Replacement Costs Battle on the Road to Somewhere

By Don Jergler | May 8, 2012

Steve Young was somewhat upbeat when he was asked what he thought about the outcome of a long-brewing legal battle between three insurance associations and the California Department of Insurance.

That upbeat attitude is because a court of appeals accepted his association’s amicus brief last month. That may sound a bit trivial, but Young sees it as a signal there’s at least a slight chance the group will have its day in court sooner rather than later.

Young, vice president and general counsel of Insurance Brokers & Agents of the West, applauded the Second District Court of Appeals action in granting IBA West’s request to file an amicus brief in the litigation over replacement cost regulations that were successfully pushed through the courts by the California Department of Insurance last year.

IBA West filed the brief last month, a request to support the petition for writ of mandate filed by the Personal Insurance Federation of California and the Association of California Insurance Companies challenging the legality of the replacement cost regulations.

The writ would speed the appeals process along. Otherwise, the appeals process could go on for years and draw out a battle that was ignted last year.

When CDI and Insurance Commissioner Dave Jones came up with the regulations regarding how do deal with and present to consumers replacement costs on homeowners’ insurance policies last year, it touched off a legal battle between the three associations and CDI attorneys.

While CDI argues the regulations were necessary to protect homeowners, the groups believe the CDI and Jones overstepped their authority, and that this move could be an inroads to enabliing the regulators to wield a broader authority over more than just those entities in homeowners insurance.

“It’s the commissioner claiming the authority to mandate underwriting guidelines through the replacement costs formula,” said Mark Sektnan, president of ACIC. “We believe any additional authority has to be granted by the Legislature.”

He added: “If the commissioner has the authority to go after underwriting on this, his authority could be unbridled.”

In January, a Los Angeles County Superior Court judge denied a motion for judgment on the pleadings brought by the three associations. It is that denial that the plaintiffs and IBA West are asking the state appellate court to overturn.

While the court’s acceptance this week of the amicus brief doesn’t necessarily indicate how it will evaluate the writ of mandate filed by the groups for a speedy appeal, Young took the acceptance as a good sign.

“The fact that the court did accept our amicus brief we think is certainly is not a bad sign,” Young said.

The second district court of appeal denies roughly 96 percent of all petitions for writ of mandate, Young said, adding, “We don’t hold out a lot of hope that our petition is going to be granted.”

However, if the court does end up denying the mandate, IBA West and the other associations will just take the long road and deal with a normal appeal process, Young said.

What’s the hurry? The regulations sought by CDI and California Insurance Commissioner Dave Jones were not stayed when an earlier court gave the state’s insurance regulatory body authority to move forward with the new replacement costs regulations.

The regulations, intended to reduce underinsurance in homeowners’ insurance policies, require all insurance companies to calculate replacement cost estimates using a standardized set of more than 20 criteria. The regulations also require producers to provide detailed information disclosing to customers the amount of the replacement cost estimate, and how it was calculated.

The California insurance code doesn’t necessarily authorize CDI to create such mandates. However, CDI lawyers added provisions to the regulations prohibiting insurers, brokers and agents from utilizing any other replacement cost calculation methodology and asserting that alternative methodologies would constitute an “untrue, deceptive, or misleading” statement in the business of insurance, which is prohibited by Insurance Code Section 790.03(b), part of the Unfair Insurance Practices Act.

IBA West’s argument is the regulation imposes significant burdens on insurance producers, and it grants Jones and CDI broader powers that could be extended into other areas of insurance, Young said.

Young said the standardized set of criteria “isn’t a bad idea just in terms of the merits of the idea.” IBA West’s issue is that Jones is overstepping his authority, and it’s the Legislature that makes the laws and the administration and DOI’s role is to interpret those laws, Young said.

“The commissioner doesn’t have the legal authority to say ‘Hey, I got a really great idea and I’m going to make everybody do the following 25 ideas,’” Young said. “There’s nothing that says the commissioner can require every homeowners’ insurer and every broker-agent to estimate replacement costs using one and only one formula.”

He added it’s his belief that Jones’ legal team “came up with what I think is a pretty sneaky backdoor attempt to find regulatory authority.

Pat McConahay, CDI’s deputy press secretary, defended CDI’s actions and said the new regulations are necessary to protect homeowners seeking insurance.

“This regulation is an important consumer protection measure,” McConahay said. “When a homeowner comes to an agent to buy a policy and the agent provides an estimate of how much it will cost to replace the home if it is destroyed, the consumer should be given a complete and accurate estimate. This regulation achieves that goal.”

The regulation places four principal obligations on the insurance industry.

The regulation forbids licensees from communicating an estimate of replacement cost to an applicant or an insured on a renewal of a homeowner’s insurance policy that provides coverage on a replacement cost basis unless the estimate takes into account at least 22 factors set forth by CDI.

The regulation states that communicating a replacement-cost estimate not comporting with the method constitutes a misleading statement and pursuant to California’s insurance code can lead to a rrange of penalties, including fines of up to $10,000 per violation.

It creates strict liability for use of third-party sources, meaning licensees are bound by the method even if they rely upon information, data or statistical methods obtained through third-party sources.

The regulation requires licensees at least annually to update the sources and methods they use to generate replacement-cost estimates.

All associations involved in the suit contend the regulations constitute an illegal intrusion into insurance underwriting by CDI, and violate First Amendment rights of insurers by prohibiting non-conforming statements regarding other replacement cost methodologies.

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