State Compensation Ins. Fund v. McConnell, etc., Industrial Indem. Co., Intervener
| Decision Date | 02 March 1956 |
| Citation | 294 P.2d 440,46 Cal.2d 330 |
| Court | California Supreme Court |
| Parties | STATE COMPENSATION INSURANCE FUND et al., Plaintiffs and Appellants, v. F. Britton McCONNELL, as State Insurance Commissioner, etc., Defendant and Respondent; Industrial Indemnity Company, Intervener and Appellant. S. F. 19164. |
Donald Gallagher, Loton Wells, McFarland, Laumelster & Fedon, San Francisco, Edward R. Young and John F. O'Hara, Los Angeles, for plaintiffs and appellants.
Edmund G. Brown, Atty. Gen., and Harold B. Haas, Deputy, Atty. Gen., for respondent.
Robert Minge Brown, San Francisco, Sidney L. Weinstock, Weinstock, Anderson ,& Chase, and McCutchen, Thomas, Matthew, Griffiths & Greene, San Francisco, James, B. Donovan, New York City, amici curiae on behalf of respondent.
Plaintiffs (State Compensation Insurance Fund and six California insurance companies) filed an action against defendant (the California Insurance Commissioner) for declaratory relief, injunction and mandamus, to prevent a certain order changing the present system of rating workmen's compensation insurance premiums from becoming effective.
Another California insurance company, Industrial Indemnity Company, intervened as plaintiff.
From a judgment sustaining the validity of the order, all plaintiffs appeal.
First: Did the defendant insurance commissioner have the power to promulgate and adopt Ruling 67 changing the method of rating premiums for workmen's compensation insurance?
Yes. Reduced to its bare rudiments, Ruling 67 provides for two new rating systems: (1) the 'Retrospective' plans, and (2) a 'Premium Discount Plan.' Within the general retrospective scheme there are three separate plans, 'D,' 'A,' and 'B.' Thus, we have four plans to consider.
All three retrospective plans have this in common: Final determination of premium cost is delayed, being computed retrospectively after the expiration of the insurance and on the basis of paid and actual loss experience during the insurance period. Each insured's premium is determined on an individual basis, without reference to other employers or to particular fields or occupations. (However, in each retrospective plan, a sort of 'tentative' premium is paid initially, and then adjusted at the end of the insurance period to the actual premium.)
Plan D: Plan D provides for retrospective determination of premium for employers who produce $5,000 or more in annual premium from operations in all states. Determination may be on an annual or three-year basis. The unique feature of Plan D is that the employer may combine premiums from other lines of liability insurance with his workmen's compensation premium in order to become eligible for this plan. (This multiline provision is not in either Plan A or B.) In brief, Plan D may be chosen if annual premium is over $5,000, based on premiums from all states, including other types of liability insurance. (Test: $5,000 total, multistate, multiline.)
Plan A: Plan A provides for retrospective determination of premium for emploers who produce $1,000 or more in workmen's compensation premium in all states. (Workmen's compensation only; not a multiline plan.) The standard (or tentative) premium in Plan A is always the maximum premium, and the minimum premium is higher than in Plan B. (Test: $1,000 total, multistate, workmen's compensation only.)
Plan B: Plan B provides for retrospective determination of premium for employers who produce $1,000 or more in workmen's compensation premium in all states. (Workmen's compensation only; not a multiline plan.) In this plan, the standard (tentative premium) is lower than the maximum, and the minimum premium is lower, correspondingly, than the minimum premium in Plan A. These maximum-minimum levels are that chief differences between Plans A and B. (Test: $1,000 total, multistate, workmen's compensation only.)
How retrospective plans work: Retrospective rating is defined in Appendix B to Ruling 67 as 'a plan or method which permits adjustment of the final premium for a Risk on the basis of its own loss experience subject to Maximum and Minimum limits.' In tabular plans A and B, the maximum and minimum premiums are fixed in relation to the standard (tentative) premium, which in Plan A is the maximum and in Plan B is much lower. In Plan D, the selection of maximum and minimum limits is left (within limits) to agreement between the buyer and seller. Within the limits of the maximum and minimum, Ruling 67 provides formulae reflecting loss experience and costs used in determining the final cost of the insurance. The appropriate formula is applied at the end of the insurance period, and the result is an adjustment of the standard premium to reflect the actual loss and cost experience during the insurance period. This adjustment results in the retrospective rate.
This plan provides for graduated expense loading determined through a scale of discounts graduated according to the annual amount of the employer's premium. To qualify for this plan, the employer must have premiums from workmen's compensation in excess of $1,000. This total may include premiums paid in all states to one insurer, but may not include other lines of liability insurance. (Multistate, but not multiline.) Then, the discount is applied to the California portion of the premium. This discount is received no matter how small the California portion may be; that is, the California portion need not be over $1,000. Furthermore, the discount is granted irrespective of loss experience.
'The California portion of the total workmen's compensation standard premium of the policy or group of policies combined in accordance with this Rule shall be subject to the following discounts:
Total Workmen's Discounts
Compensation Applicable
Standard to California
Premium Portion
First $ 1,000 None
Next 4,000 7.1%
Next 95,000 12.2%
Over 100,000 13.7%
'The foregoing premium discounts shall not be applicable to any standard premium subject to retrospective rating.' (Rule VII (2) Underwriting and Auditing Procedure of the California State Insurance Commissioner.)
In Statutes 1913, chapter 176, a compulsory workmen's compensation system and the State Compensation Insurance Fund were established by the Legislature, without any express constitutional authority therefor. To give legality to an already accomplished fact, article XX, section 21, California Constitution, authorizing the Legislature to 'create, and enforce a complete system of workmen's compensation,' was adopted in 1918. Pursuant thereto, we now have Insurance Code, sections 11730 to 11742, covering 'State Rate Supervision.' 1
By Ruling 67, the commissioner seeks to modify existing minimum workmen's compensation premium rates by putting into effect two new rating plans, one of them called the 'Premium Discount Plan' and the other the Retrospective Rating Plan.'
The purpose of both rating plans is to introduce into the California workmen's compensation insurance minimum rate structure the principle of 'expense graduation by size of risk' as a means of reflecting in premium rates the commissioner's finding that an insurance company's expense involved in handling individual risks represents a smaller percentage of the premium in the case of larger risks than in the case of smaller risks.
The present system, under which minimum premium rates are loaded by the commissioner for expense on a flat percentage basis without reference to possible variation of expense by size of risk, involves a redundancy of the expense item in the case of the larger risks. The commissioner has concluded that the proposed modifications of the rating structure will maintain adequate minimum rates and at the same time reduce existing expense redundancy, and, further, that their effect will be to promote competition between all types of workmen's compensation insurance carriers and to reduce rates charged to the public.
The two plans, although similar in purpose, seek to accomplish the purpose in different ways and may be considered separately.
In the case of the Premium Discount Plan, the commissioner seeks to accomplish the purpose by providing that all workmen's compensation policies involving premiums in excess of $1,000, computed at the regular manual rates, shall be subject to a graduated discount in favor of the insured upon the California portion of the premium.
Plaintiffs contend that this Premium Discount Plan exceeds the powers granted to the commissioner by the California Workmen's Compensation Insurance Minimum Rating Law.
Insurance Code sections 11732 and 11734 provide that the commissioner shall approve or issue as adequate for all admitted insurers a classification of risks and premium rates, uniform as to all insurers affected. The commissioner is not restricted by these sections (as contended by plaintiffs) to a mere grouping of hazard in each with a corresponding rate for each such classification. Rate-making involves a consideration, not only of the particular hazards of various occupations, but also of losses (pure premium) and of expense (expense loading). This is especially true where, as under our statute, the rate must be adequate. Expense is, therefore, not only a relevant, but an essential factor to be considered.
It is true that the commissioner in the past has always reflected this expense factor in the rate by means of a flat percentage loading. But, there is nothing in the statute which, expressly or impliedly, restricts him to that mode of considering and reflecting the expense factor.
The commissioner concluded in making up the Premium Discount Plan that a flat percentage expense loading produces redundancy in rates beyond the requirements of adequacy. He may thus make such modification of the flat...
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