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Association of California Insurance Companies v. Jones

In Association of California Insurance Companies v. Jones, 235 Cal. App. 4th 1009 (April 8, 2015), the California Second District Court of Appeal affirmed a judgment that the Insurance Commissioner (“Commissioner”) did not have the authority to promulgate California Code of Regulations, title 10, section 2695.183 (“Regulation”). The Commissioner promulgated the Regulation in 2010 in response to complaints from homeowners who did not have sufficient insurance to repair or rebuild their homes (which were damaged in the Southern California wild fires of 2003, 2007, and 2008) because the estimates of the replacement value of their homes were too low.

The Court characterized the Regulation as follows:

The introductory sentence of the Regulation prohibits a “licensee” from “communicatan estimate of replacement cost to an applicant or insured in connection with an application for renewal of a homeowners' insurance policy that provides coverage on a replacement cost basis” that does not satisfy the content and format provisions in the Regulation. Subdivision (a) of the Regulation states, among other requirements, that an estimate of replacement cost “shall include expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety” and requires in subdivision (a)(1) through (4) that the estimate include the cost of labor, building materials and supplies, overhead, profit, demolition, debris removal, permits, and architect's plans, and in subdivision (a)(5) that the licensee “consider[]” 11 designated “components and features of the insured structure.”

The estimate must itemize “the projected cost” of each expense listed in subdivision (a)(1) through (4), and the assumptions as to the components listed in subdivision (a)(5). (Reg., subd. (g)(2).) A copy of the estimate and any update of the estimate “must” be given to the applicant. (Reg., subds. (g)(1), (h).) Subdivision (e) requires that “reasonable steps” be taken to “verify … sources and methods used to generate the estimate of replacement cost” “no less frequently than annually.” The Regulation also imposes recordkeeping obligations on the licensee. (Reg., subd. (i).)

Of particular significance to the issue before us is subdivision (j) of the Regulation. It provides that “communicatcoverage on a replacement cost basis,” or any renewal thereof, “constitutes making a statement with respect to the business of insurance which is misleading and which by the exercise of reasonable care should be known to be misleading, pursuant to Insurance Code section 790.03.”

Plaintiffs, the Association of California Insurance Companies and the Personal Insurance Federation of California (“Associations”), filed a declaratory relief action seeking “a declaration that the Regulation was invalid because the Commissioner lacked authority to ‘regulate the underwriting of homeowner insurance’; section 790.03 did not authorize ‘the imposition of a single, detailed method for estimating the replacement cost of houses’; and the Regulation violated insurance companies' free speech rights under the First Amendment of the United States Constitution.” After the Associations’ motion for judgment on the pleadings was denied, the action proceeded to trial.

At trial, the Associations argued: (1) Insurance Code sections 790.10 (part of the Unfair Insurance Practices Act, “UIPA”) and 1749.85 do not grant the Commissioner the authority to promulgate the Regulation, as claimed, because (a) the UIPA merely allows the Commissioner to administer the UIPA, and enforce it as to unfair methods of competition that are already defined, and (b) the legislature’s definition of unfair methods of competition, codified in section 790.03, does not include the conduct addressed by the Regulation; (2) the Commissioner, in enacting the Regulation, did not follow the procedures required by section 790.06 for enforcement against unfair methods of competition not otherwise defined; (3) the Regulation would label estimates that do not comply with the format required by the Regulation as “unfair and deceptive,” even if the estimate is accurate; (4) the Regulation unlawfully restricts underwriting, because the Regulation requires all communications, other than those which “never come to the attention of an insured,” to comply with the Regulation, while, in practice, many internal communications do come to the attention of the insured; and (5) the Regulation does not satisfy the higher standard for government restriction of speech as announced in Central Hudson Gas & Elec. v. Public Serv. Comm'n, 447 U.S. 557 (1980).

The Commissioner asserted: (1) his authority is grounded in Insurance Code section 790.10 and the UIPA, which “must be construed broadly ‘to promote public welfare,’” citing to Calfarm Ins. Co. v. Deukmejian, 48 Cal. 3d 805 (1989), Credit Ins. Gen. Agents Assn. v. Payne, 16 Cal. 3d 651 (1976), and Ford Dealers Assn. v. Department of Motor Vehicles, 32 Cal. 3d 347 (1982) in support of his claim; (2) “the Commissioner has authority to promulgate a regulation prohibiting a specific type of misleading statement from being communicated to purchasers of homeowners insurance,” invalidating the Associations’ argument regarding section 790.03’s definition; (3) section 790.06 is an enforcement tool, not a mechanism for adding new categories of unfair and deceptive practices; (4) the Associations’ argument regarding accuracy is taken out of context, and the Regulation does not expect the insurer to guarantee accuracy; (5) the Regulation does not regulate underwriting as it does not dictate what risks a company should underwrite, and does not prevent an insurer from setting the amount of insurance to be different than the estimated replacement cost; and (6) the Associations’ claim of speech restrictions is evaluated under Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985) as a restriction on misleading speech, not Central Hudson.

The Associations’ reply to the Commissioner’s arguments hypothesized an accurate estimate, prepared from a reputable contractor, that would be labeled misleading if the components are not itemized. The Association claimed: “Mandatory, specified communication is a far cry from prohibiting misleading statements.”

The trial court agreed with the Associations: section 790.03 does not grant the Commissioner the authority to promulgate the Regulation. The Commissioner would have had to adhere to the procedure provided in section 790.06 to render conduct not defined in section 790.03 as misleading, which he did not do. The trial court also rejected the Commissioner’s arguments based on CalFarm and Payne, finding CalFarm to be dicta and Payne to caution against issuing regulations that conflict with the enabling statute. The trial court did not address the parties’ other arguments.

The Commissioner appealed from the trial court’s judgment declaring the Regulation invalid.

In reviewing the trial court’s decision, the Court of Appeal noted that “neither the trial court nor we are required to give deference to an administrative agency's interpretation of the scope of its own authority.”

According to the Court of Appeal, the parties generally made the same arguments (not again described), but also asserted some additional arguments on appeal. The Commissioner argued (1) the trial court conflated “accurate” and “misleading” because the Regulation focuses on completeness, not exactness, to prevent the situation where an insured relies on an estimate that does not include all necessary components; (2) the trial judge erred in treating section 790.06, an enforcement tool, as a substitute for rulemaking processes; and (3) the trial judge ignored section 790.05, the procedure for an administrative law judge to bring a noncompliance proceeding for unfair and deceptive practices prohibited by section 790.03. The Associations supported the trial judge’s determination, arguing (1) the UIPA is unique; (2) CalFarm, Payne, and Ford Dealers are not instructive; (3) section 790.10, which uses the term “administer” and not “implement,” was not intended by the Legislature to allow the Commissioner to regulate insurance practices; and (4) this intent was confirmed when the Legislature amended section 790.06 to address the Commissioner’s authority as to unfair practices not defined in section 790.03.

In deciding to affirm the trial court’s judgment, the Court of Appeal determined that the Commissioner only has that authority granted by the Legislature, that the language of the statutes granting that authority must be given its plain meaning, and that the principle of expression unius est exclusion alterius (“expression of some things in a statute necessarily means the exclusion of other things not expressed”) applies in interpreting the language of the statutes.

The Court of Appeal determined the Commissioner’s interpretation of section 790.10 is not consistent with the rest of the UIPA:

The language of the UIPA reveals the Legislature's intent to set forth in the statute what unfair or deceptive trade practices are prohibited, and not delegate that function to the Commissioner. [ . . . ]

In section 790.03, the Legislature has defined “as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance” numerous acts or practices, including, among other acts or practices, making false statements “as to the dividends or share of surplus previously paid on similar policies” (subd. (a)); entering into a boycott (subd. (c)); making “any false statement of financial condition of an insurer with intent to deceive” (subd. (d)); “willfully omitting to make a true entry of any material fact pertaining to the business of the insurer in any book … of the insurer” (subd. (e)); unfairly discriminating “between individuals of the same class and equal expectation of life” in life insurance rates (subd. (f)(1)); representing that one is a member of the California Insurance Guarantee Association or insured against insolvency (subd. (g)); and “[k]nowingly” committing one or more of sixteen “unfair claims settlement practices” set forth in subdivision (h). These are in addition to section 790.03, subdivision (b), at issue here, as to disseminating a “statement … which is untrue, deceptive, or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue, deceptive, or misleading.”

In addition, section 790.036, subdivision (a) provides that advertising insurance that the insurer does not sell is also “an unfair and deceptive act or practice.” There is no similar provision in the UIPA regarding the content and format of replacement cost estimates. This demonstrates that the Legislature was deliberate in choosing what conduct to brand in sections 790.03 and 790.036 as “unfair and deceptive.” Applying the legislative maxim of expressio unius est exclusio alterius, we can infer that the absence of a provision regarding replacement cost estimates was a deliberate choice. Thus, the Commissioner did not have authority to add content and format requirements for replacement cost estimates in homeowners insurance to the list of practices set forth in section 790.03 under the guise of deeming nonconforming estimates misleading under section 790.03, subdivision (b).

The Court of Appeal determined its conclusion is bolstered by those provisions of the UIPA that “actually denominatnot give the Commissioner power to define by regulation acts or conduct not otherwise deemed unfair or deceptive in the statute.”

The Court of Appeal also distinguished CalFarms and Payne: CalFarms relates to a delegation of broad authority to the DMV, while the UIPA does not confer such a broad grant on the Commissioner; and Payne “primarily addressed the necessity of the regulation,” which is not at issue in this action.

The Court then turned to the legislative history of the UIPA:

We observe that section 790.03, subdivision (h), regarding unfair claims settlement practices, was added to the UIPA in 1972. (Stats. 1972, ch. 725, § 1, p. 1314.) Section 790.03, subdivision (h) covers categories of claims settlement practices that could have been regulated under the Commissioner's interpretation of his authority under sections 790.03 and 790.10 without amending the statute. Consider section 790.03, subdivision (h)(1), regarding “[m]isrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue,” as one such example.

Similarly, in 1975, the Legislature added definitions (14) and (15) to subdivision (h) of section 790.03, respectively regarding “advising a claimant not to obtain the services of an attorney” and “[m]isleading a claimant as to the applicable statute of limitations.” (Stats. 1975, ch. 790, § 1, p. 1812.) Under the Commissioner's view of his authority, the Commissioner could have defined these practices in a regulation and then denominated them as misleading under section 790.03, subdivision (b) without waiting for enabling legislation.

Indeed, in response to complaints about underinsurance regarding the same wildfires that ultimately led to promulgation of the Regulation, the Legislature in 2005 amended section 2051.5 (Stats. 2005, ch. 447, § 3, p. 3608) and added section 1749.85 (Stats. 2005, ch. 447, § 2, p. 3608). As noted earlier, section 2051.5, subdivision (a) defines replacement cost. The 2005 amendments to subdivision (b)(2) of section 2051.5 expanded alternative living expense payments in the event of a state of emergency. Section 1749.85, subdivision (a) tasked the curriculum committee to make recommendations on training broker-agents on “proper methods of estimating the replacement value of structures, and of explaining the various levels of coverage under a homeowners' insurance policy.”

We observe that section 1749.85, subdivision (c) states that nothing in “standards for the calculation” of such estimates. Not even the Commissioner argues that section 1749.85, subdivision (d) authorized the Commissioner to promulgate the Regulation, but at trial the Commissioner asserted that the latter statute supported subdivision (k) of the Regulation regarding, among other things, training of broker-agents. Although neither section 2051.5 nor 1749.85 is part of the UIPA, the Legislature could have acted at the time of these 2005 amendments to legislate the form and content of replacement cost estimates, given consumer complaints about underinsurance, of which the Legislature was well aware, but it did not do so.

Similarly, section 10101, which was added to the Insurance Code in 1992, requires residential property insurers to provide written disclosures in the format specified in section 10102. (Stats. 1992, ch. 1089, § 1, p. 5031.) Section 10102, subdivision (a), which was added to the Insurance Code in 2010—the same year in which the Regulation was promulgated—sets forth the content of the required disclosure, including informing the consumer that the coverage “should be high enough so you can rebuild your home,” itemizing the kind of rebuilding costs a consumer should anticipate, and warning the consumer to obtain insurance in a sufficient amount to cover those costs. (Stats. 2010, ch. 589, § 2.) Section 10103, subdivision (a)(2) further provides that no residential property insurance “may be issued or renewed” unless it recites “‘[t]he limit of liability for this structure (Coverage A) is based on an estimate of the cost to rebuild your home, including an approximate cost for labor and materials in your area, and specific information that you have provided about your home.’” (Stats. 2006, ch. 137, § 2, p. 1779.)

The Legislature could have gone on to define the content and format of replacement cost estimates. It could have added incomplete replacement cost estimates to the list of unfair and deceptive practices in the UIPA. We infer that these omissions were deliberate, and that under the guise of “filling in the details,” the Commissioner therefore could not do what the Legislature has chosen not to do.

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