Insurance rate rollback sets regulatory precedent

SACRAMENTO – A spat between the California Department of Insurance and the advocacy group Consumer Watchdog over a recent news release left Sacramento insiders scrambling to understand the policy implications of a public dispute between the two organizations.

“Yesterday, Consumer Watchdog issued a news release about State Farm that includes inaccurate statements and is misleading,” according to an Aug. 10 Department of Insurance statement. “Commissioner (Dave) Jones requests Consumer Watchdog retract its false and misleading news release and respect the Proposition 103 rate setting process in this case.”

In response, Consumer Watchdog defended its news release and issued a short clarification on its website. The matter centers on the arcane nature of California’s byzantine insurance-regulatory system, which empowers the elected insurance commissioner to approve or deny any insurance company’s proposed rate changes.

Before voters approved Prop. 103 in 1988, insurance companies had much more freedom to set their rates and structure their products based on whatever factors they thought were most important. The department enforced some regulations, including making sure that rates weren’t either excessive or insufficient to provide the resources needed to pay any future claims. Consumers could pick and choose among various companies if they didn’t like the price or the terms the company offered.

Prop. 103, however, established limited criteria upon which companies could establish their automobile, homeowners’ and casualty insurance rates. When a company wanted to raise rates, the Department of Insurance would hold hearings and an administrative law judge employed by the agency would issue an order granting, amending or rejecting the request.

Consumer Watchdog’s founder and current legal counsel, Harvey Rosenfeld, was the author of Prop. 103. The measure established the new rate restrictions. It also “authorized a process for consumer participation in the administrative process for setting insurance rates, and permitted consumer ‘intervenors’ to recover advocacy and witness fees and expenses under certain circumstances,” according to the Department of Insurance website.

Consumer Watchdog has since become California’s most prominent “intervenor.” It routinely challenges industry rate requests. In the case at issue, Consumer Watchdog opposed State Farm’s effort to increase rates by 7 percent. The company cited the ongoing drought and the company’s vulnerability to wildfires as justification for the hikes, whereas the consumer group has accused it of overcharging its customers.

Instead of granting the hike, Administrative Law Judge John H. Larsen “ordered” a 5.37 percent decrease for non-tenant homeowners rates, a 20.39 percent decrease for renters’ rates and a 13.81 percent decrease for State Farm’s condominium insurance lines. The rate reductions were ordered retroactively to July 15, 2015, and State Farm was told to pay a 10 percent annual interest rate as part of its refunds, which are expected to total around $85 million.

The Department of Insurance accuses Consumer Watchdog of confusing “consumers and the media into believing that consumers are now entitled to a rate rebate and reduction, when no such order has been issued. … Commissioner Jones has the final authority in the case and will make a final decision at the conclusion of the case, which is still pending.”

Consumer Watchdog agrees that Jones “must decide whether to approve the judge’s decision” and says its news release explains as much. The group links to the judge’s order – and its President Jamie Courts notes that it is titled as an “order.” The dispute centers on timing: the department thinks the consumer group depicted the decision as final, even though Jones has yet to finalize it.

This may be a dispute over who gets the main credit for a rollback. Or it might be an effort by the department to avoid any appearance of a pre-ordained conclusion. Critics have long argued the department works closely with “intervenors.” Administrative law judges are not actually part of the judicial branch, but instead are employees of the agency. They cannot be expected to rule with true impartiality. By chastening Consumer Watchdog, the commissioner may be trying to make clear this is not a proceeding in a kangaroo court.

If Jones ultimately approves the rate rollback, State Farm can still challenge the matter in the (real) court system. If so, the company will have a solid argument. It’s one thing for state regulators to approve or deny proposed rate increases. But it’s quite another for them to order a retroactive rollback of a previously approved rate structure, which would create a precedent that should concern all of the state’s insurance companies.

Of course, Prop. 103 did call for a 20 percent rate rollback – but that portion of the measure was rewritten by the courts. Eventually, the courts upheld a rollback formula for one-time rebates and now is arguing this old rebate case gives them power to order rebates on new rate filings governed under a different section of Prop. 103. That would set precedent. If Larsen’s ruling stands, the industry is bound to wonder how it can determine what rates to set if, years from now, the agency can decide to simply go back in time and mandate massive rebates. Imagine if the state could do that to, say, retailers, restaurateurs or car dealerships.

While the dispute between the department and Consumer Watchdog centers on the ephemeral nature of a news release, the underlying issue could have deep ramifications for the long-term viability of insurance companies that do business in our state.

Steven Greenhut is Western region director for the R Street Institute. He is based in Sacramento. Write to him at [email protected].