California Court Decision May Hurt Insurers NAIC Told

NU Online News Service, June 16, 1:11 p.m. EDT, SanFrancisco?Participants at a regulators meeting here said arecent ruling by the California Appeals Court, that potentiallychallenges the regulators' authority and the validity of ratefilings, could be costly and unsettling for the insuranceindustry.[@@]

A discussion of the case became the top issue during alitigation working group session at the National Association ofInsurance Commissioners summer meeting.

Titled Donabedian v. Mercury, the case involved a suitby Sam Donabedian, a private ciizen who argued that underCalifornia's Proposition 103, it was illegal for Los Angeles-basedMercury Insurance Company to use a prior insurance record as partof its underwriting and pricing practices.

Mercury Insurance in its defense said its rates had beenapproved by the insurance commissioner, who has exclusivejurisdiction over ratemaking. The trial court agreed with Mercuryand granted the company's motion for a finding there were nogrounds for legal action.

The California Court of Appeals reversed the trial court'sruling on March 11, saying that the Department of Insurance rateapproval did not preclude Donabedian from pursuing his lawsuitagainst Mercury for violating a section of Proposition 103.

The Court of Appeals pointed out in its ruling that theCalifornia insurance department actually did not rule on the caseeven though it was entitled to do so and that the department iseven supporting the position that courts should be allowed theauthority to rule on the case.

And the appeals court also noted that, under the state'sProposition 103, California citizens have the right to directly sueany insurance company if they disagree with the company's rates,rules, or underwriting plans that have been approved by Californiainsurance department. The citizen's right to sue overrides,according to the court, the exclusive authority of the insurancedepartment to make a ruling.

Judging from the tone of speakers at the working group session,the California decision is a rattling one for insurance executivesand regulators alike.

Washington, D.C., Commissioner Larry Mirel told the Class ActionInsurance Litigation Working Group the decision "raises a lot ofissues."

"Obviously it's very unsettling for the insurance industry tothink that rates that have been filed and used are going to bechallenged at some later date by litigation. Clearly it addsuncertainty in the market," Mr. Mirel commented.

"This is a very illustrative case, it seems to me, for the kindof issue we are trying to wrestle with here," Mr. Mirel said. Hesaid the decision brings up "the question of, what should be therelationship between the regulatory authority and the courts?"

Tracey Sandin, assistant vice president of government affairs atthe 21st Century Insurance Group, based in Woodland Hills, Calif.,giving what she described as an industry perspective, said shehoped the California Supreme Court would review the issue, but as aresult of the decision, "you could be looking at an onslaught ofactions against the industry. Just bringing those actions is goingto cost us dearly."

A representative from a national trade association also voicedconcern. "The ruling of the California Court of Appeals could makeevery trial court in California an additional regulator," saidRobert Zeman, senior vice president of industry and regulatoryaffairs at the Property Casualty Insurers Association of America,based in Des Plaines, Ill.

That outcome, he said, would be terrible public policy, "notonly for insurance companies and regulators, but for policyholdersas well."