The California Court of Appeal, First Appellate District, affirmed the trial court's judgment upholding the validity of regulations concerning intervening consumers' rights to compensation for certain kinds of rate-making participation, and denying plaintiff insurance companies' requests for declaratory and injunctive relief. The Court of Appeal concluded the trial court correctly concluded the regulations were consistent with the governing statutes and reasonably necessary to effectuate their purposes. The Court of Appeal also affirmed the trial court's $121,848.16 compensation award to the intervener, holding that Insurance Code section 1861.10 authorized the trial court to do so.
In 1988, California voters passed Proposition 103 in response to calls for more effective regulation of insurance rates. Proposition 103, now codified as sections 1861.01 through 1861.16 of the California Insurance Code ("Chapter 9"), requires insurance companies to submit a rate application to the Insurance Commissioner for approval prior to implementing rate increases. Chapter 9 also provides for consumer participation and recovery of certain fees and expenses incurred in proceedings "permitted or established" under those statutes.
In 2006, the Commissioner proposed amendments to regulations previously adopted to implement Proposition 103. The amendments allowed consumer representatives who made a substantial contribution to the outcome of such proceedings to be eligible for compensation even if the proceedings ultimately concluded without a formal public hearing regarding the proposed rate increase.
The amendments changed certain definitions to clarify that a chapter 9 proceeding is established upon a consumer's submission of a petition for a hearing and, for purposes of seeking compensation, a "substantial contribution" could be shown regardless of whether a hearing petition was granted or denied.
Plaintiffs, various insurance industry associations including the Association of California Insurance Companies, brought a petition seeking to invalidate the amendments. Plaintiffs contended the amended regulations were inconsistent with the governing statutes, which allegedly permitted compensation awards only for participation in a formal "rate hearing," not in any other part of the administrative rate-setting process. The Commissioner and an intervening consumer group, The Foundation for Taxpayer and Consumer Rights (FTCR), opposed the petition and complaint.
The relevant statute, Insurance Code section 1861.10, provides:
(a) Any person may initiate or intervene in any proceeding permitted or established pursuant to this chapter [chapter 9] . . . . [?] (b) The commissioner or a court shall award reasonable advocacy and witness fees and expenses to any person who demonstrates that (1) the person represents the interests of the consumers, and, (2) that he or she has made a substantial contribution to the adoption of any order, regulation or decision by the commissioner or a court. Where such advocacy occurs in response to a rate application, the award shall be paid by the applicant."
The trial court rejected Plaintiffs' petition and complaint, ruling Plaintiffs had "failed to demonstrate that the [amendments] are inconsistent and in conflict with section 1861.10, and not reasonably necessary to effectuate the purpose thereof." The trial court also ordered Plaintiffs to pay the Commissioner's and FTCR's reasonable attorneys' fees and expenses, in the amount of $121,848.16.
Plaintiffs appealed. They argued the amendments were invalid because they conflicted with and enlarged the scope of sections 1861.05 and 1861.10. Plaintiffs further contended these statutes only authorized compensation for consumer participation in public rate hearings, not other parts of the administrative rate-setting process.
The Court of Appeal rejected Plaintiffs' position. Reviewing Proposition 103's statutory scheme, the Court held the only statutory requirements for receiving compensation are stated in subdivision (b) of section 1861.10, namely, that the intervener represent consumers' interests and make a "substantial contribution" to the outcome of the process. The Court rejected Plaintiffs' argument that section 1861.10 subdivision (a) was intended to qualify subdivision (b) by also requiring the outcome follow a public hearing or any other specific procedure.
Moreover the Court held that, even if section 1861.10 subdivision (a) was meant to qualify subdivision (b), any proceedings arising out of an insurer's rate application and which entail public participation in the review process are "proceeding[s] permitted or established pursuant to" chapter 9. Accordingly, the Court concluded the amended regulations permitting compensation for participation in "rate proceedings" were consistent with the governing statutes.
Furthermore, the Court ruled a rate proceeding is part of the public rate-setting process because, as defined in the regulations, a rate proceeding begins with the submission of a petition or notice of a hearing; the petition and notice are pleadings and part of the public record; and, though the regulations only specify the beginning, and not the end of a rate proceeding, "the regulatory scheme contemplates . . . the rate proceeding culminates in an order or decision by the Commissioner on the insurer's rate application."
The Court also found that the statutory scheme contemplated the resolution of rate applications outside of rate hearings, and the participation of consumers in other stages of the rate-setting process. The Court pointed to other regulations Plaintiffs did not challenge which specifically permitted resolution of a rate application by stipulation or settlement without a formal rate hearing, and provided for an intervener's participation in discovery, which the Court noted was a prehearing stage of the rate review process.
The Court noted the broad language employed in the statute and Proposition 103, stating the act was to be "liberally construed and applied" to support its underlying purpose, supported the Court's interpretation. The act was intended to increase consumer participation in and public scrutiny of insurers' rate-setting practices. To construe the statute as limiting consumer participation and compensation to formal public hearings would undermine that purpose.
Lastly, the Court affirmed the trial court's compensation award. It concluded the petition was a proceeding "permitted or established" by chapter 9 within the meaning of section 1861.10 (a). The Court also concluded Plaintiffs were responsible to pay this award. Under section 1861.10(b), where the prescribed circumstances for compensation were met in a proceeding other than an insurer's rate application, such as this judicial review of a rulemaking proceeding, the trial court has discretion to decide whether the insurer must pay the award. Plaintiffs did not argue the award constituted an abuse of discretion. Thus, the Court affirmed the award and added the Commissioner's and FTCR's costs from the appeal.
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This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.
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