Mercury Ins. Co. v. Lara

35 Cal.App.5th 82

246 Cal.Rptr.3d 907

MERCURY INSURANCE COMPANY et al., Plaintiffs and Respondents,

v.Ricardo LARA, as Insurance Commissioner, etc., Defendant and Appellant;

Consumer Watchdog, Intervener and Appellant.

G054496, G054534

Court of Appeal, Fourth District, Division 3, California.

Filed May 7, 2019

As Modified May 8, 2019

As Modified on Denial of Rehearing June 4, 2019

Xavier Becerra, Attorney General, Diane S. Shaw, Assistant Attorney General, Lisa W. Chao, Nhan T. Vu and Debbie J. Vorous, Deputy Attorneys General, for Defendant and Appellant.

Consumer Watchdog, Harvey Rosenfield, Pamela M. Pressley, Santa Monica, Jonathan Phenix; Aitken Aitken Cohn, Wylie A. Aitken, Santa Ana, Casey R. Johnson, Los Angeles, Megan G. Demshki, Santa Ana; and Arthur D. Levy, Oakland, for Intervener and Appellant.

Skadden, Arps, Slate, Meagher & Flom, Jason D. Russell, Hillary A. Hamilton, Kasonni M. Scales, Adam K. Lloyd ; Darrel J. Hieber ; Hinshaw & Culbertson and Spencer Y. Kook, Los Angeles, for Plaintiffs and Respondents.

OPINION

THOMPSON, J.

Defendant and appellant Ricardo Lara, the Insurance Commissioner of the State of California (Commissioner),¹ filed a notice of noncompliance against plaintiffs and respondents Mercury Insurance Company, Mercury Casualty Company, and California Automobile Insurance Company (collectively Mercury) alleging Mercury charged rates not approved by the California Department of Insurance (CDI) and that the rates were unfairly discriminatory in violation of Insurance Code sections 1861.01, subdivision (c) and 1861.05, subdivision (b) (all further statutory references are to this code unless otherwise stated). The allegedly unapproved rates were in the form of broker fees charged by Mercury agents, which should have been disclosed as premium. After prevailing at an administrative hearing, the Commissioner imposed civil penalties against Mercury in the sum of $ 27,593,550 for almost 184,000 unlawful acts.

Mercury filed a petition for writ of mandate, which the court granted, reversing the Commissioner's decision. The court found the "broker fees" were not premium because they were charged for separate services. The court also rejected the Commissioner's interpretation of the term premium under the Insurance Code and regulations. In addition, the court ruled Mercury did not have proper notice it was subject to penalties, in violation of due process, and the action was barred by laches because CDI had unduly delayed in bringing the action.

Commissioner and intervener and appellant, Consumer Watchdog (CWD), appeal on several grounds. They assert the trial court did not use the proper standard of review, failed to give the Commissioner's findings a strong presumption of correctness and failed to put the burden of proof on Mercury to show the findings were against the weight of the evidence. They also argue the trial court's finding the fees were charged for separate services was precluded by collateral estoppel. In addition, they maintain Mercury received proper notice of the potential imposition of a penalty, and laches did not bar the action.

We agree with Commissioner and CWD the writ was issued in error and reverse the judgment. Because the substantial weight of the evidence supports the Commissioner's decision, remand for a new hearing would be an idle act and we therefore remand with directions for the court to deny the writ.

As a separate ground to affirm the judgment, Mercury argues its due process rights were violated by improper ex parte communications by the CDI, and the proceedings against it should be dismissed. We disagree. We also deny Mercury's motion to strike portions of CWD's brief on this issue.

Finally, we grant intervener's unopposed motion for judicial notice of CDI's responses to initial public comments about proposed rules concerning the interpretation of the term premium.

BACKGROUND

In the insurance industry, business is generated by producers, either agents or brokers. ( Krumme v. Mercury Ins. Co . (2004) 123 Cal.App.4th 924, 932, fn. 4, 20 Cal.Rptr.3d 485 ( Krumme ).) An insurance agent is "a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life, disability, or health insurance, on behalf of an admitted insurance company." (§ 31; see § 1621.) An insurance broker is "a person who, for compensation and on behalf of another person, transacts insurance other than life, disability, or health with, but not on behalf of, an insurer." (§ 33; see § 1623.)

"An agent's primary duty is to represent the insurer in transactions with insurance applicants and policyholders." ( Douglas v. Fidelity National Ins. Co. (2014) 229 Cal.App.4th 392, 410, 177 Cal.Rptr.3d 271 ( Douglas ).) "In contrast, a broker's primary duty is to represent the applicant/insured, and his or her actions are not generally binding on the insurer. ‘Put quite simply, insurance brokers, with no binding authority, are not agents of insurance companies, but are rather independent contractors.’ " ( Id . at p. 411, 177 Cal.Rptr.3d 271, italics omitted.)

A broker may charge a fee as long as the "broker is not an appointed agent of the insurer with which the coverage is or will be placed." ( Cal. Code Regs., tit. 10, § 2189.3, subd. (c).) There is no authority allowing an insurance agent to charge such a fee.

The Insurance Code has prohibited the charging of unfair premiums since 1947. (See former §§ 1852, 1861.05.) In 1980 the Commissioner promulgated Bulletin No. 80-6 to the insurance industry stating, "The California courts have held that all payments by the insured which are a part of the cost of insurance are premium, including any and all sums paid to an insurance agent," citing Groves v. City of Los Angeles (1953) 40 Cal.2d 751, 256 P.2d 309 ( Groves ) and Allstate Ins. Co. v. State Board of Equal. (1959) 169 Cal.App.2d 165, 336 P.2d 961.² It continues, "General rules of agency law prohibit an agent from charging sums not authorized by the agent's principal. Should an insurer authorize its agents to collect ‘fees’ such fees would have to be reported as premium by the insurer, and would, of course, have to comply with the anti-discrimination statutes. Therefore, an insurer cannot permit each of its agents to determine which fees that agent will charge because to do so would surely result in rate discrimination." Bulletin No. 80-6 explained it was "not a new administrative construction of the law, but is a restatement of the law as it exists and as previously interpreted and applied by this office."

In November 1988 California voters enacted Proposition 103 " ‘ "to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace, to provide for an accountable Insurance Commissioner, and to ensure that insurance is fair, available, and affordable for all Californians." ’ " ( Donabedian v. Mercury Ins. Co. (2004) 116 Cal.App.4th 968, 981, 11 Cal.Rptr.3d 45 ( Donabedian ), quoting Prop. 103, § 2 [uncodified preamble, "Purpose"], reprinted at Historical and Statutory Notes, 42E West's Ann. Ins. Code (2013 ed.) foll. § 1861.01, p. 65.) Section 8, subdivision (a) of Proposition 103 provides it is to " ‘ "be liberally construed and applied in order to fully promote its underlying purposes." ’ " ( Donabedian, at p. 977, 11 Cal.Rptr.3d 45.)

Proposition 103 requires prior approval of insurance rates and prohibits unfairly discriminatory rates. ( §§ 1861.01, subd. (c), 1861.05, subds. (a), (b) ; 20th Century Ins. Co. v. Garamendi (1994) 8 Cal.4th 216, 239-240, 32 Cal.Rptr.2d 807, 878 P.2d 566 ( 20th Century ).) It "is not limited in scope to rate regulation. It also addresses the underlying factors that may impermissibly affect rates charged by insurers and lead to insurance that is unfair, unavailable, and unaffordable." ( State Farm Mutual Automobile Ins. Co. v. Garamendi (2004) 32 Cal.4th 1029, 1041-1042, 12 Cal.Rptr.3d 343, 88 P.3d 71.)

In 1995 CDI adopted a regulation defining "premium" as "the final amount charged to an insured for insurance after applying all applicable rates, factors, modifiers, credits, debits, discounts, surcharges, fees charged by the insurer and all other items which change the amount the insurer charges to the insured." ( Cal. Code Regs., tit. 10, § 2360.0, subd. (c) ( 10 CCR § 2360.0(c) ).) In adopting this regulation, in response to public comments the Commissioner stated: " ‘For purposes [of Proposition 103], a rate is the price or premium that an insurer charges its insureds for insurance,’ " quoting 20th Century, supra , 8 Cal.4th at p. 240, 32 Cal.Rptr.2d 807, 878 P.2d 566. He continued, the regulations "must define the term to make it clear that it is the final, total amount charged to the insured which cannot be unfairly discriminatory - - and this is clearly the intent of Proposition 103 as interpreted by the unanimous California Supreme Court. Proposition 103 was not intended to allow insurers to get around the prohibition against unfairly discriminatory ‘rates’ by adding other unfairly discriminatory charges after a base rate is determined."

"[I]nsurance premium includes not only the ‘net premium’ ... but also the direct and indirect costs associated with providing that insurance coverage and any profit or additional assessment charged." ( Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305, 1325, 90 Cal.Rptr.3d 589 ( Troyk ).)

FACTS AND PROCEDURAL HISTORY³

Since its founding in 1962 up to 1989 Mercury sold insurance only through agents. After Proposition 103 passed in 1988, Mercury "converted" approximately 700 of its agents to "brokers" and notified the CDI their agency status was terminated.

Auto Insurance Specialists (AIS) which became Mercury's appointed agent in 1968, also entered into a "broker's contract" with Mercury in 1988 after the passage of Proposition 103. In executing the "broker's contract" AIS wrote, "we understand that the relationship between Mercury and A.I.S. is not...