The California Supreme Court issued a unanimous ruling yesterday requiring insurers to communicate “complete” replacement cost estimates to insureds.1 The ruling not only found the regulation requiring this action to be well within the Insurance commissioner’s authority, but found the basis for the regulation to be well founded. It is a wonderful victory for policyholders in California.
The issue pending before the California Supreme Court was whether the California Insurance Commissioner had authority to issue a proposed insurance regulation that sought to:
- require insurers to communicate “complete” replacement cost estimates to insureds when selling homeowners policies;
- classify incomplete or misleading estimates by insurers or their representatives as a violation of California Insurance Code §790.03 (part of California’s the Unfair Insurance Practices Act).
The court found that Insurance Commissioner Dave Jones was within his authority to enact the new regulation aimed at stamping out the practice of providing incomplete home replacement cost estimates, leaving homeowners underinsured and unable to rebuild their homes after paying premium for insurance products they were led to believe provided sufficient insurance to rebuild their homes.
The ruling revives a regulation that was set to take effect in 2011, before it was struck down by the trial court in 2013.
“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 Monday statement. “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.”
The insurance industry, led by the Association of California Insurance Companies and the Personal Insurance Federation of California, pursued the legal challenge to the regulation, arguing it fell outside the commissioner’s lawmaking authority delegated by the state Legislature and conflicts with the Unfair Insurances Practice Act.
But the California Supreme Court unanimously disagreed, stating that the administrative agency acted within its authority and did not overreach in enacting the new rule:
Where, as here, the Legislature uses open-ended language that implicates policy choices of the sort the agency is empowered to make, a court may find the Legislature delegated the task of interpreting or elaborating on the statutory text to the administrative agency… An agency’s choice regarding the use of rulemaking or adjudication implicates the expertise and accountability rationales that cut in favor of deference to the agency, and the [insurance industry] does not contend that any statute expressly limited the commissioner’s ability to choose between rulemaking and adjudication,” the court wrote.
In this instance, the Commissioner undertook an investigation into the widespread problem of underinsurance and, in particular, the disconnect between a homeowner‘s expectation and the actual scope of insurance coverage purchased. Based on that investigation, he determined that an incomplete replacement cost estimate — i.e., an estimate that fails to account for all of the costs necessary to rebuild the structure — qualifies as ―a specific kind of misleading statement, and that regulation of any misleading statement ―is authorized by the broad statutory prohibition against false and misleading statements‖ in section 790.03, subdivision (b).
An agency‘s choice regarding the use of rulemaking or adjudication implicates the expertise and accountability rationales that cut in favor of deference to the agency, and the [insurance industry] does not contend that any statute expressly limited the Commissioner‘s ability to choose between rulemaking and adjudication. We therefore defer to the Commissioner‘s decision to address the problem of underinsurance by rulemaking.
Finding otherwise would not only cut against the grain of our previous decisions and the importance they ascribe to the agency‘s expertise in deciding how it makes policy, but would also eviscerate section 790.10. It is the agency‘s prerogative to promulgate reasonable rules and regulations ―as are necessary to administer‖ the Unfair Insurance Practices Act (§ 790.10) –– not merely to do so where it cannot otherwise address offending conduct through enforcement actions.
It follows that the Commissioner‘s authority under section 790.06 to determine what undefined conduct qualifies as unfair or deceptive is irrelevant to the question whether the Commissioner had the authority to regulate incomplete replacement cost estimates as misleading statements within the meaning of section 790.03, subdivision (b).
The court also explained why a replacement cost estimate that is incomplete and inaccurate should be considered an unfair insurance practice:
The trial court reasoned that a replacement cost estimate –– as an estimate — is inherently inaccurate and therefore cannot be deemed ―misleading within the meaning of section 790.03, subdivision (b). But the defect sought to be remedied by the Regulation is not the possibility that actual costs, for unforeseeable reasons, may not align with estimated costs. Rather, the Regulation seeks to reduce the possibility that an estimate would be misleading by ensuring that the estimate include all that is reasonably knowable about actual costs at the time the insurance contract is executed. It may be theoretically possible for a replacement cost estimate that omits consideration of labor costs or the materials used in constructing the home nonetheless to come close to the actual replacement cost if (say) the expected rate of inflation or some other cost component was badly or unreasonably overstated. But the estimate would still have been misleading in purporting to represent each of the essential components for rebuilding the dwelling. In addition, it would have been misleading to the extent that the incomplete estimate could not meaningfully have been compared with a competitor‘s estimate that did faithfully account for each component necessary to rebuild the dwelling. In any event, the validity of the Regulation does not depend on a finding that an incomplete replacement cost estimate would be misleading in every conceivable circumstance. The prohibition on untrue or misleading statements in section 790.03, subdivision (b)…extends to statements that are ― likely to deceive the public. (citation omitted). The Commissioner could reasonably conclude that replacement cost estimates are likely to mislead the public about the actual cost of repair or replacement when they willfully omit cost components essential to repairing or rebuilding a dwelling.
This decision is an important win for policy holders and consumers. It is also a great example of how hard work, perseverance, and a refusal to give up fighting for what is right can pay off. The proponents of the regulation could have given up after the trial court struck down the regulation and ruled for the insurance industry. They could have also given up after the Court of Appeal upheld the trial court’s ruling. Instead, the proponents of the regulation continued fighting—and it paid off!
As a trial attorney who has seen and experienced trial judges reach incorrect decisions to the detriment of policyholders, the California Supreme Court’s ruling gives me a renewed sense of optimism in our civil justice system. I truly believe that if we tirelessly fight for what is right and fair and refuse to give up when the odds seem stacked against us, at the end of the day, justice will prevail.
1 Ass’n of California Ins. Companies. v. Jones, No. S226529, 2017 WL 280822 (Cal. Jan. 23, 2017).