California Insurance Code (CIC) 1861.12 is part of Proposition 103 and authorizes insurers to issue property and casualty 'insurance coverage on a group plan.'  Insurers may issue such group insurance 'without restriction as to the purpose of the group, occupation or type of group.'  Under 1861.12 the rates for group insurance are not 'considered to be unfairly discriminatory, if they are averaged broadly among persons insured under the group plan.'  However, the statute does not define the term 'group' and does not specify conditions as to when insurance may be issued on a group plan.  Further, the statute provides no guidance with regard to the validity of groups that exist solely for the purposes of purchasing insurance, or groups that are simply acknowledge by an insurer based on shared characteristics or status, such as everyone who has purchased a particular product from a particular vendor."

On behalf of the CDI were Dan Goodell, Joel Laucher, Pam O’Connell, Stan Bair and Betty Mohr.  Doug Heller and Todd Foreman appeared on behalf of the Consumer Watchdog ("CW").  From the industry trade organizations (at least as far as I was able to identify) were Jeff Fuller (ACIC) and Kim Dellinger (PIFC).  Finally, 20-25 company reps and attorneys from law firms, including myself, were present.

The CDI noted that the forum was intended to be open and invited a frank discussion of all points of view.  The following is a summary of general comments made at the workshop by the CDI and CW.  [Because the discussion was a bit free-form, rather than discuss the comments linearly, I set forth the positions raised by the CDI and the CW (where comments were made) as they concern the list of questions set forth in the Notice. Also, this author apologizes if he has inartfully and/or imprecisely reiterated the positions set forth below and invite any and all corrections.]

ISSUE 1: “What is the most appropriate definition for the word ‘group’ as used in CIC 1861.12?”

Unsurprisingly, this issue gave rise to the most debate. 

Preliminarily, the issue of whether the CDI had authority, in the first instance, to promulgate regulations to alter what is arguably the clear and broad meaning of “group” under Section 1861.12 came up.  The CDI understood that this will be a debated issue, but did not agree that this issue had merit.

The CDI's View:

With respect to the main question, the CDI's position is that a “group” must be an actual organizational group.

With respect to the “without restriction as to the purpose of the group, occupation or type of group” language, the CDI noted that it did not believe this language meant any identifiable “group” could be the subject of a group plan.  Rather, the CDI believed that Section 1861.12 implies the existence of an actual bona fide group and that the “without restriction” language is intended to prevent the discrimination against any particular “group.”  By way of example, the CDI noted that graduates of Cal Berkeley are not a “group” but that the alumni organization for Cal Berkeley could be a qualifying group.

While the CDI appears to have a strong idea (though not necessarily fully disclosed) of what is a “group,” the CDI also demonstrably appeared to have an open mind to discuss this issue.  At the outset of the workshop, the CDI noted that it was inclined to require a “group” to exist for some purpose other than the purpose of purchasing insurance.  Throughout the workshop, however, the CDI noted that a “group” could possibly qualify if brought specifically together for the purpose of buying insurance.

The CW's View:

For the CW, a “group” must be an authentic "group," not a "grouping" of individuals defined simply by a set of characteristics.

The CW noted that interpretation of “group” should be viewed in light of the purpose of Prop 103.  Per the CW, voters pass Prop 103 to empower policyholders.  Because, as the CW argues, this was the goal of Prop 103, this view should shape the discussion in understanding the meaning of 1861.12.

The CW considers this statute to be about enabling consumers to ban together to wield “collective bargaining power” to obtain better insurance rates from carriers.  The CW cited chambers of commerce, AARP, and alumni organizations as examples of authentic groups.

ISSUE 2: “Should insurers be allowed to issue insurance on a group plan for groups such as those based on shared characteristics or status, even if the group has no membership requirements?"

In short, both the CDI and CW would answer this question in the negative.

ISSUE 3: “Should groups have to exist for a particular purpose other than the purpose of purchasing insurance?"

While the CDI initially noted that it felt groups should be together for a purpose other than for the purpose of purchasing insurance, the CDI later noted it could be open to this type of group.  The CW is fine with this type of "group" under 1861.12.

ISSUE 4: “Should insurers be permitted to form groups solely for the purpose of allowing consumers to purchase insurance a group rate?"

The CDI expressed no definitive position on this issue.  While the CW strongly believed that groups could specifically be brought together to obtain a "group plan" and generally focused on consumer-created "groups," the CW did not out rightly reject an "authentic" group that may be created by an insurer.

ISSUE 5: “To what extent, if any, do the auto rating factor rules found in CIC 1861.02(a)(4) and CCR 2632.5 impact what groups may be allowable under 1861.12?"

To the extent this was discussed, it was briefly discussed in connection with the CW’s concern that "group plans," in effect can be used to employ unapproved rating factors (i.e., where insurer uses "group" characteristics to underwrite only certain risks having preferred group characteristic). 

ISSUE 6: "How should group membership be determined?  Should there be eligibility requirements for 'membership' in a group, such as payment of dues or voluntarily joining the group?"

This issue was not directly discussed to any material extent.

ISSUE 7: "Should an insurer ever be required to confirm group membership of an applicant who claims to be a member of a group?  What should be required and under what circumstances?"

The CDI strongly believes that some process should be put in place to ensure that risks actually belong to a group and to ensure, for future renewals, that these risks are still part of a group.  There was no substantive discussion on specific processes that the CDI would like to see, but the CDI noted that this would depend upon the specific circumstances for each type of group for each insurer.

ISSUE 8: "Should an insurer be required to have a formal agreement with a group before issuing insurance for the group on a group plan?"

This issue was not expressly discussed.  However, based on their comments, both the CDI and CW believe that there should be an authentic/organizational "group."  Further, the CW contemplated that groups could form to present RPAs to carriers for group plans.  Based on these comments, the CDI and CW would appear to require some type of agreement or at least a mutual understanding that a group plan is being offered to members of a qualifying group.

ISSUE 9: "Should an insurer that offers group rates be required to notify/offer every insured/applicant of every group rate available?  How often - at every renewal?"

This issue was not discussed.

ISSUE 10: "Should an insurer be required to discontinue a group rate for an individual when the insured leaves the group or otherwise becomes ineligible for the group rate?  What should the insurer have to do to confirm that insured’s receiving the group rate remain eligible from one policy period to the next?"

The CDI indicated that a group rate for an individual should be discontinued where an individual leaves a group.  It was noted by some that this could depend upon the defined "group" (i.e., a group could include current and former members of a "group").  The CDI did not necessarily agree with the concept of a "group" that is inclusive of "former" members of a group.  Further, the CDI strongly believes that some process should be in place to ensure that a risk is still part of a "group."

ISSUE 11: "What should be required to establish an initial rate for a new group that has no experience date to support a rate differential?"

This issue was not discussed to a material degree.

ISSUE 12: "What should be required to demonstrate that the group rate is justified as experience from the group develops?"

This issue was not discussed to a material degree.

ISSUE 13: "Should there be a mandatory re-filing period when an insurer makes a new group filing with no experience data?

This issue was not discussed to a material degree.

* * *

Depending upon the view of the next administration on the need for regulations, there may be a second workshop to invite further comment on any contemplated regulations.  In advance of a second workshop, it was suggested that the CDI publish something that could provide the industry and consumer groups a more concrete idea of what may be contemplated by the CDI to sharpen any further discussion. 

Rick De La Mora of my office and I gave a presentation re: "The Regulation and Oversight of Insurance Pricing: Developing Trends in Health and Property & Casualty Insurance."  To the extent that there is any interest, excerpts of that presentation relating to Rick and my portion of the presentation, including a discussion of emerging caselaw regarding the filed rate doctrine, can be found here. 

On October 6, 2010, the California Court of Appeal issued a landmark decision involving Proposition 103 insurance rate approval in MacKay v. Superior Court, B220469 & B223772.

The legal issue, as Division Three of the Second Appellate District explained, was

"whether the approval of a rating factor by the DOI [Department of Insurance] precludes a civil action against the insurer challenging the use of that rating factor.” 

In MacKay, the plaintiff class sued 21st Century Insurance Company asserting that its use of certain rating factors (persistency and accident verification) was illegal and therefore actionable under California's Unfair Competition Law (“UCL”), Bus. & Prof. Code § 17200.

In a unanimous decision, written by Justice Croskey, the Court held "that the statutory provisions for an administrative process . . . are the exclusive means of challenging an approved rate,” precluding a UCL action and therefore ordered the trial court to enter judgment for 21st Century.

Prior to this decision, previous decisions had created uncertainty as to whether insurers, having fully complied with the requirements of Proposition 103 rate approval, could charge approved rates free from subsequent civil challenges.

While Walker v. Allstate Indemnity Co, 77 Cal. App. 4th 750 (2000) held that approved rates could not thereafter be civilly challenged, Donabedian v. Mercury Ins. Co., 116 Cal. App. 4th 968 (2004) created confusion on this issue.

The MacKay decision resolves all prior confusion in declaring that approved rates and rating factors cannot thereafter be civilly challenged.

21st Century Insurance Company was represented in this action by Kent R. Keller, Steven H. Weinstein, Marina M. Karvelas and Peter Sindhuphak of Barger & Wolen.

[A copy of the published decision can be found here.]

"He believes that additional bureaucracy envisioned in the bill doesn’t deal with the fundamental problem of health care — rising medical costs. Steve is committed to lowering healthcare costs, but President Obama demonstrated with his healthcare bill that he is not the least bit interested in lowering healthcare costs for consumers,” Agen said in an e-mailed reply to my query."

“Steve wants greater choice and competition in the healthcare marketplace through measures like reducing the number of mandates, increasing the use of electronic medical records, and giving consumers the freedom to purchase health insurance across state lines. He believes measures such as these, rather than more government incursion into our healthcare system, will make healthcare more affordable for California’s citizens.”

[Link to article/post here.]

This position is not in line with the Consumer Watchdog organization, which strongly supports prior approval of health insurance rates, but certainly consistent with Poizner's gubernatorial campaign platform.

[By Richard G. De la Mora: For original post, please go here.]

Having unsuccessfully urged Congress to impose a national freeze on health insurance rates, Harvey Rosenfield has refocused his efforts on the California legislature and AB 2578.

Who is Harvey Rosenfield? He is, in his own words, the “author of California’s landmark property-casualty insurance rate regulation Proposition 103 – recognized as the most successful rate regulation in the country.” In fact, AB 2578, which cleared Assembly Health Committee earlier this week, includes the following provisions modeled closely on Proposition 103:

• A requirement that all rates and rate changes be filed with and approved by the Department of Insurance or Department of Managed Health Care before they go into effect;

• A prohibition on the use or approval of rates that are “excessive, inadequate, or unfairly discriminatory”;

• A right for consumer advocates to request a hearing on a rate application, and a requirement that a hearing be granted whenever the rate increase sought exceeds 7%.

Finally, Mr. Rosenfield has made sure that he and his friends in the consumer advocacy industry are taken care of by advocating a provision requiring health plans to pay the consumer advocacy fees associated with fighting the health plan’s rate application.    

We have seen this played out before, as our firm has represented property-casualty insurers in administrative and judicial matters involving insurance rates regulated under Proposition 103 since 1989.

While property-casualty insurers have had plenty of time to adjust to the dictates of rate regulation, health plans will face a steep learning curve if AB 2578 becomes law. 

We are hopeful that this legislation will not become law. Even if it does, AB 2578 will likely face legal challenges and hurdles as did Proposition 103.

From our experience, we learned some of those challenges will be more successful than others. Nevertheless, if rate regulation comes to pass, a company’s goals can still be achieved provided that it has a complete understanding of the proposed regulatory system, plans ahead, has input into the development of regulations, and prepares itself for life after the system is implemented.

Barger & Wolenwill continue to keep our clients and friends apprised on new issues pertaining to AB 2578 via the firm’s Insurance Litigation & Regulatory Law Blog and the Life, Health & Disability Law Blog (as well as this blog). If you would like to be notified about upcoming events and seminars pertaining to AB 2578 and other issues, please subscribe to our firm blog via the RSS feed or send us your email so we can sign you up for alerts.

For instance, who first came up with the continuous coverage discount? 

Well, if you ask a former Division Chief of Rate Regulation and Deputy Commissioner of Rate Regulation of the California Department of Insurance ("CDI"), the CDI did. 

In a declaration filed in connection with the Proposition 17 ballot litigation, the former chief and deputy commissioner stated:

"In early 1994, during the course of a Field Rating and Underwriting Bureau examination of a large market share insurer, I was contacted by the Bureau Chief for the Field Rating and Underwriting Bureau who indicated that the rate analyst conducting the examination determined that the insurer's persistency discount rule may be unfairly discriminatory and in violation of Insurance Code section 1861.05(a).  The rate analyst claimed that there should be no difference between an existing policyholder who receives a persistency discount and a new policyholder with verifiable existing insurance experience with a different insurer.  In other words, the existing insurance experience should be 'portable' and considered by a different insurer ('portable persistency').  I concurred with this analysis."

"A review of the automobile rating factors reflected that persistency is the only rating factor that makes a distinction between existing and new policyholders which we felt was unfairly discriminatory.  In addition there was a public policy component to our decision as well.  If other companies were to adopt a portable persistency interpretation, it potentially could help reduce insurance premiums for the vast majority of drivers in [] California since roughly three out of four drivers in the State have existing automobile insurance.  Consumers would be more inclined to shop for insurance if they knew that they would not lose their persistency discount by moving to another insurer."

"Following a number of discussions with this larger market share insurer, at our instruction it added portable persistency to its class plan.  Its class plan was then approved in 1995."

"As the foregoing reflects, the concept of a portable persistency discount was initially the Department's idea.  The Department subsequently approved the adopting of such a persistency discount in 1995."

[Emphases added.]

While the CDI's currently stated position on Proposition 17 might be characterized as equanimous, the CDI apparently had a much stronger opinion on this discount and even considered the existence of this discount to be good for California consumers. 

[A copy of the court filed declaration can be found here.]

It appears that the process toward adopting this bill may move quickly as it was announced today in the LA Times that the bill "sailed through" the Assembly's Health Committee (link here).  Of course, the Consumer Watchdog organization has a blurb on this issue as well (link here).