Insurance companies could soon be off the hook for stiff penalties and fines imposed by the California Department of Insurance’s (“CDI”) for violations of the Fair Claims Settlement Practices Regulations (“FCPR”). This is according to California Administrative Law Judge Stephen J. Smith, who recently issued a 51-page ruling finding the CDI’s Fair Claims Settlement Practices Regulations might not be brought as unfair claims acts.
This ruling affects how the CDI has imposed penalties against insurers for claims since the inception of the FCPR in 1992. Since that time, only two cases have gone to adjudication challenging the procedure, and fines, as most insurance companies have chosen to settle. In both cases, the insurance companies -- an auto insurer and a life and health insurer -- retained Robert Hogeboom, senior insurance regulatory attorney with Barger & Wolen, to represent them.
In the most recent decision, Judge Smith’s ruling was based on the CDI’s Order to Show Cause (“OSC”) action alleging 697 violations against the five Torchmark groups of life and health insurers.
According to Hogeboom,
This ruling is an extraordinary indictment of the FCPR because for the past 20 years the CDI has required insurers to follow the FCPR under threat of an OSC proceeding and large fines."
This may also result in changes to Market Conduct Examinations if they are to serve as the basis for an OSC proceeding.
The decision will impact all lines of insurance regulated by the DOI.
Full Analysis of the Decision
On August 25, 2012, California Administrative Law Judge Stephen J. Smith, issued a 51-page ruling that found the California Department of Insurance’s (“CDI”) Fair Claims Settlement Practices Regulations (“FCPR”) may not be asserted as unfair claims acts. The ruling affects how the CDI has asserted penalties since the inception of the FCPR in 1992 in Order to Show Cause proceedings based on Market Conduct Examinations. Robert Hogeboom of Barger & Wolen represented the successful insurer, the Torchmark group of five life and health insurers, in the proceeding.
Judge Smith’s ruling was issued in the form of an Order pursuant to the CDI’s Order to Show Cause (“OSC”) action alleging 697 violations against the five Torchmark group of life and health insurers. The violations were based primarily on violations of the FCPR contained in § 2695.1 et seq. of Title X, California Administrative Code. The OSC was issued following the CDI’s Market Conduct Claims Examination which examined Torchmark’s life and health claims settlement practices principally through application of the FCPR.
On behalf of Torchmark, Barger & Wolen filed a denial of the allegations in the OSC followed by a Motion to Strike the FCPR allegations. The motion relied on California Government Code § 11506 to challenge the FCPR as improper to seek monetary penalties and a cease and desist order. A four-hour legal argument on the Motion occurred on May 25, 2012, before Judge Smith. In the court’s extensive ruling, which contained 150 separate findings, the court ruled that:
- None of the standards prescribed in the FCPR appear anywhere in California Insurance Code § 790.03 (pursuant to which statute the CDI adopted the FCPR); these are additional standards added exclusively by regulatory action of the CDI.
- The FCPR as applied are unenforceable pursuant to California Government Code §§ 11152 and 11342.2, which establish the test for determining the validity of regulations. Specifically, the court held that § 2695.1 of the FCPR improperly creates new unfair standards and duties within the meaning of Insurance Code § 790.03(h), which subjects insurers to the penalty provisions of Insurance Code § 790.035 for failure to meet those standards.
- The FCPR through CCR § 2695.1(a) dramatically and impermissibly expands the scope, nature and reach of the 16 unfair claims settlement practices set forth in Insurance Code § 790.03(h)(1)-(16). The court held that new unfair acts may only be promulgated by the legislature or through the process set forth in Insurance Code § 790.06.
- The CDI’s language in CCR § 2695.1 impermissibly amends Insurance Code § 790.03(h) such that a violation can be proved by means of a single knowing act or by proof of a general business practice, which amendment lowers the burden of proof and quality of evidence necessary for the CDI to prove a violation of § 790.03(h). In order to assert a violation of § 790.03(h), proof must be shown that the violation was both knowingly committed and performed with such frequency as to reflect a general business practice.
- An OSC drawn from the conclusions or statements in a Market Conduct Examination is improper to support a valid pleading. Such examinations lack specificity about each act. OSC pleadings must assert violations under Insurance Code § 790.03(h)(1)-(16) and pleadings must set forth the charges and allegations in ordinary and concise language, such that the acts or omissions of which the respondent is charged may be reasonably ascertained.
Hogeboom’s observations on the ruling are the following:
- The ruling is an extraordinary indictment of the FCPR and how for the last 20 years the CDI has required insurers to follow the FCPR under threat of an OSC proceeding and large fines.
- The ruling will require the CDI to plead OSCs using pertinent facts relating to each specific transaction.
- The ruling may result in changes made to Market Conduct Examinations if they are to serve as the basis for an OSC proceeding.
- The ruling requires the CDI to show a general business practice as a condition for a violation of claims settlement practices specified in § 790.03(h)(1-16).
- The ruling also covers all Insurance Code § 790.03 unfair practices. Accordingly, this brings into question the validity of the § 790.03 penalty provisions in the recent regulation containing the standards for homeowners’ estimates of replacement value contained in CCR § 2695.183 and the long-standing broker fee regulations in CCR § 2189.5.
Because of the impact of this decision on the claims regulations and market conduct examinations, Mr. Hogeboom will hold a seminar on the background of the FCPR, the court’s decision and Market Conduct Examinations in the near future. Mr. Hogeboom is also available to meet with specific insurers at their home offices upon request.