Panel on California Insurance Regulations - Registration123

ACIC 23 st Annual General 

GREENBERG TRAURIG, LLP � ATTORNEYS AT LAW � WWW.GTLAW.COM 

©2011. All rights reserved. 

Counsel Seminar 

Rex Frazier, Personal Insurance Federation of California 

Gene Livingston, GreenbergTraurig 

Sanford Michelman, Michelman & Robinson 

July 2012

California Insurance Regulation Update 

� Litigating DOI Regulations 

□ Iran Bulletin 

□ ITV Regulations 

� Labor Rate Surveys 

� Steering 

� After-Market Parts 

� Prior Approval Workshop



Litigating DOI Regulations 

A Presentation by Gene Livingston to 

ACIC 23 nd Annual General Counsel Seminar 

Contact: Gene Livingston � Shareholder � livingstong@gtlaw.com � 916.442.1111

Litigating DOI Regulations 

Last year, we asked, “Is Litigation Our Future?” 

� Jones v. OAL 

– The Iran Directive 

� ACIC v. Jones 

– ITV Regulations

Jones v. OAL -- Iran Directive 

□ Poizner developed a list of 50 foreign 

companies engaged in Iran’s energy, nuclear, 

and defense industries. 

□ Ordered all investments held by insurers in the 

listed companies to be treated as nonadmitted 

effective March 31, 2010. 

□ “Requested” insurers to withhold future 

investments in the listed companies.


� Petition to the Office of Administrative Law 

� Five insurance trade associations, including 

ACIC and PIFC, petitioned OAL to determine 

the directive to be an “underground” 

regulation. 

� OAL granted the petition, determining the 

directive to be an underground regulation.


� The Commissioner Sues OAL 

□ He argued that OAL’s determination was 

erroneously issued. 

□ He named OAL as the Respondent and the five 

trade associations as Real Parties In Interest.


� The Five Trades Counter-Claim Against the 

Commissioner 

□ They sought an injunction against the 

Commissioner for enforcing the directive as an 

underground regulation. 

□ They sought a declaration that the directive 

exceeded his statutory authority and was 

preempted by the federal Constitution, federal 

statutes and regulations.

� Settlement 


□ The trade associations agreed that the 

Commissioner could: 

� Compile a list of companies doing business in 

Iran. 

� Encourage insurers to withhold investments in 

the listed companies.


� The Commissioner Agreed 

□ The Department will not favor or disfavor any insurer in 

any administrative matter because of the insurer’s 

decision about investments in the listed companies. 

□ Insurers no longer have to report separately investments 

in the listed companies. 

□ Investments in the listed companies will be treated as 

admitted investments.

ACIC v. Jones – ITV Regulations 

□ The regulations prohibit any communication to a 

homeowner about a replacement cost estimate unless 

the estimate is prepared in accordance with the 

detailed provisions of the regulations. 

□ The regulations provide that communicating an estimate 

without fully complying with the regulation constitutes 

the making of a misleading statement, in violation of 

Insurance Code section 790.03.


□ ACIC and PIFC filed a complaint for declaratory relief in the Los 

Angeles County Superior Court on June 8, 2011. 

□ The two trades seek a declaration that the regulation is invalid 

on the grounds that: 

1. Section 790.03 does not confer authority on the Commissioner to 

dictate how insurers calculate and communicate replacement cost 

estimates. 

2. The regulation controls insurers’ underwriting, and the Commissioner 

has no authority to regulate underwriting in this manner. 

3. Denying insurers the right to provide estimates based on other 

methods infringes on their First Amendment rights.


� Status of the Litigation 

□ The trial court denied the trades’ motion for 

judgment on the pleadings. 

□ The Court of Appeal denied a petition to review 

the trial court’s decision. 

□ Next Step: Cross-motions for summary 

judgment.

Auto Body Repair Issues: 

Labor Rate Surveys, and 

Steering 

Sanford Michelman

Auto Body Repair Labor Rate Surveys 

� What is it all about? 

□ Insurance Code Section 758: 

� IF an insurer utilizes surveys to “determine and set” a 

labor rate it must report the results to the Department 

and make it available upon request. 

– Section 2698.91: 

� In 2002, CDI adopted and OAL approved this regulation to 

“implement, interpret, and make specific” section 758: 

– Basic information as to what information is 

available upon request 

□ Tension between Non-Direct Repair shops (“DRP”) and 

insurers continued: 

� Non-DRPs dislike the use of surveys with respect to labor 

rates – too much pricing pressure


� What’s the status of the issue? 

□ Department of Insurance Action(s) 

� Department held an informal workshop and issued a draft 

� Issue is still under active review by the Department 

– Workshop draft may not be the final version 

� Analysis of Workshop Draft: 

□ General Impressions 

� Not clear drafting: Inconsistencies in intent & purpose 

� Opens potential abuses by Repair Shops 

� Potential liability traps through out the draft 

� Generally – Not good!



□ First Step: Only applies to non-DRP shops 

� If no surveys – end of analysis 

� If surveys issued, go the second step: 

□ Second Step: Section 2698.91 & .92: 

� 2698.91 Analysis (already decided to use surveys): 

– Important Aspects – Just the Big issues: 

» (a) - Must adhere to the standards of .91 

» (a) - If an insurer complies, the Department may consider 

the claims practice “fair and equitable” – See, Section 

790, et. seq.



» (h) – Primary purpose(s): 

» Inform public about prevailing labor rates 

» Data to negotiate with DRP shops 

»A survey cannot be used to “cap or reduce” labor 

rate charged on an estimate or repair order (outside 

DRP) or support the “presumption of 

reasonableness” in any such adjustment 

» UNLESS, the insurer complies with .92



»(h) –PROBLEM: If a survey is issued, what’s the value 

and exposure? 

» It cannot be used outside DRP 

» No other viable use for surveys 

» It is public information. Plaintiff lawyers will 

attempt to show a relationship between the surveys 

and the insurer “capping or reducing” the labor 

rate 

» Section 17200 or Class Action?



» (h) – So why have .91 stand alone? Insurer will always go 

to .92 to mitigate exposure. No upside - only downside as 

drafted 

» (k) – If the repair shop responds to a survey stating is 

“posts” labor rates, then the Insurer must adhere to the 

posted rates 

» PROBLEM: Repair shops can just respond they post 

rates – insurer is stuck with the labor rate



� 2698.92 Analysis (already decided to use surveys): 

– Important Aspects – Just the Big issues: 

» (c) – To be “statistically valid” the surveys must: 

»Go to all known shops licensed by the Bureau of 

Automotive Repair 

» The responding shops must meet 12 specific 

standards to be included in the survey



□ Second Step: Section 2698.91 & .92: 

»(c) –PROBLEMS: 

» Retrospective analysis if challenged 

» “all” & met 12 standards 

» Not required to ask if the shops meet the criteria 

in .92 

» No safe harbor in surveys 

» 17200 & Class Actions 

» Potential Solution: Safe Harbor regarding standards


� Other Issues & Challenges: 

□ Is this relationship subject to section 790 (Unfair Claims)? 

� Not clear – just vendor (no contract/policy issues) 

□ Insurance Code section 758 – Only reporting surveys requirement 

� Regulation is appropriate to “implement, interpret, and make specific” a 

statute. 

– Section 2698 goes way beyond – new scheme 

� The Department would be exceeding its authority

Auto Repair Shops - Steering 

� What’s the status of the issue? 

□ Department of Insurance Action(s) 

� Issue is still under active review by the Department 


□ Insurance Code Section 758.5: 

� Insurer cannot “suggest or recommend” claimants use a specific repair 

shop absent: (1) claimants express request for a referral, (2) claimant was 

informed in writing of the right to select their own repair shop


□ Section 2695.8(e): 


� Seeks to clarify “suggest or recommend”. Per draft, it means: 

– Insurer communicated the name of a repair shop 

– Requested the claimant choose a different repair shop 

– Communicates information to the claimant only relevant to the 

choice of repair shop



□ PROBLEMS: 

� Too broad – “any information” … “relevant only to choice of…repair dealer”. 

– “only” may be a safe guard – fact specific 

� May Violate AB 1200 (2009): 

– “provide the claimant with specific truthful and non-deceptive 

information” about the claims process. 

» Harmony? 

» What can an insurer say? 

»1 st Amendment Issues



□ PROBLEMS: 

� BIGGEST PROBLEM: 

– Too much risk for insurer to discuss the chosen facility 

without violating draft subsection C: 

» Insurer cannot discuss a poor service, quality, etc. 

without “clear documentation in the claim file 

supporting these statements”; otherwise deemed “false, 

deceptive, or misleading”: 

» All subject to challenge

Regulating Repair and Use of 



Aftermarket Parts 

A Presentation by Gene Livingston to 

ACIC 23 nd Annual General Counsel Seminar 

Contact: Gene Livingston � Shareholder � livingstong@gtlaw.com � 916.442.1111

Amendments to 10 CCR Section 2695.8(f) 

An insurer’s estimate shall be of an amount for repairs to be 

made: 

� In accordance with accepted trade standards for good 

and workman-like automotive repairs by an auto body 

repair shop; and 

� In accordance with the standards of automotive repair as 

required in the statute and regulations, including 16 CCR 

section 3365.

16 CCR Section 3365 

□ The accepted trade standard for good and 

workman-like repairs shall include the following: 

� Repair procedures shall be performed in accordance 

with OEM service specifications or nationally 

distributed service specifications generally accepted 

by the auto body repair industry.

� No insurer shall depart from accepted trade 

standards for good and workman-like repairs in 

preparing a settlement offer or estimate. 

� An insurer shall not prepare an estimate that is 

less favorable to the claimant than the 

guidelines provided by estimating software.

Amendments to 10 CCR Section 

2695.8(f)(3) 

� An insurer, in providing an adjusted estimate to the 

claimant, and claimant’s repair shop, shall provide either: 

□ An edited copy of the claimant’s repair shop estimate; or 

□ A supplemental estimate based on the itemized copy of 

the claimant’s repair shop estimate. 

The adjusted estimate shall identify the specific adjustments 

made to each item of the claimant’s shop’s estimate.

Amendments to 16 CCR Section 2695.8(g) 

(3) Insurers must disclose in writing in any estimate 

that it warrants that non-OEM parts are of like 

kind, quality, safety, fit, and performance as 

original equipment manufacturer replacement 

crash parts.

Amendments to 16 CCR Section 2695.8(g) 

(6) – (9) Insurers specifying the use of non-OEM replacement crash parts 

that the insurer has implied, actual, or constructive knowledge are 

not equal to the OEM parts in terms of kind, quality, safety, fit, and 

performance shall: 

□ Immediately cease specifying the use of those parts and notify the 

collision repair estimating software provider to remove the part 

from the software; and 

□ Notify the distributors of the part of the defect, safety issue, or noncompliant 

aspect of the part. 

□ If the part is certified, file a report with the certifying entity. 

□ Pay for the costs associated with returning the part and the cost to 

remove and replace the non-OEM part with a compliant or OEM part.

Proposed Amendments to 16 CCR Section 

2695.8(f) 

� Oppose the Regulation Unless It Is Amended


2695.8(f) 

(f) If partial losses are settled on the basis of a written estimate prepared by or 

for the insurer, the insurer shall supply the claimant with a copy of the 

estimate upon which the settlement is based. The estimate prepared by or 

for the insurer shall be of an amount which will allow for the repairs to be 

made in accordance with accepted trade standards for good and 

workmanlike automotive repairs by an “auto body repair shop” as 

defined in section 9889.51 of the Business and Professions Code. [Strike 

Out] The estimate shall be based on repairs to be performed either in 

accordance with OEM service specifications or in accordance with 

nationally distributed and periodically updated service specifications 

that are generally accepted by the autobody repair industry. An insurer 

shall comply with the standards, costs, and guidelines provided by the 

third-party automobile collision repair estimating software used by the 

insurer to prepare the estimate.


2695.8(f) 

If the claimant subsequently contends, based upon a written estimate 

which he or she obtains, that necessary repairs will exceed the 

written estimate prepared by or for the insurer, the insurer shall: 

(3) reasonably adjust any written estimates prepared by the repair shop 

of the claimant’s choice and provide a copy of the adjusted estimate 

to the claimant and the claimant’s repair shop. The estimate 

provided to the claimant and repair shop shall be either an edited 

copy of the claimant’s repair shop estimate, an edited copy of the 

insurer’s estimate, or a supplemental estimate prepared by the 

insurer adjusting the itemized supplemental request from the 

claimant’s repair shop. [Strike out]


2695.8(g) 

(2) insurers specifying the use of non-original equipment 

manufacturer replacement crash parts shall only 

specify parts that are distributed by entities which 

agree to pay the cost of any modifications to the parts 

which may become necessary to effect the repair; and,


2695.8(g) 

(6) Insurers specifying the use of non-original equipment manufacturer 

replacement crash parts shall [Strike out] only specify parts that are 

distributed by entities which: 

(i) have in place a program to analyze parts returned as defective 

and report the defective part number, lot number, and nature of the 

defect to the manufacturer, certifying entity, and the Department of 

Insurance within thirty (30) calendar days of determining the part to be 

defective; 

(ii) agree to pay the cost to the repair shop associated with 

returning the part, and to replace the part; 

(iii) indemnify the auto repair shop for any part verified by the 

distributor to be defective. 

[Strike Out]

Prior Approval Regulation 

Workshop 

Rex Frazier

Prior Approval Workshop 

� Notice of Workshop, dated September 21, 2011 

□ CDI notice of workshop “regarding the scope of prior approval.” 

□ “… to discuss potential revisions to the regulations concerning the 

prior approval process for class plan and rate applications.” 

� Workshop held on November 10, 2011, with industry 

and “consumer” group discussion.

Big Picture 

� CDI staff seemed interested in understanding: 

□ Exactly what is the department approving when it 

approves a rate or class plan? 

□ Is there a way to more clearly define, or potentially 

limit, what is considered “approved?” 

□ Should the CDI create a checklist of exactly what is 

approved, and not approved?

Why Do These Questions Matter? 

� MacKay v. Superior Court, 188 Cal.App.4 th 1427 

(2010). 

□ “The question presented by this appeal is whether, after a rate 

has been approved [by the Department of Insurance], an insured 

may pursue a civil action to challenge what it believes to be an 

illegal rate.” 

□ Holding: No, an insured must petition the CDI alleging an illegal 

rate and, if the CDI disagrees, the insured must appeal the CDI’s 

determination in court as set forth in the Insurance Code.

� Insurers happy. 

The Reaction? 

� “Consumer” groups sad. 

� Depublication requests by: 

□ CDI 

□ Consumer Watchdog 

□ Consumer Federation of California 

□ Consumers for Auto Reliability and Safety 

□ City of San Francisco 

� Depublication Denied.

Topics for CDI Workshop 

� The Differences Between a “Rate,” “Premium,” 

a “Rating Factor,” and an “Underwriting Rule.” 

� Effect of the CDI’s Approval of a Rate or Class 

Plan Filing Which Contains an Unlawful Practice. 

� The Difference Between an “Authorized” and 

“Unauthorized” Rating Factor. 

� Should Underwriting Guidelines, Eligibility 

Criteria and Rating Rules Be Made Public? 

� Should Underwriting Guidelines, Eligibility 

Criteria and Rating Rules Be Subject to Prior 

Approval? 

� The Difference Between Section 1585 

Complaints and Primary Jurisdiction Referrals.

Brief MacKay Facts 

□ Plaintiff objected to 21 st Century’s use of two approved 

auto rating practices: 

� An “accident verification” method for calculating 

driver safety record; and 

� A “portable persistency” rating factor. 

□ Plaintiff alleged these approved factors violated Prop. 

103’s ban on using the “absence of prior insurance” for 

rating. (1861.02(c)) 

□ Plaintiff asked the CDI to investigate and hold a 

hearing, but CDI declined. 

□ Rather than challenge the CDI’s decision in court, the 

plaintiff initiated a class action against 21 st Century 

under B&P Section 17200.

Topic #1 

� The Differences Between a “Rate,” “Premium,” a “Rating 

Factor,” and an “Underwriting Rule.” 

□ In MacKay, Plaintiff argued that the “accident 

verification” factor was not a “rating factor” but 

rather an “underwriting guideline.” 

□ Underwriting guidelines are not “approved.” So, 

Plaintiff should be permitted to initiate a civil action. 

□ Court rejected this word play: “The issue is whether 

it is submitted to the DOI as a factor affecting the 

rates to be charged.” 

□ Insurers believe case law has resolved these issues of 

terminology, as the Court noted approvingly of Smith 

v. State Farm, 93 Cal.App.4 th 700 (2001), which had 

examined the definition of “underwriting rule.”

Topic #2 

� Effect of the CDI’s Approval of a Rate or Class Plan Filing Which 

Contains an Unlawful Practice. 

□ The CDI’s notice asks whether approval of an unlawful 

practice is “subject to correction and remediation.” 

□ In MacKay, Plaintiff argued that the CDI lacked the 

power to approve the “illegal practices.” 

□ But, the Court was only concerned with whether the 

CDI had “approved” the practices, which it concluded 

the CDI had approved in an enforcement action 

stipulation. 

□ MacKay does not validate illegal insurer practices. The 

case only examined whether a class action is possible 

against an insurer using “approved” practices.

Topic #3 

� The Difference Between an “Authorized” and “Unauthorized” 

Rating Factor. 

□ The CDI’s Notice mentions that 10 CCR 2632.2(a) 

defines permissible rating factors in addition to 

Insurance Code Section 1861.02(a), which specifies 

mandatory and optional factors. 

□ The CDI’s Notice invites discussion of “a regulation 

designed to prevent any confusion about the 

difference between an authorized and an unauthorized 

rating factor.” 

□ There is ample case law already analyzing the 

operation of auto rating factors, particularly Spanish 

Speaking Citizen’s Foundation v. Low, 85 Cal.App.4 th 

1179 (2000). 

□ MacKay did not impact this issue.

Topic #4 

� Should Underwriting Guidelines, Eligibility Criteria and Rating Rules Be Made 

Public? 

□ The CDI’s Notice references Insurance Code Section 1861.07, which requires 

“all information provided to the commissioner pursuant to [Proposition 103] 

shall be available for public inspection.” 

□ The CDI asks whether 1861.07 should be applied to underwriting rules and 

other materials which it traditionally has not been part of a rate application 

and which the CDI has agreed to keep out of the public file. 

□ Consumer Watchdog previously made this argument. 

□ This issue seems related to State Farm v. Garamendi, 32 Cal.4 th 1029 (2004) 

(permitting the CDI to subject Community Service Statement data submitted 

under 10 CCR 2646.6(c) to the public disclosure provisions of Section 

1861.07). 

□ Insurers share information not part of the rating application if the CDI 

agrees to keep it confidential; subjecting anything submitted to the CDI to 

public disclosure will undoubtedly alter insurer behavior.

Topic #5 

� Should Underwriting Guidelines, Eligibility Criteria and Rating Rules 

Be Subject to Prior Approval? 

□ The CDI’s Notice invites a discussion of “a regulation 

that would require insurers to submit, and the 

Department to approve, all of an insurer’s underwriting 

guidelines, eligibility criteria and rating rules. 

□ It is unclear what authority the CDI has to require 

approval of materials traditionally considered outside of 

the rate approval process, and the Commissioner’s prior 

approval authority. 

□ Such a regulation would undoubtedly invite insurer 

litigation.

Topic #6 

� The Difference Between Section 1585 Complaints and Primary 

Jurisdiction Referrals. 

□ The CDI’s Notice references confusion between 1) 

instances where a court, using the doctrine of 

primary jurisdiction, halts its proceeding to get input 

from a regulator with special competence, and 2) 

complaints received from the public under Insurance 

Code 1858 (like in MacKay) 

□ In MacKay, Plaintiff attempted to argue that Farmers 

Ins. Exchange v. Superior Court (1992) 2 Cal.4th 377, 

should be used as authority for allowing a civil suit 

against 21 st Century – they argued that primary 

jurisdiction stayed, but not precluded a 17200 action 

and “includes the implicit holding that an approved 

rate can, in fact, be challenged.” 

□ It is unclear what the CDI wants to do with this.

Status? 

� 7+ months since the Workshop. 

� No clear indication of the CDI’s next steps. 

� MacKay has not spawned rampant insurer 

abuses.

Why MacKay is So Important 

� Justice Croskey wrote: 

□ “… there is no tort liability for charging a rate that 

has been approved by the commissioner.” 

□ “Plaintiffs repeatedly argue that our decision grants 

insurers ‘immunity’ for their illegal practices… 

Plaintiffs’ concern is not that insurers will be left free 

to charge illegal rates, but, rather, that they will be 

unable to collect damages or obtain disgorgement of 

any illegal premiums collected. There is no injustice 

in exempting an insurance company from disgorging 

premiums collected pursuant to a rate which has been 

approved in advance by the Commissioner.” (citing 

1858.07, providing no civil penalties may be imposed 

for the use of an approved rate)

� Workshop Notice: 

See No Evil, Hear No Evil 

□ “Please do not submit topics relating to the 

prior approval formula, the class plan rating 

factor weighting process, or to the adoption of 

new or different rating factors, as topics such 

as these are beyond the scope of this Workshop 

and will not be discussed.”

Panel on California Insurance Regulations - Registration123

Create successful ePaper yourself

Delete template?

Save as template?