Appeals Court Rejects California Home Insurance Refund Order

SACRAMENTO, Calif. (AP) — Consumer advocates said Tuesday that they will ask the California Supreme Court to overturn an appeals court ruling they said undermines the state’s ability to order billions of dollars in insurance company refunds.

A San Diego-based state appeals court on Friday rejected a California insurance commissioner’s finding from 2016 that State Farm’s California subsidiary was overcharging on its homeowners insurance rates.

Dave Jones, who was insurance commissioner at the time, ordered the company to refund more than $100 million to its California policyholders, a decision reversed by the appeals court.

More broadly, Consumer Watchdog founder Harvey Rosenfield said the decision also imperils current Insurance Commissioner Ricardo Lara’s order that insurance companies refund as much as $3.5 billion he says they overcharged California motorists who dramatically curtailed their driving during the coronavirus pandemic as the state imposed sweeping stay-at-home orders last year.

Rosenfield said the ruling undermines the 1988 voter-approved ballot proposition he authored, which created California’s elected insurance commissioner and has allowed the commissioner to reject proposed rate increases and order refunds.

Deputy Insurance Commissioner Michael Soller had a narrower interpretation, that the decision was specific to State Farm and the state’s attempt to prevent the company “from manipulating its corporate investment policies in order to increase insurance premiums for California consumers” — a claim the court also rejected.

The three-judge panel of the 4th District Court of Appeal ruled “that the retroactive rate and refund were impermissible” under its interpretation of the powers imposed by Proposition 103.

The initiative “was meant to ensure fair and reasonable rates” and the insurance commissioner has “broad discretion in adopting regulations to administer the initiative,” the judges found.

But that allows for a prior-approval system in which companies apply for rate changes that are reviewed by the insurance commissioner before they take effect — “not the kind of open-ended enforcement power the Commissioner appears to be asserting,” the court found before rejecting the method Jones used to assert that the company had overcharged its policyholders.

“Californians passed Proposition 103 to protect themselves against arbitrary rates and discriminatory practices by requiring insurance companies to keep rates and premiums fair,” Rosenfield said. The appeals court’s decision “has stripped the Insurance Commissioner of the powers the voters gave him to protect Californians against excessive rates.”

He said the state Supreme Court has already twice upheld the commissioner’s authority to order refunds, though the lower court said the justices were addressing related issues and “not the Commissioner’s discretion generally.”

State Farm said it was pleased with the court’s decisions on both the retroactive refund and its rejection of the way Jones determined how much he believed the company owed.

State Farm created a California-only subsidiary for its non-automobile insurance lines in 1998, citing “the unusual risks presented by California’s exposure to catastrophes.” By the time of Jones’ order, the subsidiary insured about 20% of California homeowners.

The company in 2014 had applied for a 6.4% rate increase for its home and renter insurance policies.

Two years later, Jones instead ordered the refund based in part on his calculation of how much State Farm had earned by investing consumers’ insurance payments nationwide.

The appeals court said he could only consider the subsidiary’s income, a decision that Rosenfield argued opens the door to bookkeeping tricks that underreport the subsidiary’s true profitability.

But the court said opponents of its interpretation did “not establish that limiting rate manipulation was a purpose of Proposition 103.” It specifically rejected the argument that because of its ruling, multistate insurers can in the future be expected to cook the books.