THE UNFAIR PRACTICES ACT AND ACIC V. JONES
The UIPA is contained in Article 6.5 of Division 1, Part 2 of the Insurance Code which regulates “trade practices," a broad concept originally developed under federal law in 1945. [6] The UIPA is broad in scope. Its key statutory provisions include:
1. A list of ten categories of unfair methods of competition and unfair deceptive acts or practices in the business of insurance; [7]
2. Proceeding relating to the prosecution and imposition of penalties for engaging in unfair practices defined in the UIPA; [8]
3. A discretionary process for the Commissioner to determine "new" unfair acts that are not otherwise defined as unfair or deceptive in the UIPA; [9] and
4. Authority to promulgate rules and regulations as are necessary to administer the UIPA.[10]
Each of these standards which govern the UIPA are discussed by the Supreme Court in the ACIC case. The regulation at issue, 10 CCR 2695.183 was adopted in 2011.[11] The regulation provides that “no licensee shall “communicate” an estimate of replacement cost in connection with an application for or a renewal of a homeowners policy that provides coverage on a replacement cost basis, which is misleading and which by the exercise of reasonable care should be known to be misleading pursuant to CIC § 790.03. [12]
ACIC and the Personal Insurance Federation of California (collectively, the "Associations") filed a lawsuit challenging the validity of this regulation.[13] The Associations argued that the Legislature defined a finite list of unfair insurance practices in Insurance Code § 790.03 and the Commissioner exceeded his authority by creating a new unfair practice through the regulation. The Associations pointed out that the UIPA contains no statute or standards concerning replacement cost estimates.
The Associations argued that the Commissioner failed to utilize the procedure mandated by Insurance Code § 790.06, which must be followed in order to create a new unfair practice not previously defined in Insurance Code § 790.03. Specifically, the Associations asserted that the Commissioner could address replacement cost estimate practices through the hearing procedure defined in § 790.06, but that the Commissioner did not have the authority to define replacement cost practices as an unfair insurance practice through the adoption of a regulation. The trial court ruled in favor of the Associations reasoning that an “estimate” of replacement cost is inherently inaccurate. The estimate could not be deemed misleading unless the insurer claimed that the estimate was accurate.
The Court of Appeal affirmed the trial court's decision. The Court of Appeal concluded, "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." [14] The Court of Appeal rejected the Commissioner's argument that Insurance Code § 790.10 – which states that the Commissioner may promulgate reasonable regulations to administer the UIPA – gave him the authority to adopt the regulation. The Court of Appeal noted that the Commissioner's interpretation would render Insurance Code § 790.06 "superfluous."
In ACIC, the Supreme Court reversed the Court of Appeal's decision focusing on the Commissioner’s authority in § 790.10 which broadly asserts that the Commissioner should from time to time, as conditions warrant, promulgate regulations as are necessary to administer this article. [15] The Supreme Court found that the Commissioner's regulation did not create a "new" unfair practice, making § 790.06 irrelevant. Rather, the regulation was found to be a valid interpretation of the existing prohibition against misleading statements under § 790.03(b) of the UIPA. The Court held that “the Commissioner enacted the replacement cost regulation by exercising valid authority conferred under § 790.10 of the UIPA." [16]
The Court agreed with the Associations that the Legislature defined a misleading statement as an unfair practice in Insurance Code § 790.03(b). However, the Court cautioned, "that it would be wrong to conclude that the Commissioner was thereby deprived of authority to 'interpret, or make more specific' those defined methods, acts, or practices by rule or regulation."
After the decision was issued, the CDI's then General Counsel summarized the Supreme Court's ACIC v. Jones decision into three key holdings:[17]
1. Insurance Code § 790.10 gives the Commissioner broad authority to promulgate regulations in the public interest;
2. The Commissioner’s interpretation of “misleading statements” to include providing replacement-cost estimates that do not include the foreseeable costs of replacing a home was reasonable;
3. The Commissioner has broad discretion to determine whether to proceed by rulemaking or adjudication.
TEST AND FACTORS APPLIED BY SUPREME COURT TO SUPPORT THE COMMISSIONER’S AUTHORITY TO ADOPT REGULATION
In its decision, the Supreme Court applied the following factors in its analysis deciding that the regulation “falls within the Commissioner’s broad discretion to adopt rules and regulations as necessary to promote the public welfare.”
a) The regulation, like any agency action, comes to the court with the presumption of validity. [18]
b) In exercising its responsibility to construe the statutory scheme, we “accord” great weight and respect to the administrative agency’s construction.[19]
c) How much weight to accord the agency’s construction depends on the “context” a term which encompasses both the nature of the statutory issue and characteristics of the agency. [20]
d) Factors which apply to the agencies interpretation include two broad categories: i) factors relating to the agency’s technical knowledge and expertise which tend to suggest the agency has an interpretive advantage over a court; and ii) factors relating to the care of its determination which tends to suggest the agency’s interpretation is likely correct. [21]
Step 1
The court first evaluated whether the regulations exceeded the authority granted to the Commissioner by the Legislature. Here the Supreme Court concluded that the authority the Legislature conferred was “quite broad”. [22]
The broad authority focused primarily on Section 790.10 which gave the Commissioner the authority to “from time to time as conditions warrant…promulgate reasonable rules and regulations…as are necessary to administer this article.” Its conclusion was that the Commissioner “ostensibly has authority to craft regulations as are necessary to administer misleading statements” as found in section 790.03. The court held that the grant of regulatory authority to the Commissioner in section 790.10 is written in terms of what is necessary to administer section 790.10. The term “administer” was held to “carry out or direct, and in the process to implement.”[23]
The Associations argued that the Commissioner’s authority was limited to a 790.06 proceeding. The court held that the Commissioner’s rulemaking authority under the regulation authorized the Commissioner to delineate particular categories of misleading statements. Thus, it was not a new category of unfair acts under Section 790.06. [24]
Step 2
In analyzing the Commissioner’s authority the court next determined if the subject regulation was consistent with the authorizing statute. The test here is to determine under the Government Code whether the regulation is “consistent and not in conflict with” the statute and “whether it is reasonably necessary to effectuate the purpose of the statute.” [25]
This analysis was determined by the court in part on “whether the regulation is best understood as quasi-legislative or interpretive. [26]
The court noted that quasi-legislative rules represent “an authentic form of substantive lawmaking” in which the Legislature has delegated to the agency a portion of its lawmaking power. Because such rules “have the dignity of statutes,” a court’s review of their validity is narrow: “If satisfied that the rule in question law within the lawmaking authority delegated by the Legislature, and that it is reasonably necessary to implement the purpose of the statute, judicial review is at an end.” [27]
An interpretive rule instead represents the agency’s understanding of the statute’s meaning and effect – consequential, but not an exercise of delegated lawmaking power. A court reviewing the validity of an interpretive rule therefore must consider more than simply whether the rule is within the scope of the authority conferred, and whether the rule is reasonably necessary to effectuate the statute’s purpose. A court must also consider whether the administrative interpretation is a proper construction of Gov. Code § 11342.1 and 11342.2. [28]
The court concluded that it need not decide whether the regulation’s interpretation of a “misleading” statement is best characterized as quasi-legislative or merely an interpretive rule devoid of any quasi-legislative authority. The court held that “Even if the Regulation were considered purely interpretive, we would conclude that the Commissioner has reasonably and properly interpreted the statutory mandate.”[29]
"It is the Commissioner who is charged with implementing the UIPA. In doing so here, the Commissioner set forth his interpretation in a regulation adopted pursuant to the Administrative Procedure Act. Moreover, the regulation does no more than identify a specific class of offending statements within the general statutory prohibition on any untrue, deceptive, or misleading statements in connection with the business of insurance.[30]"
Step 3
The court explains that it has the ultimate responsibility to interpret a statute, but in exercising that responsibility it gives weight to an administrative agency's construction of the statute. How much weight is given depends on two factors. First, the agency's technical knowledge and expertise compared to that of the court. And second, the care the agency used in promulgating its interpretation of the statute. [31] In this case, the court found that the Commissioner has expertise and the Commissioner complied with the governing law in the adoption of the regulation through the APA to take public comment and hearing before the regulation was finalized. [32] These two factors guided the court's consideration whether section 790.10 gave the Commissioner the authority to adopt the regulation. The court concluded that section 790.10 is written in terms of what is necessary to “administer” the authorizing statute. [33]
The court relied on its holding in an earlier Supreme Court case, which involved a grant of rulemaking authority that is similar to section 790.10. [34] The court brushed aside the fact that the language in that case is different than section 790.10. "We do not perceive such slight difference in wording to evidence any substantial distinction in the power the Legislature conveyed." The court described the language in section 790.10 as "open-ended" and concluded that the use of such open-ended language allows a court to "find the Legislature delegated the task of interpreting elaborating on the statutory text to the administrative agency."[35]
Section 790.06 was a linchpin in the Associations' argument. The Associations argued that section 790.06 provides a process that the Commissioner must use to determine that conduct not defined in the UIPA is an unfair practice. The Associations contended that the UIPA does not define "misleading" and the only way the Commissioner can define a practice as misleading is to follow section 790.06. The court gave this argument no credence. The court held that the Legislature in fact defined "misleading" as an unfair practice in section 790.03(b). [36]
OTHER CASES
While this article focuses in part on the test and factors to be applied by the court in determining the validity or invalidity of a regulation, the industry has also been following for several years, two other cases at the administrative and lower court levels in which insurer’s challenged the validity of certain claims regulations following market conduct examination. The regulations were also adopted pursuant to the UIPA. Unlike the regulation at issue in ACIC, the regulations in these other cases were not adopted to define a "misleading" statement, but were said to implement a subsection in the UIPA which prohibits 16 unfair claims settlement practices.
In the administrative case involving a proceeding against Globe Life and four other insurers following a Department of Insurance claims exam, two different administrative law judges in the same case and over a period of several years, determined that the parts of the claims regulations that were the foundation of the Insurance Commissioner's case exceeded the scope of the statute. Therefore, the regulations could not be used to justify the issuance of penalties against the insurers. The Commissioner ultimately dismissed the Globe Life action prior to the issuance of the Supreme Court's decision in ACIC. [37]
In a second case also involving a claims exam of PacifiCare, the administrative law judge, after a lengthy hearing, proposed an $11.1 million penalty. On review, the Commissioner rejected the administrative law judge's decision and increased the penalty to a staggering $183 million. Thereafter, PacifiCare filed a Writ of Mandate which is currently ongoing and which is being litigated and decided in three "phases." In Phase I, PacifiCare followed similar arguments made in Globe Life, that certain definitions and the test to determine a violation as set forth in the regulations were inconsistent with the governing statutes and, therefore, invalid. The Superior Court agreed with PacifiCare and cautioned that her ruling could be dispositive of the case. The case is ongoing. [38]
It is unclear whether the CDI will attempt to use Supreme Court decision in ACIC, to argue that deference should be given to the Commissioner in PacifiCare. The stakes are high for the industry based on the large penalties sought by the Commissioner under the UIPA.
The Court's discussion in ACIC regarding the Legislature's grant of rulemaking authority to an agency may make it difficult to argue that the ACIC decision supports the conclusion that the Commissioner has broad authority to adopt regulations to administer the 16 specific claims practices prohibitions in section 790.03(h).
The Court explained that the Legislature grants an agency broad rulemaking authority when the Legislature decides not to provide specific remedies in statutory law. The prohibition against "misleading" statements is not specific; therefore the court concluded that the Commissioner had broad authority to adopt a regulation which declares that noncompliant cost estimates are misleading. In contrast, an agency lacks broad rulemaking authority when the Legislature sets forth specific prohibitions. The Court indicated that this is the case in regard to the unfair claims se ttlement practices statute. The Court's opinion states, "When the Legislature is confident that it has identified a given problem and the best solution, it may enact a specific remedy into statutory law---as it did with the unfair claims settlement practices." [39] This language supports the position that the Commissioner's broad authority to administer the UIPA's general prohibition against misleading statements may not compel the conclusion that the Commissioner has broad rulemaking authority to administer the UIPA's specific claims practices prohibitions.
CONCLUDING COMMENTS
While the ACIC decision includes language suggesting that the Commissioner has broad authority to adopt regulations under the UIPA, it is important to remember that the decision also upholds the basic law followed in the Globe Life and PacifiCare cases – i.e. that the Commissioner can only promulgate regulations that are within the scope of Insurance Code § 790.03 and that any new unfair acts can only be defined pursuant to a hearing held under § 790.06. The Supreme Court's decision was specific to the homeowners regulation and its decision involved the question whether the regulation fell within the scope of the UIPA’s prohibition against “misleading” statements. Therefore, it is not a foregone conclusion that ACIC has any relevance to cases involving the validity of claims settlement practices.
While the Commissioner can say that, pursuant to ACIC, he has “quite broad” authority to interpret and implement the UIPA, there was still a necessary connection that the Supreme Court had to make in order to fit the homeowners regulation into the prohibition against misleading statements. There had to be a communication (i.e. the estimate) that was likely to mislead (by claiming or implying that all relevant costs are included when they are not). Moreover, the Court’s holding suggests that the Commissioner was given more leeway in this case because there was a definable issue under his area of expertise (underinsurance in connection with wildfires) that he specifically investigated and diligently tried to resolve through a regulation that addressed the specific issue. Finally, the Court suggests that if a regulation seeks to prohibit an action which is not within the prohibitions in the UIPA, the regulation would be invalid.