State Farm Gen. Ins. Co. v. Lara
Decision Date | 29 October 2021 |
Docket Number | D075529 |
Citation | State Farm Gen. Ins. Co. v. Lara, 71 Cal.App.5th 148, 286 Cal.Rptr.3d 146 (Cal. App. 2021) |
Parties | STATE FARM GENERAL INSURANCE COMPANY, Plaintiff and Appellant, v. Ricardo LARA, as Insurance Commissioner, etc., Defendant and Appellant; Consumer Watchdog, Intervenor and Appellant. |
Court | California 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 PlaintiffState 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 DefendantRicardo 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.
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.2SFG 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.
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 );seeStats. 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 alsoid. , uncodified § 8, subd. (a)[].)
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);20thCentury , 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."(SeeCalfarm, 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:
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.(SeeRejda & McNamara, Principles of Risk Management and Insurance (12th ed. 2014)p. 127;accord, Werner and Modlin, Basic Ratemaking (5th ed. 2016)p. 5[ ].)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. )
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:
(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...
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 7-day Trial
- State Farm Gen. Ins. Co. v. Lara
-
Council for Educ. & Research on Toxics v. Starbucks Corp.
... ... , listed on or before March 15, 2019 as known to the state to cause cancer, that are created by and inherent in the ... " ( State Farm General Insurance Company v. Lara (2021) 71 Cal.App.5th ... ...
-
Day v. GEICO Cas. Co.
... ... include the broader coverage when effective in your state. The premium for each auto is based on the information we ... State Farm Fire & Cas. Co. , No. 20-cv-07074-WHO, 562 F.Supp.3d 469 ... Ins. Code. 1861.01(c). Prior to changing an insurance rate, an ... California Court of Appeal's decision in State Farm Gen. Ins. Co. v. Lara , 71 Cal. App. 5th 148, 188194, 286 ... ...
-
Blain v. Liberty Mut. Fire Ins. Co.
... ... state which respectively lowered ... the number of claims likely to be ... jurisdiction. See Chandler v. State Farm Mut. Auto Ins ... Co. , 598 F.3d 1115, 1122 (9th Cir. 2010) ... not alleged ... ” Associated Gen. Contractors of ... Cal., Inc. v. Cal. State Council of Carpenters , ... Commissioner Ricardo Lara (“Lara”) on April 13, ... 2020. (Doc. No. 15-6 at 2.) Exhibit ... ...
-
The Tide Shifts In California Covid Premium Refund Cases
...of California. Recently, the tide has shifted. In October of 2021, the Court of Appeal held in State Farm Gen. Ins. Co. v. Lara, 71 Cal. App. 5th 148, 188-92 (2021) that the DOI had no statutory authority to order retroactive premium refunds. In particular, the Lara court held that such ref......