allowance was proper.

4. The filing did not reflect any part of investment income in the figures for premiums earned or to be earned.

5. The filing disclosed unadjusted loss ratios for the five years ending December 31, 1966 which do not justify the rate increase requested.

'Accordingly, it is hereby ordered that any homeowners rate increases which were put into effect pursuant to the above filings shall not be effective after July 26, 1969. The homeowners rates which had been in effect prior to the effective date of the filing shall be used after July 26, 1969 pursuant to law.'

The Rating Bureaus entered timely appeals to the Baltimore City Court as permitted by § 245(2) of the Act. At the hearing, argument was largely focused on the Rating Bureaus' omission of the civil disorder loading and the inclusion of the catastrophic windstorm factor. From an order of that court affirming the Commissioner's order, this appeal was taken.

At the outset, it would be well to delineate the narrow scope of judicial review of legislative functions of the Commissioner arising under the rating subtitle of the Act. ⁴ The Act itself provides in § 245(2):

'All orders or decisions of the Commissioner shall be subject to review by appeal to the Baltimore City Court. * * *'

'If the Baltimore City Court finds that the Commissioner's order or decision is not supported by the preponderance of the evidence on consideration of the record as a whole, or is not in accordance with law, the court shall reverse or modify the Commissioner's order or decision in whole or in part.'

and then provides for the taking of an appeal to this Court as in other civil cases.

Judge Sodaro, who heard the case below, recognized the limits imposed by the Act:

'Being mindful of the statutory requirement that rates shall neither be excessive nor inadequate and unfairly discriminatory, and applying the principles of the appropriate decisions, the Court is unable to hold that a reasoning mind could not, using the preponderance of the evidence test, arrive at the conclusions asserted by the Commissioner. Nor can the Court upon consideration of all the testimony, including numerous exhibits, rule that the Commissioner's action was arbitrary and unreasonable. It appears that both his findings and conclusions were based on and supported by sufficient facts and proper factual inferences. It seems that he has followed legislative directive in reaching his factual conclusions on the...