We all know that insurance companies are good at trying to find any way possible to deny claims, whether they be long-term disability claims, life insurance claims, health insurance claims or homeowner’s claims. To curtail their ability to do so, the Legislature enacted the Unfair Insurance Practices Act (“UIPA”) to regulate unfair or deceptive acts or practices in the insurance business. UIPA defines such unfair methods of competition or unfair or deceptive practices as including untrue, deceptive, or misleading statements with respect to the business or conduct of insurance. Under UIPA, the Legislature granted the Insurance Commissioner authority to promulgate rules and regulations, as well as to institute individual enforcement actions, against those who violate UIPA. In Association of Insurance Companies v. Jones, No. S226529, 2017 WL 280822 (Cal. Jan. 23, 2017), the California Supreme Court validated the Commissioner’s broad rulemaking authority as including the ability to define which types of statements fall under the broad definition of misleading statements in UIPA.
What is the Insurance Commissioner’s authority under the Unfair Insurance Practices Act?
Under UIPA, the Legislature granted the Commissioner two types of administrative authority: quasi-legislative rulemaking authority and quasi-judicial hearing authority. The basic difference between the two is how they are enforced. Rulemaking authority typically allows for enforcement penalties and as such, requires more stringent public notice and comment. In contrast, quasi-judicial authority is usually not subject to the extensive public notice and comment requirements, but it also does not have the same teeth in terms of enforcement, i.e. no monetary penalties or injunctions.
Under UIPA, the Commissioner may, after notice and public hearing, promulgate reasonable rules and regulations as necessary to administer the statute. UIPA §790.10. Where the unfair or deceptive practice is defined by statute, the Legislature grants the Commissioner the authority to investigate and determine whether insurance companies have engaged in an unfair method of competition or in any unfair act or practice as prohibited by UIPA. UIPA §790.03. To enforce this grant of authority, the Commissioner may bring an administrative enforcement action against, recover damages from, and enjoin any person engaged in such practices defined in section 790.03.
However, if the unfair practice is undefined in section 790.03, a separate statutory provision applies. Instead the Commissioner may use its quasi-judicial authority and issue an order to show cause. The Commissioner then conducts an administrative proceeding to determine whether the conduct is unfair or deceptive. The Commissioner then serves a written report declaring the practice as such. UIPA §790.06(a). Under this latter provision, the Commissioner may not assess monetary penalties and must apply to the superior court for an injunction.
Association of California Insurance Companies v. Jones
In Association of California Insurance Companies v. Jones, the Supreme Court of California held that statutory authority supports the Insurance Commissioner’s 2011 regulation categorizing estimates as a certain type of misleading or deceptive statement as defined under UIPA. The Supreme Court reversed and repealed the lower court’s judgment invalidating the regulation, finding the rule within the scope of the Commissioner’s authority under UIPA and consistent with the language of the statute.
A brief review of the facts of the case begins with the Commissioner’s investigation into homeowner’s insurance practices. Upon concluding his investigation, the Commissioner promulgated regulations that sought to improve the accuracy of replacement cost estimates. Basically, if the insurer estimates a home’s replacement cost in a given policy, the rules specify how the estimate is to be calculated and communicated to the insured. Additionally, the Commissioner conducted extensive public notice and hearing procedures to adopt the regulation.
Of course, insurance companies challenged the new rules. The trial court agreed and invalidated the regulation. The trial court found that the regulation exceeded the scope of the Commissioner’s authority by adding “estimates” to the Legislature’s defined list of unfair or deceptive practices. The appellate court agreed, affirming the trial court’s decision on review. The appellate court also noted that when the Legislature chose to define only some unfair and deceptive practices, it deliberately decided to exclude others (including such estimates).
The Supreme Court overturned the lower court’s decision on the grounds that UIPA expresses a very broad grant of legislative power to the Commissioner. The Court found that the Commissioner’s exercise of power was within the scope of its authority and consistent with the terms of UIPA. This ruling may signal good news for insureds with denied long-term disability claims, life insurance claims, health insurance claims or homeowner’s claims.