Garamendi Ruling On Brokers Overturned

A California administrator has ruled that a change in the definition of an insurance broker instituted by the former insurance commissioner is illegal.

California's Office of Administrative Law ruled Monday that former Insurance Commissioner John Garamendi's attempt to use a settlement as a precedent-setting rule was illegal and violated the state's statutes on creating such rules.

In October of last year, the Insurance Brokers & Agents of the West filed a petition with the OAL objecting to Mr. Garamendi's attempts to use a settlement reached with American Reliable as a precedent-setting agreement.

Under the agreement brokers were redefined as agents and the commissioner used the agreement to change the definition of brokers to agent-in-fact.

In the OAL's 17-page opinion, it did not rule on the merits of the American Reliable agreement, but did find that defining the agreement as precedent-setting violated the state's laws on this issue.

In a statement, Steve Young, IBA West General Counsel, said: “This is a hugely important decision for all Californians because it reaffirms the very important principle that regulatory agencies must comply with the rule of law. They cannot circumvent the legislature or ignore the due process protections that are the essence of the state Administrative Procedures Act.”

He added that if the OAL had ruled in favor of the department, then the “commissioner could have exercised near dictatorial powers to create and enforce new regulatory requirements.”

Byron Tucker, deputy commissioner of communications for Insurance Commissioner Steve Poizner said the department is currently evaluating the OAL's decision before deciding if it will appeal the ruling or initiate a formal rule making process.

He pointed out that the OAL's decision in no way addressed “the underwriting correctness of the department to distinguish between an agent and broker.”

Mr. Tucker declined to say when the department would make a decision, but noted that an appeal would have to be filed within 30 days, but the rule making process could take up to a year or more.

(This story was updated at 5:11 p.m. today.)