Groups Challenge California's Advisory Notice
NU Online News Service, June 6, 3:16 p.m. EDT?Three insurance trade groups filed a lawsuit this week challenging an "advisory notice" issued by California's insurance commissioner, John Garamendi.
The advisory notice, issued last April, orders new requirements on insurance companies that could hike the cost and lower the availability of insurance for California homeowners, trade groups argued. One trade group representative said it would require more home inspections.
"The advisory notice essentially tells insurers that they have to change how their underwriting is done," said Nicole Mahrt, spokesperson for the Washington-based American Insurance Association, one of the lawsuit plaintiffs. The other two plaintiffs involved in the suit are the Personal Insurance Federation of California and the Association of California Insurance Companies.
The AIA charges that Commissioner Garamendi's advisory notice was not enacted according to the Administrative Procedure Act, which lays out the process for adopting regulations, thus making it an "underground" regulation, which is illegal.
"We have taken this step because the insurance department changed the rules without going through the appropriate processes," Ms. Mahrt said. "Usually, if they want to change rules, they have to go through the Administrative Procedure Act, which lays out the process for adopting regulations. But that was not done in this case. So that's one of the concern we have."
Commenting further on specific requirements mandated by the notice, Bill Gausewitz, assistant vice president for the AIA, argued that these orders, if unchallenged, would significantly alter the way insurers evaluate their risks.
"Insurers historically have used prior losses as a way to help evaluate the likelihood of future losses. That's always been done on a statistical basis," he said. "Statistically speaking, properties with one loss in the past year are more likely to have future losses than properties that had no losses. It's just statistics."
But Mr. Gausewitz explained that the advisory notice would require insurers to examine each individual loss and figure out whether a particular loss is somehow linked to the likelihood of a future loss.
"So instead of doing it statistically, essentially you are forced to do it subjectively. And that is going to make underwriting more difficult. It's going to increase the number of cases where we have to do property inspections, and it's likely to make insurers more cautious about writing risks. It's more difficult to process and also more difficult just to understand what you are supposed to do," he said.
Mr. Gausewitz also noted that the "real point" of the lawsuit is that if the insurance department is going to adopt a new rule, there are procedures as to how it has to do that.
"Imagine, for example," he said, "that the governor of a state just issued a decree that said, 'We are going to increase the sales tax by a half-percent.' Then everyone would say, 'Wait a minute. You can't do that without the legislature passing a bill. You can't do it just because the governor said so,'" he said.
Likewise, with Commissioner Garamendi, he can adopt regulations if he has the legal authority, but there is a procedure that he has to follow, Mr. Gausewitz said.
"He has to propose it and there has to be a hearing. But none of that happened in this case. In this case, he just asserted that he was doing nothing but interpreting the existing law," Mr. Gausewitz said. "In other words, the Commissioner's position is that all he is doing is explaining to us what the law already is. We dispute that. That's really what we are suing about."
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