State Farm Gen. Ins. Co. v. Lara

Decision Date29 October 2021
Docket NumberD075529
Citation71 Cal.App.5th 148,286 Cal.Rptr.3d 146
Parties STATE FARM GENERAL INSURANCE COMPANY, Plaintiff and Appellant, v. Ricardo LARA, as Insurance Commissioner, etc., Defendant and Appellant; Consumer Watchdog, Intervenor and Appellant.
CourtCalifornia Court of Appeals Court of Appeals

Gibson, Dunn & Crutcher, Theodore J. Boutros, Jr., Kristin A. Linsley, Kahn A. Scolnick ; Hogan Lovells, Vanessa O. Wells and Victoria C. Brown for Plaintiff State Farm General Insurance Company.

LevatoLaw and Ronald C. Cohen for California Business Roundtable as Amicus Curiae on behalf of Plaintiff.

California Appellate Law Group, Rex Heinke, Jessica Weisel ; Akin Gump Strauss Hauer & Feld and Shawn Hanson for Personal Insurance Federation of California and National Association of Mutual Insurance Companies as Amici Curiae on behalf of Plaintiff.

Xavier Becerra and Rob Bonta, Attorneys General, Diane S. Shaw and Tamar Pachter, Assistant Attorneys General, Molly K. Mosley and Michael Sapoznikow, Deputy Attorneys General, for Defendant Ricardo Lara in his official capacity as Insurance Commissioner of the State of California.

Strumwasser & Woocher, Michael J. Strumwasser, Bryce A. Gee, Caroline C. Chiapetti; Harvey Rosenfield and Pamela Pressley, for Intervenor Consumer Watchdog.

HUFFMAN, Acting P. J.


This appeal arises from an application by State Farm General Insurance Company (SFG) to increase its homeowners' insurance rates, under the prior approval system implemented by Proposition 103 ( Ins. Code, § 1861.01 et seq. )1 Nonprofit Consumer Watchdog (CW) intervened in the proceeding, and challenged SFG's proposed rates. Section 1861.05, subdivision (a) ( § 1861.05(a) ), requires the Insurance Commissioner to "consider whether the rate mathematically reflects the insurance company's investment income." The Commissioner relied on regulation section 2644.20, addressing projected yield, to use the combined annual statement of SFG's parent company, State Farm Mutual Automobile Insurance Company (State Farm Mutual) and its property-casualty affiliates. The Commissioner ordered SFG to decrease its rate retroactively and issue refunds (Rate Order).

SFG filed a petition for writ of mandate. The superior court determined section 1861.05(a) requires the rate to mathematically reflect the applicant insurer's income, and the Commissioner's interpretation and application of regulation section 2644.20 to use the income of SFG's affiliates conflicted with the statute. The court entered judgment for SFG, issued a peremptory writ of mandate requiring the Rate Order be set aside, and remanded remaining issues to the Commissioner, including the propriety of the retroactive rate and refund.

The Commissioner and CW (Appellants) appeal from the judgment and writ of mandate, contending the Commissioner properly interpreted the statute and regulation and had authority to set an earlier effective date and require refunds.2 SFG cross-appeals from the order directing remand to the Commissioner, which it argues is unnecessary in light of the impropriety of the retroactive rate and refund as well as a subsequent rate change for SFG.

We conclude the superior court correctly determined section 1861.05(a) requires use of the applicant insurer's income, and the Commissioner erred in interpreting and applying Regulation 2644.20 here. We further conclude the retroactive rate and refund were impermissible, and remand is not warranted under the circumstances. We direct the superior court to modify the writ of mandate to require the Rate Order be vacated to the extent inconsistent with this opinion, and affirm the judgment and writ of mandate in all other respects.

A. Proposition 103

Proposition 103 was approved by voters in November 1988, and made "numerous fundamental changes in the regulation of automobile and other types of insurance," including homeowners' insurance and excluding certain lines not at issue here. ( Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal.3d 805, 812, 258 Cal.Rptr. 161, 771 P.2d 1247 ( Calfarm ); id. at p. 812, fn. 1, 258 Cal.Rptr. 161, 771 P.2d 1247.) Previously, insurers set rates in an " ‘open competition’ system," and rates had increased significantly. ( 20th Century Ins. Co. v. Garamendi (1994) 8 Cal.4th 216, 300, 32 Cal.Rptr.2d 807, 878 P.2d 566 ( 20th Century ); see Stats. 1988, Prop. 103, uncodified § 1 [Findings & Declaration.].) Proposition 103 explained its purpose was "to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace, to provide for an accountable Commissioner, and to ensure that insurance is fair, available, and affordable for all Californians." (Stats. 1988, Prop. 103, uncodified § 2 ["Purpose"]; see also id. , uncodified § 8, subd. (a) ["This Act shall be liberally construed and applied in order to fully promote its underlying purposes"].)

With respect to rate setting, Proposition 103 had two main components. First, it imposed a rollback of rates to 20 percent less than their November 1987 levels, for one year after passage (through November 1989). ( § 1861.01, subd. (a).) This is sometimes called the "rollback year" or "rollback period." ( 20th Century, supra , 8 Cal.4th at pp. 243, 253, 32 Cal.Rptr.2d 807, 878 P.2d 566.) During this period, insurers could set a different rate to avoid confiscation, subject to Commissioner review and the risk of having to refund amounts in excess of a minimally non-confiscatory rate. ( § 1861.01, subd. (b) ; 20th Century , at p. 254, 32 Cal.Rptr.2d 807, 878 P.2d 566.) For purposes of this appeal, "confiscatory" can be understood generally to mean "inadequate." (See Calfarm, supra , 48 Cal.3d at p. 822, fn. 15, 258 Cal.Rptr. 161, 771 P.2d 1247.)3

Second, Proposition 103 implemented a "prior approval" system, which provided that as of November 1989, "insurance rates subject to this chapter must be approved by the commissioner prior to their use." ( § 1861.01, subd. (c).) Section 1861.05(a) addresses approval of rates, and provides:

"No rate shall be approved or remain in effect which is excessive, inadequate, unfairly discriminatory or otherwise in violation of this chapter. In considering whether a rate is excessive, inadequate or unfairly discriminatory, no consideration shall be given to the degree of competition and the commissioner shall consider whether the rate mathematically reflects the insurance company's investment income."

The remainder of section 1861.05 sets forth procedural requirements for rate applications ( § 1861.05, subd. (b) ) and public notice provisions ( § 1861.05, subds. (c) - (d) ).

The California Supreme Court has explained that section 1861.05(a)'s requirement that the Commissioner " ‘shall consider whether the rate mathematically reflects the insurance company's investment income’ ... impliedly requires that the commissioner shall offset the latter against the former." ( 20th Century, supra , 8 Cal.4th at pp. 290-291, 32 Cal.Rptr.2d 807, 878 P.2d 566.) Insurance companies have two main sources of income: premiums and investments. (See Rejda & McNamara, Principles of Risk Management and Insurance (12th ed. 2014) p. 127; accord, Werner and Modlin, Basic Ratemaking (5th ed. 2016) p. 5 [describing income sources as "underwriting profit and investment income"].) Thus, Proposition 103 provides for lower premium rates when investment income is high, and higher rates when that income is low. This is consistent with a "total return" ratemaking approach, in which the premium an insurer can charge is a function of other available income sources, thus avoiding an unreasonable rate of return. That said, Proposition 103 did "not establish a detailed method of processing and deciding rate applications," and "[m]uch [was] necessarily left to the [Commissioner] ...." ( Calfarm, supra , 48 Cal.3d at p. 824, 258 Cal.Rptr. 161, 771 P.2d 1247.) The Commissioner promulgated regulations to implement Proposition 103, which we describe shortly.

Calfarm and 20th Century were early and significant decisions regarding Proposition 103, and specifically the rollback period. In Calfarm , the California Supreme Court "upheld, inter alia, Proposition 103's provision requiring rate rollbacks." ( 20th Century, supra , 8 Cal.4th at p. 240, 32 Cal.Rptr.2d 807, 878 P.2d 566.) A few years later, in 20th Century , the Court upheld the "implementation of Proposition 103's rate rollback requirement provision by the Insurance Commissioner." ( Ibid. )

B. Regulations

The regulations contain formulas for determining the "maximum permitted earned premium" and "minimum permitted earned premium" (Reg. §§ 2644.2, 2644.3); these turn in part on "investment income factors" (Id. , § 2644.19) and may be subject to variances (Id. , § 2644.27). Broadly speaking, investment income is calculated by multiplying projected yield by other figures defined elsewhere in the regulations, regarding reserves, surplus, and federal income taxes. (Id. , § 2644.19.)

Projected yield is central to this appeal. This factor initially was based on "imbedded yield," calculated using "the insurer's net investment income." (Register 92, No. 3, p. 728.30; Register 92, Nos. 15-17, p. 728.32; Register 95, Nos. 10-11, p. 728.26.) Effective 2007, the regulation was amended as follows:

" ‘Projected yield’ means the weighted average yield computed using the insurer's actual portfolio and yields currently available on securities in US capital markets. The weights shall be determined using the insurer's most recent consolidated statutory annual statement, and shall be computed by dividing the insurer's assets in each separate asset class ...."

(Register 2007, No. 1; reg. § 2644.20, subd. (a).) A set yield was assigned for each asset class, with bonds having lower yields and stocks having higher ones. (Reg. § 2644.20, subd. (c).)4

Reserves are funds for expected liabilities (Werner...

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