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Supreme Court Upholds Facial Challenge To Replacement Cost Regulations

SAN FRANCISCO, CA, Jan. 26, 2017 --The California Supreme Court unanimously ruled this week that the California Insurance Commissioner was authorized to use provisions in the Unfair Insurance Practices Act to justify regulations that require insurers selling homeowners insurance to include mandatory items in every estimate of replacement cost. 

The 7-0 decision in ACIC v. Jones, issued Jan. 23, overturns two lower court decisions that the Commissioner had exceeded his lawful authority in creating wholly new requirements never enacted by the California Legislature.  

The regulations—promulgated in June 2011 by then-Commissioner Steve Poizner in response to numerous claims by homeowners that they were “underinsured” after suffering total losses in wildfires—require every “replacement cost” estimate to be based on identical mandatory criteria.  In addition, insurers or their broker-agents are required to provide detailed documentation showing how the mandatory factors are applied to produce the replacement cost estimate. 

Nothing in the California Insurance Code expressly authorizes CDI to create or enforce such factors.  The Commissioner’s lawyers circumvented that problem by asserting that the Unfair Insurance Practices Act (UIPA) gives the Commissioner broad power to prohibit unfair and deceptive acts in the business of insurance.  The regulation declares that insurers commit a deceptive act solely by failing to follow all of the Commissioner’s mandates—regardless of whether the estimate itself is accurate or not. 

Both a trial court and the court of appeal ruled against CDI.  The rare decision by the California Supreme Court in 2015 to take the case on appeal signaled its predisposition to overturn that result. 

The Supreme Court’s opinion dealt with the “facial authority” of the Commissioner to promulgate these regulations; i.e., whether UIPA, on its face, authorized the regulations.  The plaintiffs in the case, which include the Association of California Insurance Companies (ACIC) and the Personal Insurance Federation of California (PIF), had challenged the regulations on additional (non-UIPA) grounds.  The lower courts never evaluated those claims, having invalidated the regulations solely on UIPA grounds.  As a result of the Supreme Court decision, the case is now “remanded” (sent back to the lower courts) for consideration of the other legal challenges. 

Current California Insurance Commissioner Dave Jones was predictably pleased with the Court’s holding.

"We have won an important victory for California consumers over the insurance industry with the Supreme Court's decision today upholding our consumer protection regulation," Jones said in a press release.  "The Supreme Court rejected the insurance industry's effort to strike down the department's regulation, which protects consumers from misleading insurer estimates of home replacement costs, which left homeowners without adequate coverage or ability to rebuild their homes after fires.

"Climate change, years of drought, and more devastating wildfires have changed the landscape of California and led to a year-round fire season. This regulation offers homeowners peace of mind, should disaster strike," he added.

Representatives of ACIC and PIF were, equally predictably, not as pleased.

The action by the Commissioner represented an overreach, and the decision of the Court “does not accurately reflect the Legislature’s intent,” according to a joint statement by ACIC President Mark Sektnan and PIF General Counsel Kara Cross. 

The Supreme Court’s decision turned on its interpretation of UIPA.  That Act enumerates and prohibits over two dozen specific acts defined to constitute an unfair or deceptive practice in the business of insurance.  Section 790.06, therein, permits the Commissioner to add other offenses to the list of prohibited acts—but only if he issues an order to show cause, and meets the burden of proving that a particular behavior not already enumerated in the statute is unfair or deceptive.  Any such order ensuing from an administrative law judge can then be appealed in court. 

CDI did not follow that procedure in this case.  Instead, the Commissioner’s lawyers simply declared that any insurer not using all of the factors identified by the Commissioner for calculating a replacement cost estimate had, by virtue of that admission, committed a new unfair or deceptive act—without regard to the accuracy of the estimate actually provided—and relied upon general language in that act authorizing the Commissioner to enforce the law. 

The opinion, authored by Justice Mariano-Florentino Cuéllar, turned in substantial part upon the Court’s characterization of what the Commissioner had done as merely “interpretative” in nature, rather than as “quasi-legislative.” 

Here is the Supreme Court’s opinion.

Here is the Commissioner’s press release.

Here is the text of the regulations.

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Rita says: Wednesday, March 1, 2017 11:23 PM
Can this Supreme Court decision positively affect those of us who were underinsured during the Valley Fire of 2015 and haven't sent in our claim yet for replacement/extended replacement costs (but were told the limits) because we're still in the process of dealing with debris on our property and designing a new home? Will this only benefit people insured in the future or can we still benefit? If so, how do we go about getting satisfaction?

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