California High Court Gives Regulators Vast New Powers

A ruling on insurance could embolden all kinds of state regulators.

President Donald Trump's spate of executive orders has jump-started a national debate about the wisdom of executive edicts, especially those that stray into the area of lawmaking. While presidential orders grab the spotlight, the issues of administrative overreach and how to properly limit the power exerted by government officials are frequent subjects of court scrutiny at every level of our political system.

For instance, the California Supreme Court issued a Jan. 23 ruling in a case that challenged the insurance commissioner's authority to issue rules governing how insurance companies calculate replacement-cost estimates for homeowners' policies. The trial and appeals courts ruled the commissioner exerted power not granted to him by the legislature, but the high court overruled those decisions.

The decision has broad implications for the California Department of Insurance, which has been granted vast new regulatory powers. And while the 1959 statute at issue relates solely to the insurance industry, the court's opinion could embolden other California regulatory agencies to take wider latitude as they implement business-related regulations.

The regulation in question was promulgated in 2010 under former Insurance Commissioner Steve Poizner, a Republican, and defended by the current commissioner, Dave Jones, a Democrat. Following wildfires in the 2000s, some homeowners complained their policies did not provide enough coverage to cover the total cost of rebuilding. They argued the insurers' replacement-cost estimates, which they relied upon in their coverage purchases, often excluded major items like debris removal that should have been factored into the calculation.

The resulting "replacement cost regulation" requires insurance companies that choose to provide replacement-cost estimates to include a detailed list of requirements and standards that must be followed before communicating any such estimate. Those that provide estimates that diverge from the standard would be deemed to have provided a "misleading" statement—a serious matter under the state's Unfair Insurance Practices Act.

In a brief submitted to the court by two trade associations, the insurance industry argued the commissioner "attempted to run roughshod" over the authority granted by that 1959 law by "expanding the legislatively prescribed list of unfair or deceptive acts spelled out in the UIPA." The industry further argued the insurance code doesn't allow the commissioner to mandate only one type of replacement estimate and that restrictions on communicating other types of cost estimates would abridge the First Amendment.

The lower courts ruled in favor of the industry on the "limits of power" issue, so the courts never examined the legal issues surrounding those other points. The state attorney general's office took the side of the state Department of Insurance. In its 2015 ruling, the appeals court noted that, while the Legislature could "regulate the form and content of replacement cost estimates" if it wanted to, "the UIPA has not as of yet given the commissioner authority to regulate the content and format of replacement cost estimates."

The state Supreme Court, however, found that neither "the UIPA nor any other statute categorically limits the commissioner's authority to issue the regulation. On the contrary: section 790.10 explicitly vests in the commissioner authority to issue 'reasonable rules and regulations' to administer the UIPA. Which is what the commissioner sought to do here."

The industry groups that were party to the case obviously disagreed with the court's opinion with leaders of the Association of California Insurance Companies and the Personal Insurance Federation of California noting in a short statement their belief that "it does not accurately reflect the Legislature's intent."

While this case dealt with the relatively obscure issue of underinsurance—i.e., when consumers have too little insurance to meet their needs—the ruling's implications are potentially quite broad. The term "reasonable rules and regulations" could be taken to mean that an insurance commissioner—and perhaps leaders of other regulatory agencies—is free to delve into lawmaking. Future regulators could use that broad rubric essentially to write vast new regulations and impose them on businesses. That's certainly how Jones appears to be taking it, with his office writing in a Jan. 23 statement that "the Supreme Court ruled the insurance commissioner has broad discretion to adopt rules and regulations as necessary to promote the public welfare."

Under our system of government, legislatures are the proper place to write laws, which are then implemented by the administrative agencies. Should insurers be compelled to provide more coverage than the policyholders purchased? What responsibility do policyholders have in assuring they purchase the right amounts of coverage? There are various remedies for these problems in the marketplace and via the legislative process. The long-term result of this case, however, is to allow an insurance commissioner to try to fix the problem with a regulatory edict.

The Supreme Court left open the opportunity for insurers to challenge the decision on other grounds and the insurers are mulling their options. But the ruling clearly gives insurance commissioners broader discretion than before in crafting and implementing regulations.