20th Century Insurance v. Garamendi

Aug. S032502. [Nо. 1994.] al., et Plaintiffs and COMPANY

20th CENTURY INSURANCE v. Respondents, etc., GARAMENDI, Commissioner, as Defendant and Appellant.

JOHN al., COMPANY et Plaintiffs and INSURANCE 20th CENTURY v. Respondents; etc., GARAMENDI, Commissioner, as Defendant and Appellant;

JOHN REVOLT, VOTER Intervener Appellant. INSURANCE AND STEAM BOILER INSPECTION

HARTFORD al., et v. Respondents, COMPANY Plaintiffs Commissioner, etc., GARAMENDI, Defendant and Appellant. JOHN Counsel Woocher, Strumwasser,

Strumwasser & Michael J. Frederic D. Woocher and Susan L. Durbin for Defendant and Appellant. Lawrence, Tachiki, (Santa Monica),

Joseph Martin T. Acting City Attorney Shelton, A. Rosenbaum and A. Barry Kimery City Deputy Attorneys, Amici Curiae on behalf of Defendant and Appellant. Manheim, Associates,

Karl M. Hall & Hall & John R. Phillips, Phillips, Edward P. Howard and Leon for Intervener and Dayan Appellant. Norma P. Garcia as Amicus Curiae on behalf of Intervener and Appellant and Defendant and Appellant. Thelen, Marrin, Fontana,

John R. Bollington, Johnson & L. Bridges, Gary Cole, Carvill, Rowen, Kortum, Curtis A. S. N. Wynne John L. Hilary Foerster, Fairman, Carlson, Morrison & Marc P. Michael M. Latham Watkins, Pulliam, Lauer, Wolen, & Mark S. Katherine A. & Kent R. Barger Keller, Weinstein, Robert W. Steven H. John C. Holmes Hogeboom, Lawrence F. Krutchik for Plaintiffs and Respondents. Mintel, Heller, Ehrman, McAuliffe, Alexander,

Judith K. White & Paul Wells, Olson, Katz, Vanessa Tolies & Allen M. Munger, Craig Berrington, Aceituno, Nielsen, Merksamer, David Snyder, Nancy Siegel, Thomas Parrinello, Mueller & Steven A. Merksamer and John Naylor, E. Mueller as Amici Curiae on behalf of Plaintiffs and Respondents.

Opinion 8, 1988, Election, MOSK, J. the November General the voters ap- —At an initiative statute that proved was on the ballot as designated Proposition 240 in the changes regulation made numerous fundamental

103. The measure so- in California. the Formerly, and forms of insurance automobile other obtained, had under which system regulation “open competition” called the or by insurers without prior subsequent approval set by “rates [were] 1217, Cal.3d (1987) .” v. Meese 43 (King Commissioner . . . Insurance 829, 889].) “California system, P.2d Under 1221 743 Cal.Rptr. [240 state, other California any of insurance than less regulation ha[d] than other forms of insurance less most regulated automobile liability [was] Broussard, 1).) The initiative (Id. (cone. insurance.” opn. others, contained, the of rates for rollback relating among provisions 8, extending for the from November within its coverage period insurance here, 7, a 1988, (For rate is price purposes November 1989. through insurance.) its insureds for that an insurer charges premium indus that the insurance regulation It needs mention scarcely “What said about is the state’s police power. [has been] within try squarely be needs’ great may ‘extends all public police power—that deems judgment necessary public utilized in aid of what legislative welfare, business of insurance when the apt peculiarly [citation]—is has had to which long ‘special involved—a business government ” 105, (1951) 341 Assn. v. U.S. Maloney [95 relation.’ Auto. (California 788, 792, 601].) S.Ct. L.Ed. Deukmejian (1989) In Co. v. 48 Cal.3d 805 Cal.Rptr. Ins. [258 Calfarm alia,

161, we inter (hereafter Calfarm), sometimes P.2d upheld, 1247] rate rollbacks. 103’s Proposition requiring provision In 103’s we review the implementation this proceeding, Commissioner. rate rollback Insurance provision by requirement Garamendi, His elected to the office. first person incumbent John Roxani who was thereto. was M. Gillespie, appointed predecessor from a we decide Specifically, cross-appeals judgment appeals in Judicial Los Court in three consolidated cases Superior Angeles County 2419, Im- entitled Proceeding Council Coordination No. “Proposition cause, then pending We transferred the which was plementation Cases.” District, to ourselves No. in the Court of Second Appeal, Appellate B074704 because it issues of “presents imperative public importance requiring prompt from normal court “and justifying departure appellate resolution” this Court, (Cal. 27.5(b).) The cases are as follows. Rules of rule processes.” Ct. S.F. (Super. 1. et al. v. Garamendi Company 20th Insurance Century 1992, trans., No. L.A. County, No. Ct. Super. County, concerns, alia, I). inter BC046216) (hereafter 20th This action Century the Insurance Commissioner as to of rate regulations adopted by validity The regulations question both on their face and as applied. rollbacks insur- so called: rules all generally applicable include regulations strictly in File ers formulated the commissioner by quasi-legislative proceedings deter- include well No. RH-291. as They regulations incorporating “generic minations”: to all or at least several insurers made relating by findings in consolidated conducted in accordance with commissioner hearings quasi- then him as and adjudicatory procedures adopted by regulations—specifical- RCD-1, basis, (1) from File No. ly, findings arising concerning exposure standards, etc.; reserve executive strengthening, compensation, efficiency RCD-2, return, factor, (2) File and No. rate of concerning leverage projected etc. action This also concerns the yield, constitutionality Proposition 103’s rate rollback both on its face and as requirement provision applied. include 20th parties Insurance and 21st Century Company Century (hereafter (and, Casualty 20th as Company collectively Century) plaintiffs and the commissioner in official as formerly, petitioners) his defend- capacity (and, ant formerly, respondent).

2. 20th Insurаnce et al. v. Garamendi Ct. L.A. Century Company (Super. 1992, BS016789) (hereafter No. County, II). 20th This action Century involves, issues, other among of the rate both on validity regulations their face and as and also the of a rollback order issued applied validity the Insurance Commissioner 20th thereto. The against Century pursuant parties include 20th as Century and commissioner his petitioners court, official as capacity leave Allstate Insurance Com- respondent. By (hereafter Revolt, Allstate) pany and Voter proponent interveners, side, the former on 20th the latter on the commis- Century’s sioner’s.

3. Hartford Steam Boiler and Insurance et al. v. Inspection Company BC023983). Garamendi Ct. (Super. L.A. No. This action County, concerns, alia, inter of the rate validity generic incorporating determinations, both on their face and as to the applied, relating issue i.e., the “leverage,” or available that backs It “surplus” capital premiums. up that the insurance appears industry’s surplus greatly represented by appre- (such bonds), assets as ciating stocks assets opposed depreciating (such as (or plant threat- equipment). Over-leverage undercapitalization) ens there is insolvency: insufficient to back surplus up premiums. By contrast, (or under-leverage threatens undue there overcapitalization) profit: what surplus beyond is useful to back up premiums—surplus surplus— which inflates the insurer’s base to the rate set thereon capital any insureds, of its while at the same time it investment disadvantage produces as to This was bifurcated assets. action from appreciating income II Century I 20th with Century 20th and issue and consolidated with leverage Steam Boiler and Inspection include Hartford parties thereto. regard Hartford) (hereafter the State Farm Insurance Com- Insurance Company insurers, as Farm), scores of other (hereafter State with together panies capacity and the commissioner his official plaintiffs petitioners, defendant and respondent. Proposition

I. 103 and Calfarm sections following 103 added things, other Among Insurance Code.

Insurance Code section 12900. an elected official. the Insurance Commissioner

This makes provision Code section 1861.01. Insurance “For is (a) any the rate rollback requirement provision.

Subdivision other form any for automobile [specified] for coverage policy 1988, 8, every after November . . . issued or renewed or insurance 20% than the which are at least less reduce its to levels charges insurer shall 8, effect on November 1987.” same which were in coverage charges from the rate mechanism for relief (b) Subdivision defines procedural 8, 1988, and Novem- “Between November rollback requirement provision. 1989, (a) be 8, may to subdivision rates and reduced ber premiums pursuant read, if the commissioner be increased only”] increased “may only [szc: finds, threatened with insol- an after a insurer hearing, substantially vency.” (c) “Commencing system.

Subdivision institutes “prior approval” be the commis- . . . must November insurance rates approved sioner to their use.” prior 1861.05.

Insurance Code section (a) “prior approval” standard of Subdivision articulates substantive excessive, which is shall or remain effect system. approved “No rate be of [specified or otherwise violation unfairly discriminatory inadequate, excessive, inadequate unfairly In rate is considering whether a law]. competition be to the degree no consideration shall given discriminatory, and the commissioner consider shall whether the rate reflects mathematically the insurance investment income.” company’s (b)

Subdivision defines the mechanism for the procedural “prior approval” insurer which desires to rate shall system. “Every file change any complete rate with the application commissioner. . . . The shall have the applicant burden of that the proving requested and meets the change justified of’ law. requirements specified

The scheme for the of rates regulation thus established by 103 Proposition is as follows. 8,

For the 7, from period extending November November through (hereafter 1989 sometimes the 1989), rollback or as a year simply temporary regulatory of rate regime reduction and freeze evidently designed to allow follow, of a setting up permanent to regulatory regime 103 Proposition itself sets a maximum rate for covered insurance at 80 of the rate for percent the same insurance in effect on (hereafter November 1987 sometimes the rate). 1987

For the 8, 1989, from period future, November extending into the Propo- sition 103 institutes a permanent regulatory regime comprising “prior which, under approval” system, in the words of Insurance Code section 1861.05, (a), subdivision the Insurance Commissioner must a rate approve for use, an insurer applied by before its to whether looking the rate in “excessive, question inadequate, or otherwise in unfairly discriminatory violation of’ specified law—considering “investment income” of the individual insurer and not considering “degree in the competitiоn” insurance industry generally.1

In Calfarm, we reviewed Proposition 103 against challenges under the United Constitutions, States and California a claim that the rate including rollback requirement was on its provision face invalid as confiscatory arbitrary, discriminatory, irrelevant to demonstrably legitimate policy violation of the I, clause of the takings Fifth Amendment and article section 19 and the due clause of process I, the Fourteenth Amendment and article use,” systems Other include theory “file and which open[s] up “[i]n least. . . somewhat greater insurers, competition” among in rates “open competition,” theory which “in encourage[s] greater far competition by permitting in rates company to establish new rates freely place (Keeton Widiss, them in promptly.” effect (1988) & Insurance Law 8.4(a)(3)(iii), noted, 963.) p. form, system, As the latter § in its fullest obtained in this state Proposition before 103. Our rejected our we analysis, point. In the course of

sections 7 and 15.2 as follows. was reasoning viz., Insurance rollback requirement provision, 103’s rate

Proposition 1861.01, for (a), which sets the maximum rate subdivision Code section rate, would be invalid facially at 80 the 1987 percent rollback year if avoid confiscation necessary rate confiscatory adjustments because Deukmejian, Ins. Co. v. (Calfarm for individual insurers. were available the rate set the statute is risk that 48 Cal.3d at [“The its high enough require some from inception insurers confiscatory relief.”].) for individualized an method adequate obtaining for relief from the rate rollback mechanism procedural 103’s 1861.01, viz., section subdivision Insurance Code requirement provision, rollback year over the maximum rate (b), which allows an increase threatened “substantially if the insurer is only because it rate is invalid facially precludes adjustments with insolvency,” confiscation, a cannot be sustained as avoid and further tempo- necessary rary emergency (Calfarm Deukmejian, supra, 48 Co. v. measure. Ins. 816-821.) Cal.3d at pp. however, 1861.01, (b), is severable Code section subdivision

Insurance supra, Co. v. Deukmejian, 103. Ins. Proposition (Calfarm from balance of 821-822.) 48 Cal.3d at pp. for adjust- is standard rate Code section 1861.05 the “general

Insurance 1861.01, (b), is subdivision and Code section ment" for most rates Insurance Ins. Co. v. Deukme- rates the rollback year. (Calfarm an for “exception” 822.) 48 at supra, Cal.3d jian, p. 1861.01, (b), subdivision Code section

The invalidation Insurance Ins. Co. v. (Calfarm Code section 1861.05. “leaves untouched” Insurance words, 822.) the “deletion” at In other Deukmejian, supra, Cal.3d p. (Id. in be all cases. standard” to applicable allows “exception” “general 825, declares, (a) 17.) in subdivision The standard” “general at fn. pp. 1861.05, in effect rate shall. . . remain Insurance Code section “[n]o excessive, in or otherwise is unfairly discriminatory which inadequate, Hence, rates standard” “requires violation of’ law. “general specified . . .” and reasonable . which can be described as fair range within that 822-823.) “The 48 Cal.3d at Deukmejian, supra, pp. Ins. Co. v. (Calfarm refer, process” to Calfarm, and “due phrases process such as the “due clause" 2In we used also, course, broadly, takings but more to the protection and process the due clause its protection. clause and its (Id. ‘fair and reasonable’ are . . . .” at ‘confiscatory’ antonyms p. terms 5.) is fn. of fair and reasonable rates defined light range in financial the insured’s insurer’s interest legitimate integrity legitimate at (See interest freedom from id. exploitation. p. [implying “ ” on rates must calculated to eliminate excessive’ controls be ‘reasonably “ ” “ at the consumers ‘and same time ‘with charges producers provide’ ”].) A on their reasonable return just property’ “confiscatory Therefore, 822.) (Id. an rate . . . .” at necessarily p. ‘inadequate’ . . . (Id. standard” maintenance of rates.” at “general “prohibits confiscatory 822-823.) pp. (a)

It follows that Code section subdivision Insurance 1861.05 “pro- vides valid standard for rate . . . adjustment .” constitutionally (Calfarm 823.) Co. v. Ins. 48 Cal.3d at Deukmejian, supra, p. 1861.01, Code

Accordingly, (a)—which Insurance section subdivision sets the maximum rate for rollback at 80 year rate—is not invalid because inasmuch as rate facially confiscatory adjust- ments to avoid confiscation are in available for necessary fact individual v. (Calfarm 816-826.) insurers. Ins. Co. 48 Cal.3d Deukmejian, at supra, pp. Further, under 103 “insurers be charge will compelled [not] confiscatory rates (Calfarm administrative relief.” Ins. Co. v. Deu- pending kmejian, 823.) at Cal.3d There “no . . . p. barriers to efficient decision (Id. 824.) the initiative. “Much making" left to necessarily Commissioner, the Insurance who has broad discretion to rules adopt as (Ibid.) to the regulations promote welfare.” The absence necessary public of “barriers” is evident. For bars the example, commissioner provision “[n]o from consolidating issuing cases or of Thus general applicability. there is here which nothing prevents commissioner from whatever taking “Moreover, are to steps necessary job (Ibid.) reduce to size.” manageable the commissionеr has to interim relief from power grant invalid plainly rates. or are not limited [His to those conferred powers expressly by her] statute; ‘rather, is well settled in this state that officials “[i]t [administrative] exercise such additional for may the due and powers necessary statute, efficient administration powers expressly by may or as granted ’ be from statute fairly implied granting powers.” [Citations.] to power grant interim relief is due for the and efficient adminis- necessary 103, tration of Proposition may be from its command that fairly implied excessive, rate shall. . . in remain which is unfairly ‘[n]o inadequate, effect discriminatory otherwise violation (Id. at [specified pp. law].’” 824-825, italics in original.) conclusion,

In under who Proposition insurer believes the rates “any 1861.01, (a), set by section are confiscatory [Insurance subdivision Code] with the Insurance Commissioner approval file an may application 8, 1989, the November insurer is filed before rate. If that higher application rate from higher pending approval that may immediately begin charging to After date insurance rates subject Proposition commissioner. use, . . to their but . the commissioner by prior must be approved her final decision. an interim commissioner can approve pending [his or] rate, or some other rate less than If finds the initiative’s the commissioner reasonable, refund excess fair and the insurer must the insurer charged, insurer, however, will be compelled collected with interest. No premiums in that rate or initiative unless it either acquiesces the rates set by charge (Calfarm rate is constitutionally required.” is unable to that a higher prove 825, omitted.) fn. “Proposition Ins. v. 48 Cal.3d at Deukmejian, supra, p. Co. will be rate set the commissioner any subject 103 contemplates 18.) added section 1861.09 (Id. at fn. The initiative review.” judicial p. Code, which for such review. Under expressly provides the Insurance 1861.01, (a)—to appearing use terms Code section subdivision Insurance 1861.05, if (a)—a rate is “inadequate” subdivision Code section Insurance if more minimally nonconfiscatory “excessive” than confiscatory and rate. above 80 the 1987 Litigation

II. The Present the challenge 103 did not find rest after largely surviving Quite the contrary. mounted Calfarm. (N.D.Cal. 1992) 790 F.Supp. Fund Ins. Co. v. Garamendi

In Fireman’s Fund), the federal district court (hereafter sometimes Fireman’s pro- . . over lawsuits fifty “Insurers . filed vided a abbreviated summary: greatly courts, the Commissioner’s aspects in California state challenging many (Id. 942.) “In December 103.” effort implement Proposition] California], in his as Chairperson Chief Justice capacity [the California, Court Judge Superior Judicial Council of Sacramento assigned to the four cases relating Park to determine whether then Richard pending to 103 be coordinated pursuant the should Proposition implementation et and California Rules of Civil Procedure section 404 seq. California Code Court, 103 the title ‘Proposition Imple- Rule 1501 et under seq., special 1990, issued an order coordinating In Park Judge mentation Cases.’ January be actions, that the cases to the Judicial Council the and recommended the conve- efficiency Court for and to Los transferred Angeles Superior Park’s recommen- Judge nience of the The Judicial Council adopted parties. dation, to Miriam Judge Vogel. and coordinated cases were reassigned in May, to the Court Appeal [the After was elevated Judge Vogel 103 order reassigning Proposition issued an amended Chief Justice] number, Cases, 22 in to Janavs. Judge then Dzintra Cases Implementation to have been added-on the coordinated formally filed either subsequently Court, or Rule 1544 of California Rules of have actions to pursuant Judge Presently, every Superior otherwise made their before Janavs. way 103 is to the or has been Court case relating implementation Proposition 13.)3 fn. (Id. those here. at her”—including heard before p. To the words of the court Janavs: superior spoken through Judge quote be child its to from It “Proposition proved problem inception. [has] has, doubtful whether other initiative or enactment in legislative any span more extensive just years, engendered administrative proceedings [a few] and as much 103.” litigation

The historical in background is sketched the Fireman’s Fund court’s (Fireman’s Garamendi, Fund Ins. Co. v. at opinion. supra, F.Supp. pp. 941-944.) Two deserve mention. aspects were,

The first concerns the of the rate in validity as it regulations, context.

The Insurance Commissioner’s had issued predecessor what commonly referred to as her “Amended Decision.” She its sub subsequently adopted stance as rate regulations—which included so called and strictly office, also generic determinations. Shortly after taking commis present sioner announced his to intention from the in depart charted path Amended Decision and to strike out aon different one. he Specifically, gave notice that he his proposed repeal predecessor’s regulations and his own in their adopt He did so. His in place. action was validated 3Insurers only (See have mounted their in attack not in state court but also federal. Garamendi, Fireman’s Fund Ins. Co. v. F.Supp. doing at business [“Insurers in certainly right challenge California have any aspects unconstitutional of the rate making process which have been forced multiple on them the initiative. But and court, overlapping Commissioner, challenges assertions of these in state before the in this question court causes this court those tactics. Numerous insurers are involved these multiple challenges, represented by some challenges the same law firms. Some are filed identical, state court and challenges some are filed in federal. The the same time separate overlapping. (for appears Some of that to be coordinated and example, calculated filing of the complaints significant two these apart). actions minutes And most of already issues in these pending two cases are in state court. net bring result is to this court already an complex into protracted process litigation. forum-shopping, Is that or complexity, issues?”].) court, deliberate merely the difficulty may be In federal noted, (See the away, attack has been present. turned at for id. [entering least the 966 judgment of dismissal in favor against of the Insurance Commissioner and certain insurers parties and related in brought by against two ground actions the latter the former on that underlying ripe].) claims were not

248 Farm Auto. Ins. Co. and State Mut. Garamendi* (Cal.App.), Ins. Co. v. Safeco Farm, the Court of Appeal, In and State (Cal.App.). v. Garamendi† Safeco District, Five, in that the concluded substance Division Second Appellate Decision his Amended lawfully: predecessor’s commissioner had proceeded and quasi-adjudicative; did not bind him it was quasi-legislative because however, issues, are not raised to These yield her could his. regulations rate in this proceeding. so to validity regulations, concerns second aspect and of themselves.

speak, OAL) to (hereafter Law has the authority of Administrative The Office (See generally, certain regulations. or disapprove review and either approve times, Code, the Insurance Commissioner et Several Gov. seq.) § times, the OAL. (in forms) various to Several the rate regulations submitted alia, them, beyond inter that are they concluding, the OAL disapproved Code, (see Gov. by Proposition conferred on the commissioner authority (see 11349.1, with the initiative’s terms (a)(2)) and also inconsistent subd. § id., 11349.1, “restrict an insurer’s (a)(4)) subd. because they impermissibly § rates.” obtain relief from confiscatory right as a review to the OAL subject requirement are generally Regulations others, those, Code, 11346.) (See among But Gov. validity. condition § 11343, rates, (id., (a)(1)) or tariffs” subd. that prices, fix[] § “[e]stablish[] id., 11346.1, (See (a).) subd. excepted. the rate regula- has taken the The Insurance Commissioner position within fall outside the OAL tions hence ratesetting exception, come of OAL are not invalid because disap- review therefore requirement, He that he submitted represents regulations question proval. “in opportunity public OAL order to maximum “voluntarily” provide might accom- avoiding any litigation the hope participation, his reliance on that” pany exception. court

Let return The focus the superior us present proceeding. his rollbacks and was the Insurance Commissioner’s rate regulations order 20th rate rollback determining Century’s liability.

A. The Rate Regulations 4.8, 5, 10, subchapter

The rate are codified as title chapter 7, 2647.1, Code sections 2641.1 the California through through articles (S030921). granted March Review dismissed October *Reporter’s Note: Review District, 14, 1994, Five. Appellate remanded Second Division Appeal, cause to Court (S030917). granted dismissed October Note: Review March Review †Reporter's District, 13, 1994, Five. Appellate Division Appeal, and cause remanded to Court Second rollbacks, Insofar bear on are included directly they as Regulations. they 10, 5, 4.8, 5, therein article sections as title 2645.1 chapter subchapter 6, 2645.9, through and article sections 2646.1 2646.5. through outset, At the comments called for. three general First, insurance and losses be accounted on a cash or premiums may accrual basis. Cash written” and “losses accounting speaks “premiums received; written” refers to dollars “losses refers to paid”: “premiums paid” contrast, dollars out. Accrual paid accounting, speaks by “premiums earned” and “losses incurred”: earned” refers to dollars distrib- “premiums rata over the pro uted term “losses incurred” refers to both policy; actual and reserves set aside for future The rate pay-outs payouts. require insurance and losses to be accounted for on

generally premiums an basis, accrual (See earned” and “losses Cal. “premiums incurred.” Code 10, 2643.3, 2644.4, 2644.5, 2644.6, 2644.7, 2645.4, Regs., tit. 2645.9.) §§ Second, an insurer’s be measured in may accordance with capital “gener- ally (hereafter GAAP) sometimes accepted accounting principles” “stat- (hereafter utory SAP). accounting sometimes account- principles” Statutory ing are more principles conservative than generally accepted accounting principles. “Statutory ... are rules that state insur- accounting principles ance have . departments . . insurance developed regulate companies; SAP mandate that conservative methods be the assets employed valuing of such their companies guarantee continuing This solvency. [Citations.] routine conservatism as reflected use of SAP that through requires only [sic: read, certain “requires only”] assets be considered in calculat- types condition, ing financial company’s that the value of such . . . assets be determined according (5th restrictive rules.” v. quite (Meyers Moody 1982) Cir. 693 F.2d 1218.) The rate regulations an generally require insurer’s to be capital measured accordance with statutory accounting rather principles than generally accepted accounting (Cal. Code principles. Regs., 2643.5.) tit. § Third, insurance transactions bemay subjected to “direct” or “net” “rate- “ To

making.” quote Insurance Commissioner: ‘Direct mea- ratemaking’ sures the level, insurer’s at the ‘retail’ operations all counting premiums insurer receives from its and all losses policyholders to them. ‘Net paid measures the same ratemaking’ ‘net’ of operations reinsurance—subtracting from premiums insurer receives from policyholders portion passes (‘cedes’) to reinsurers and from losses those amounts covered subtracting (‘ceded to’) reinsurers.” The rate insurance regulations generally require (See Regs., “direct Cal. Code tit. ratemaking.” be subjected

transactions 10, 2645.9.) § as the “ratemaking is is referred to commonly this matter what

Central to 10, 2644.2, 2644.3.) Code tit. (Cal. Regs., formula.” §§ - = + income expenses + ALAE ancil EP losses Permitted fixed - - + invest inc 1 var exp profit factor factor factor (Cal. Code earned Regs., EP” stands for premium. “Permitted permitted 2644.2, 10, 2644.3.) tit. §§ (Cal. are as Code adjusted means incurred losses that specified.

“Losses” 2644.4, 2644.5, 2644.6, 2644.7, 10, 2645.4.) tit. Regs., §§ which means for “allocated loss adjustment expenses,” “ALAE” stands (Cal. claims. Code Regs., with the adjustment specific the costs associated 10, 2644.8, (a).) subd. tit. § (other than commission means for acquisition

“Fixed expenses” expenses collection; plus general expenses; field supervision, plus and brokerage), taxes; licenses, fees; taxes, plus minus state and local premium state (Cal. Code adjustment adjusted loss expenses—all specified. unallocated 10, 2644.9.) tit. Regs., § test of rea-

“Fixed to an standard”—a “efficiency expenses” subject insurance, line of as established from time to sonableness—for each covered (Cal. determination. Code Commissioner in a generic time the Insurance by 10, 2644.12.) to rollbacks tit. determination generic applicable Regs., § 10, 2645.5, (Id., (c).) (b) tit. subds. & incorporated. § (a) lobbying; “Fixed contributions and do include: expenses” political amount, as found from (b) a reasonable compensation executive exceeding determination—the time to time the Insurance Commissioner generic (Cal. tit. Regs., for Code generic incorporated determination rollbacks 2645.5, (a)); loss (c) bad faith and associated allocated judgments subd. § (d) unsuccessful defense of costs attendant expenses; adjustment claims; (e) (f) advertising discrimination fines and institutional penalties; their exceeding to affiliates for services goods expenses; (g) payments (Id., 2644.10.) fair market value. tit. § income,” means net income

“Ancil which income” stands “ancillary (Cal. to covered insurance. Code directly not derived from related operations 10, 2644.13.) tit. Regs., § factor,” for which means the

“Var factor” stands “variable exp expense (Cal. of the and the state tax rate. Code sum commission rate premium 10, 2644.14.) tit. Regs., § of return" by

“Profit factor” means the after-tax rate divided “permitted for factor” each line covered insurance “leverage product 10, (Cal. the “federal income tax factor.” Code tit. multiplied by Regs., 2644.15.) “Permitted after-tax rate of return” on investment yield § time established from to time the Insurance Commissioner by generic 10, (Id., 2644.16.) determination. tit. The generic determination applicable § as 10 to the rollbacks lower incorporated percent, “corresponding 10, (Id., of the of reasonable . . .” boundary . tit. range [rates of] return[] 2645.6, (a).) “Leverage subd. factor” means the ratio of net written premi- § insurance, each ums for line covered as established surplus from time 10, (Id., to time by generic commissioner determination. tit. 2644.17.) determination ratios generic to roll- leverage applicable § 2645.6, (Id., (b).) backs is If tit. subd. an insurer’s actual incorporated. § ratio ratios leverage or for the rollback under year 1989 calendar data is year ratios, than the (Id., ratio it is used instead. tit. higher specified leverage 10, 2645.6, (c).) subd. “Federal income tax factor” means minus the § (Id., 2644.18.) insurer’s effective federal income tax rate. tit. factor,” “Invest inc factor” stands “investment income which means the insurer’s the sum of yield multiplied by the “reserves ratio” plus (Cal. 10, 2644.19.) ratio.” Code tit. “surplus Regs., “Reserves ratio” means § (a) reserves, two lаst loss average years’ loss plus adjustment reserves, reserves, expenses plus (b) unearned divided premium earned for the most recent premium for which data are year (Id., available. 10, 2644.21.) tit. ratio” means the “Surplus reciprocal leverage § 10, (Id., 2644.22.) factor. tit. § formula is to a the ratemaking designed that yield premium

insurer should receive its in from insureds order earn a to sum amounting (1) the reasonable cost of (2) insurance capital the used and providing useful for insurance providing a fair rate of return. is by This multiplied consistent with the rule general that the rate firm the set for is regulated (1) sum of (2) its cost of service its base rate capital multiplied by (See, return. & (D.C. Cent. Power Co. v. e.g., Jersey Light F.E.R.C. Cir. 1168, 1987) 810 F.2d (en banc) 1172 App.D.C. some [28 189] [hereafter Central].)4 Jersey times

The ratemaking formula the incoiporates accounting “match- principle involves, alia, ing.” Matching inter the consistent treatment of related items 4The “used and useful” traditionally applied defining capital rule has been in the base regulated the “prudent firms. So too rule. an “Requiring prudent investment” investment be Thus, for one recognize, for must any period, given and expense.

of revenue a decrease an in taxes with increase premiums an increase example, the of rates subject So far review a decrease premiums. taxes with concerned, account of the expenses take matching is operates rate rollback than a rate no higher avoided had the insurer charged that have been would the as construed in Calfarm—i.e., the maximum rate set rate or such rate than greater percent of the 1987 rate that is well as the revenue that nonconfiscatory—as the rate as is minimally been forgone. would have its variables values of many formula defines the

The ratemaking rollback and for the to the rate for review of rates subject the differently to the “prior system. review of rates subject approval” future, the its concerns rates for system approval” Because “prior thereunder, Hence, for review rates is necessarily orientation prospective. (See, Cal. Code much e.g., formula relies ratemaking projections. 2644.9, 2644.13, 2644.2, 2644.4, 2644.8, 2644.20.) 10, 2644.3, tit. Regs., §§ has contrast, for a rollback concerns rates period because rate By thereunder, Hence, of rates for review orientation is retrospective. its passed, Cal. (See, e.g., data. relies much on actual historical formula ratemaking convenience, 2645.4, 10, 2645.2, 2645.8.) (d), subd. For tit. Code Regs., §§ instead of the rollback from the 1989 calendar year such data is taken largely 1988, 8, November from through as noted extended November which year, id., 2645.4, 2645.6, (See, (c).) tit. subd. 1989. e.g., §§ Further, for review of rates formula used ratemaking differently to the review of rates subject “prior to the rollback and subject rate system. approval” free to set for insurer is effectively “prior system,

Under approval” chooses, here) its (as relevant rate it itself whatever provided nor “inadequate.” neither “excessive” by regulatory upon regulated the business safeguard imposed when is one authorities made safeguard. The . . . is but another ratepayers. for benefit of ‘used and useful’ rule [T]he investment, the and rule looks toward

prudence rule looks to the time of whereas ‘used useful’ ratepayers, property principles designed The the whose a later time. two are to assure that authorities, necessarily be might by of be will not saddled regulatory otherwise course ‘taken’ mistakes, justice, management’s simple matter be with results of defalcations or or as a of the (Jersey benefit.” required pay provides ratepayers to for that which the with no discernible F.B.R.C., Starr, (conc. J.).) Light Cent. Power & Co. v. opn. at p. 810 F.2d 1190 managers restraining reminding that operates principle, “The rule a . . . ‘used and useful’ as is working against prudent investment which they forces an must assume the risk economic 1190, Starr, J.).) (Id. (conc. opn. 1 fn. at the time it made.” rate define as “excessive” a that is “expected yield rate to regulations a return the the efficient insurer a that exceeds fair reasonably profit to the in provide investment used insurance” inter- light “competing consumers prices ests of lower investors that prices yield high returns” and the “fact that insurance is imbued with the interest and is public (Cal. 10, sometimes Code tit. legally §2642.1.) required.” Regs., They define as a rate “under which a “inadequate” efficient insurer is reasonably not to have the to earn a fair return on the expected investment opportunity used that is to the insurance” in considerations light the identified provide (Id., 2642.3.) above. tit. define a “fair return” as the they Lastly, “profit § can to from reasonably that an investor earn an investment a expect other than insurance to business subject regulation presenting [thereunder] investment risks to the risks insurance comparable presented by subject” (Id., 2642.2.) thereto. tit. § contrast, rollback, under the rate the is not

By insurer free set for itself whatever rate it chooses between the “excessive” the “inadequate.” Rather, it is a rate no required charge higher than maximum rate set by as construed in Proposition the rate is 80 Calfarm—i.e., percent rate or such rate greater than of the 1987 rate as is minimally whichever nonconfiscatory, higher. out, others, this

In set regard, among following the Insurance findings by Commissioner:

“Proposition that all rates requires the rollback charged during period 8, 1987, be reduced 20%by from their November levels. are Consumers receive, entitled to reduction, insurers are this obligated give, except to the extent that it violates the (Cal. insurers’ constitutional Code rights." 10, 2645.2, tit. Regs., (a).) subd. §

“Insurers are entitled to rates during the rollback not are period Rates are confiscatory. if and confiscatory if all the rates only by” charged “are, whole, individual insurer taken (Cal. Code confiscatory.” 10, 2645.2, tit. Regs., (b).) subd. §

“To extent that the rates specified by 103 for the rollback period confiscatory, insurers are entitled rate above the level initiative, prescribed but than higher rates not to necessary (Cal. be 10, 2645.2, confiscatory.” Code Regs., (c).) tit. subd. § To cover both the rate rollback and “prior ratemak- approval” system, formula be ing used to may both a yield maximum earned permitted premium factor value a maximum profit takes as its (when factor variable the profit Cal. Code Regs., rate of return after-tax [see based on maximum permitted (when 10, 2644.2, 2644.15]) earned permitted premium and a minimum tit. § minimum factor based on as its value a profit variable takes the factor profit 10, 2644.3, id., tit. rate of return after-tax [see minimum permitted §§ 2644.15]). the Insurance system, approval” of rates under the “prior

For review minimum permitted the maximum and both Commissioner determines because, stated, free to insurer is effectively the That is earned premium. and the the “excessive” it chooses between whatever rate set for itself the maximum if it is than permit- A rate is “excessive” higher “inadequate.” 10, 2644.1.) It is “inade- (See tit. Regs., Cal. Code ted earned premium. (See ibid.) earned minimum premium. if it is lower than the permitted quate” here) between (as relevant falls a rate that commissioner must approve The ibid.) (See and the “inadequate.” “excessive” the rollback, the Insurance contrast, under the rate review of rates By stated, is not free during As the insurer otherwise. Commissioner proceeds the between rate it chooses for itself whatever to set the rollback year no a rate higher but rather must charge the “excessive” and “inadequate,” i.e., in Calfarm, as construed the maximum rate set by Proposition than than 80 such rate greater rate or rate that is 80 percent rollback For the nonconfiscatory. rate as is minimally of the 1987 percent minimum earned determines permitted the commissioner only year, above minimally “inadequate” and does so to define what is only premium, to each of its in- insurer must refund or minimally nonconfiscatory. annum sureds, computed at 10 percent per with interest calculated simple date of 1989, through of the rollback year, from May midpoint for the rollback year premiums paid an amount equal payment, (1) the lesser which means “refund percentage,” multiplied by earned (a) pre- total 1989 direct (i.e., the larger “statutory percentage” credit, minus financial guaranty insurance] and surety, mium [excluding credit, financial and [excluding surety, direct earned premium total 1989 is 80 to the rate that guaranty adjusted insurance] credit, and [excluding surety, direct earned premium divided total 1989 insurance], (b) zero), (2) per- the “constitutional or financial guaranty (i.e., (a) [including earned premium total 1989 direct centage” larger credit, minimum minus the total financial guaranty insurance] surety, credit, financial guaranty [including surety, earned premium permitted surety, [excluding earned premium total 1989 direct divided by insurance] tit. insurance], (b) zero). (Cal. Regs., Code credit, and financial guaranty calculation, earned minimum the total 2645.9.) permitted In the refund § minimum for is the sum the earned each premium permitted premium the covered lines of insurance written insurer—the latter functioning as an intermediate the calculation. only ‍‌‌‌‌​​‌​​‌‌‌‌‌​​​‌‌​​‌​​​‌‌​​​​​​​‌​‌​‌‌​‌​‌​‌​‌‍step itself, Central to this is not formula but only ratemaking proceeding also of the at which the individual the nature insurer’s scope hearing rates are reviewed. a

Concerning nature of for review rates: such a has hearing hearing 10, 2646.4, (Cal. (b).) two Code tit. purposes. Regs., subd. § One is to determine whether the insurer has the relevant properly applied determinations, statutory regulatory provisions, including generic (Cal. calculating maximum minimum earned permitted premium. 10, 2646.4, tit. (b)(1).) Code subd. Regs., § other to determine whether the maximum or minimum resulting (Cal. earned

permitted should be premium Regs., Code tit. adjusted. 2646.4, (b)(2).) subd. A for such an is referred to as request a adjustment § (ibid.) “variance request.”

There are eight (Cal. valid bases for variance Code tit. request. Regs., 10, 2646.4, (c).) subd. §

Only three are (Cal. rates under the rate applicable rollback. Code 10, 2646.4, tit. Regs., (d).) subd. are: They §

First, the “one-line” variance: insurer should be authorized a rate “[T]he of return” other than 10 “on the ground that insurer writes in only one line and its ofmix business investment presents risks different from the risks that are typical (Cal. line a whole.” Code Regs., tit. 2646.4, (c)(4).) subd. §

Second, the “entering-the-market” variance: insurer be should “[T]he granted relief from operation of the standard a line of efficiency insur- ance in which the insurer has $1 never written over previously million earned premiums and in which annually the insurer has made or is making substantial investment in order to enter (Cal. the market. . . Code .” Regs., 10, 2646.4, tit. (c)(5).) subd. § third,

And the “insurer-insolvency” variance: insurer’s financial “[T]he condition is such that its maximum earned should be permitted premium increased in order to protect (Cal. the insurer’s . . .” Code solvency. Regs., 10, 2646.4, tit. (c)(8).) subd. § for of a “Relitigation of a review rates: scope hearing the

Concerning of a matter determined either already insurer’s rates on an individual hearing is of order and shall or a determination out generic regulations by these by However, admit law shall evi- the administrative judge not be permitted. whether the rate is to the determination of he or she finds relevant dence a rate (or, case of a [concerning or the inadequate proceeding excessive the non- for to the determination of minimum the rollback relevant year], rate), contemplated or such evidence expressly whether confiscatory for is not offered the of purpose these the evidence by regulations, provided determined a regulations generic these by a matter relitigating already 2646.4, This (Cal. (e).) tit. subd. determination.” Code Regs., § to the bar.” “relitigation referred as commonly Determination 20th Rate Century’s B. The Insurance Commissioner’s of Liability Rollback to Commissioner’s rate his

Let us turn from the Insurance now 20th Century’s liability. determination of rate rollback Insurance a after we handed down Calfarm, It that week appears insurers who wished gave notice that predecessor public Commissioner’s year file for of rates for rollback approval to do so could applications (hereafter than maximum rate of the 1987 rate percent of higher such rates could charge higher “rollback-exemption” applications), pending approval. 20th filed seven Century “rollback-exemption”

It further appears to rates—which seem higher indicated applications proceeded charge to have been about 12.63 than the 1987 percent greater rate—pending The firm writes six lines insurance. approval. Commissioner issued File No. REB-5173 the Insurance

Subsequently, in the Century’s an order to show cause and notice of matter 20th hearing indicated that 20th should Century rate rollback The commissioner liability. for the rollback refund to each insured an amount the premiums paid equal a with interest refund 13.34 year multiplied by percentage percent, simple 8, 1989, to date of from calculated at annum May per payment. order show was held

A on the Insurance Commissioner’s cause hearing extensive. In her own before an administrative law was judge. hearing words, law considered “hundreds of pages administrative judge detailed as well several weeks live exhibits prefiled testimony . briefs and oral . .” testimony, posthearing argument. law fills 185

The administrative issued decision that judge proposed review, she judicial effec- Evidently purpose subsequent pages. bar” to tively “relitigation Century lifted allow 20th introduce evi- dence to of the rate it the challenge premises “according] regulations, evidence issue that it contended was ... present every opportunity material.” She also mandated “variance”— recognized constitutionally and from those established in the in independent regulations separate ques- confiscation, would on tion—which be available 20th of for Century proof which she allowed “evidence and on the whether rollback formula argument . . and as . unconstitutional results to 20th yielded confiscatory applied and or Century” “justif[ied] from thereby requir[ed] departure regula- here, . tions . . .” As her pertinent determinations were to the following effect. 20th rollback

During Century’s liability hearing, rate were regulations effect, in the OAL’s at various times. notwithstanding disapproval authorizes Insurance

Proposition Commissioner to rate adopt regulations rate rollback implement “The requirement provision. regulations,” administrative law “avoid explained the administra- judge, tive gridlock would result from and over over hundreds readjudicating of issues that affect insurers in multiple that would lengthy hearings yield inconsistent (Italics ever result they yielded at all.” added in any results—if in place “The underscoring original.) determi- employ generic a nations and detailed formula to ensure and designed consis- manageability time, tent treatment of insurers and insureds." “At the same the regulations incorporate formula, multiple company-specific factors into the rollback and then are in individual applied adjudicatory hearings. company-specific allow further hearings to a . tailoring situation . . .” company’s Specifically, 103 authorizes Proposition the Insurance Commissioner adopt regulations to the rate rоllback implement requirement provision with a view toward factors the individual insurer’s including profits not—as 20th he claims Century must—through imposition general on “price caps” the rates of insurers 20th generally. Century’s rates for the rollback year survive the might of such because imposition “price caps” they were relatively its low—reflecting low is a relatively costs: it direct writer of insurance, and therefore does not or utilize employ captive independent it agents; insureds, selective to its very choosing risks. preferred But, observed the administrative law 20th judge, Century’s argument regulation by “price rather caps” than factors is bottomed including profits on rather “policy” than law—specifically, that “would have us “policy" ignore arm's on” emphasis such factors as profits “and Proposition Calf of whether “regardless 103’s for reduction rates industry-wide,” call (Italics . . standards . .” added place rates low or high by industry were at least financial requires “deep Confiscation underscoring original.) short bankruptcy—within financial “deep hardship” hardship”—albeit F.E.R.C., Co. v. Light Central. Cent. Power & (Jersey of Jersey meaning issue, Moreover, it 3.) “is an 810 F.2d at fn. enterprise-wide basis.” Under the rate rollback line-by-line to be not one parsed Code sec use the terms Insurance appearing requirement provision—to 1861.05, if (a)—a rate is confiscatory tion subdivision “inadequate” and above 80 if more than minimally nonconfiscatory “excessive” the 1987 rate. the Insurance Commissioner to a rate- adopt 103 authorizes rate rollback Spe- formula to implement requirement provision.

making to determine him to frame a formula empowers ratemaking cifically, insurer, whether, a for the rollback an maximum rate year for individual and, to avoid confiscation than 80 of the 1987 rate is required higher percent so, such maximum rate is. if what higher face as and the rate are valid on their

Substantively, necessary regulations rate rollback requirement 103’s for proper implementation provision. sound insofar as define 10 they the rate

Specifically, regulations rates return as the lower reasonable boundary range percent that The administrative law stated judge formula. ratemaking historical rates of return rate of return was based “on the percent average and rather than achieved between 1980 industry actually by determined She econometric models.” theoretical investor expectations in 1989” under noted earned an 9.1% return ... “industry average from and that “over the 10 years statutory accounting principles, accounting 10% return” under both averaged statutory principles omitted.) (Internal marks generally accepted accounting principles. quotation rather than actual historical rates of return She concluded that “[u]se is investor hypothetical expectations inherently speculative projections , for now already past.” . . . reasonable . . . a time particularly period formula, noted, be does not any must ratemaking purport guarantee of its insurer a rate its cost of service plus individual covering etc., exclusions, incor- base of the various capital adjustments, independent all is or other requirement therein. There no constitutional porated must be allowed. reasonable investments expenses prudent investment The rate are also sound insofar as regulations they recognize as “[Ujnlike businesses such income in the formula. other ratemaking public utilities,” observed the administrative law “insurers need not trans- judge, their into assets like a but them power may form physical plant, keep capital like simultaneously assets stocks and bonds. Surplus may instead liquid earn the insurance business and investment income.” support The rate are sound as well insofar they as concern line insurance, which is of interest because the Loma Prieta earthquake particular struck Northern California the rollback earthquake during year. They subject treatment, including ratemaking—which all insurers to consistent direct used avoid since reinsurance is possible loophole generally regulated Code, (Ins. (a)). subd. outcomes They yield generally supportable § insurers, for individual disfavor those whose incurred losses although they event, are small favor those whose incurred losses are In large. any they do not themselves determine the insurer’s rate rollback The mini- liability. mum earned for the permitted line must not be viewed premium earthquake in isolation anas end result. with minimum Together earned permitted lines, each of the insurer’s premium other it functions an only as intermediate in the refund calculation. step

With specific regard direct ratemaking, administrative law judge observed: The Insurance Commissioner’s of “direct adoption ratemaking a consistent basis for determining rollback obligations” a “reasonable . . choice . .” One of policy 20th witnesses “admitted that 20th Century’s like the Century, industry uses direct generally,” He ratemaking. also that as a “agreed matter of the Commissioner should a poliсy consis- adopt tent basis for all and insurers that direct would benefit ratemaking greatly with companies reinsured losses large like those who paid claims due to Loma Prieta He earthquake.” that “most “acknowledged” insurers benefit use from of the direct basis since had losses ceded they large to reinsurers in due , to the Loma Prieta . . . and those earthquake recoveries from Therefore, reinsurers are not on recognized a direct basis. the uniform use of direct rather than net was more ratemaking favorable aas industry whole, while rollback placing higher on those obligation with low losses and thus “Further, better able to it.” while 20th pay Century’s argument that direct ratemaking is unfair because it ignores money actually paid pur- chase blush, reinsurance 1989 has some at first appeal ignores fact set any of accounting rules includes necessarily conventions which in a Indeed, sense from deviate actual expenditures. 20th benefits from Century the regulations’ of recognition 1989 reserves as if those amounts were actually when paid, in fact the claims covered by reserves were actually paid after 1989.” Surely, “losses are major in the rate component” regulations— both and generally as to specifically rollbacks. But that is “because simply the nature of the insurance business is to losses.” indemnify uniform, they insofar as require are also sound regulations

The rate of refund and a uniform year, percentage rate for the rollback maximum therein, without to claimed and overpaid regard overcharged premiums lines. individual “excessiveness” or “inadequacy” Further, are not “retroactive.” regulations impermissibly rate their face and are valid on as necessary the rate Procedurally, regulations of 103’s rate rollback requirement Proposition for implementation proper a hearing as they provide are sound insofar they Specifically, provision. do an not They an individual insurer’s rate rollback liability. preclude or number of the potentially reason the nature hearing by “individualized” “one-line,” variances, viz., “insurer- and “entering-the-market,” available hearing Neither do an “individualized” they variances. insolvency” preclude of the bar.” “relitigation reason Moreover, as rate are valid procedurally, substantively 103’s rate for the necessary implementation proper as 20th Century. applied rollback requirement provision their its variables ratemaking deriving The formula with operation whatever afforded 20th Century values from data necessarily firm-specific thereon to avoid confiscation. necessary hearing was adjustment fair. “individualized” and full and altogether was Further, rates range as the lower reasonable percent boundary as to 20th Century. of return is confiscatory to establish its entitlement 20th introduced evidence in an Century attempt high rate of return at least 20 as percent. to a perhaps The evidence to 20th cost of “Cost Century’s capital.5 capital” related in on of return the marketplace be defined as the rate available may or, practically, investments in terms of risk and otherwise more comparable would to take a return a investor as the rate of expected hypothetical require 20th in the firm in the evidence looked to position question. Specifically, directed cost of derived from econometric models various Century’s capital on investor toward the rate of return based “optimal hypothetical prospective expectations.” i.e., in Century “private corporation engages company,” 5 20th is a “stock insurance which generally private corporations, the insurance business. As is true of an insurer shareholders) organized in who receive way (usually this is owned investors described Law, (Keeton Widiss, 2.1(a)(2), any, if Insurance profits, through the dividends.” & § 33.) the evidence was deemed immaterial by

20th Century’s cost-of-capital Under adjective Proposi- administrative law judge. “optimal” inapt: arm, for the rollback the Insurance tion 103 as construed year Calf the the rates Commissioner “must select a rate at or near bottom of range lower of the which are constitutional. Yet has end Century] ignored [20th on return instead rate of exclusively highest might range, focusing be investors in Also is the conceivably expected by inapt 1989.” adjective rate- “While estimated returns are for pertinent prospective “prospective”: the rollback making “prior approval” system], implementation [under does not rather the of a but determination require prospective ratemaking (Internal minimum return now nonconfiscatory period past.” quotation omitted.) marks

20th evidence was also deemed Century’s cost-of-capital unpersuasive by the administrative law One of 20th main witnesses judge. Century’s expert “testified to a rate of return constitutionally required (ultimately percent, 41.5 earlier and even higher when he advocated more than percent, initially doubling his that exceeds 20th figures) Century’s actual оf return” of 31.51 about under and 32.52 percent statutory accounting principles percent under generally accepted accounting principles.

Neither is of the as to 20th any following confiscatory Century: insurance, treatment the line of direct earthquake including ratemaking; factor; factor; the variable expense or the of a leverage requirement uniform, maximum rate for covered insurance for the rollback and a year, therein, uniform refund of percentage premiums overcharged overpaid without to claimed regard “excessiveness” in individual “inadequacy” lines. insurance,

As treatment the line of direct earthquake including ratemaking, the administrative law judge observed: “The component rollback calculation related to 20th line Century’s Earthquake may appear somewhat , harsh when it is viewed isolation . . . as if were the final result rather However, than an intermediate only calculation. 20th step rollback must Century’s be on the issue of confiscation judged based on overall result. From that is not perspective, [Citation.] confisca- impact tory. 20th is a multi-line insurer line Century [Citation.] whose Earthquake accounted for 1.35 only ($8.7 of its $641.7 business million of million) in the rollback its year, reinsurance unrecognized premiums Earthquake accounted for 0.7 only ($4.5 of its business million of $641.7 million). It suffered low losses in its admittedly very [Citation.] line Earthquake that of year its in southern concentration Califor- [because nia, which did not experience the Loma Prieta and its cost of earthquake] . . to be as low five dollars (estimated was small . that coverage writing case, in that line. In [citation]), high profit any so it a enjoyed per policy, of the is one of the rollback merely of the Earthquake component calculation omitted.) (Fn. to rollback.” the final intermediate many steps factor, observed: “For judge the administrative law As to the leverage rollback, the actual ratio higher, use whichever is leverage the regulations (For or a ratio.” the specified in the rollback year “prior that the insurer had ratio, contrast, if a even the leverage use system, by they specified approval” for the rollback it ratio 20th “contends that Century year actual is higher.) (i.e., earn on a level of lower higher surplus be to a should permitted profit ratio) that because than had actually year, leverage premium-to-surplus it was and therefore entitled more riskier leveraged as a highly company, to an return.” This “contention boils down unjustifiable a rate of higher addition, did In 20th that it not have.” earn a capital request profit its stockholders deserve a the to its that corollary argument “omits Century ratio: because of the risk entailed greater by high leverage return [its] higher for security who its insurance peace that purchased policyholders risk, and did so involuntarily.” mind shared in this higher probably is a that recognition in the administrative law observation judge’s Implicit stated, the to the determination of rates. As the factor crucial leverage the a that insurer should designed premium formula ratemaking yield (1) the to earn amounting receive from its insureds in order a sum (2) used and useful for reasonable cost of insurance the capital providing The factor a fair rate of return. multiplied leverage insurance providing by the that is deemed used and contributes to definition directly capital insurance inverse the the lever- higher useful providing by relationship: ratio, lower the the the leverage the smaller used-and-useful age capital; ratio, that the the used-and-useful It follows the greater leverage capital. itself inverse factor contributes to the of the rate setting indirectly ratio, the smaller used-and-useful relationship: higher leverage rate; ratio, the the leverage hence smaller the lower capital Thus, so and hence the rate. greater greater used-and-useful capital concerned, far as the of rates is the insurer favors generally determination lower and its ratio. generally higher leverage ratio insureds favor leverage out not to be “used and useful” is nonrecognition capital “tum[s] no observed the law matter judge, administrative confiscatory,” underlying investment. prudence law in the hundreds of

The administrative concluded: “Nowhere judge has Century exhibits and that 20th proffered pages testimony, argument its would has it rollback its confiscation claimed support argument

263 financial . . that pose type . rises the level of deep hardship most, confiscation. At it has that it would not be able to as argued expand itas in the because its reduced after a rapidly past has rollback would surplus as written. Even support large growth premiums assum- [Citations.] true, that this were 20th has cited no case ing that a Century holding slowdown in The clear evidence that 20th growth confiscatory. Century has been able to expand rapidly largely use of retained through earnings, stock selling $500 once the last six while from only years growing [citation], $1 million to a billion company undеrcuts 20th Century’s claim Moreover, that it will not be able to raise new if forced to surplus rollback. to the extent that 20th has set aside Century reserves its already against rollback with a reduction in liability, corresponding surplus, impact that reduction has occurred. Yet 20th already has contin- Century [Citation.] ued to more than grow each from percent year 1991.” through (Fn. omitted.)

The Insurance Commissioner the administrative law adopted judge’s pro- therewith, decision as his own. In posed accordance he ordered 20th Century to refund to each insured an amount to the equal for the premiums paid rollback year a refund multiplied by 12.203 with percentage percent, simple 8, 1989, interest calculated at 10 annum percent per from to the May date of In so payment. he maximum doing, set 20th effectively Century’s rate for the rollback at about year 98.89 percent 1987 rate to avoid confiscation, rate, rather than at 80 of that percent required by Proposition 103 in the rate rollback Put requirement he reduced provision. differently, 20th maximum rate for Century’s the rollback to a a mere 1.11 year point rate, below the percent rather than to a below that point rate. The Insurance Commissioner’s decision on the rate rollback liability 20th is the Century first and final determination of this only sort. The commissioner chose the case,” 20th matter as a “test Century because part of its relative It simplicity. more determinations of rate appears rollback will liability follow: The commissioner that about 460 represents insurers 4,000 have filed over “rollback-exemption” and have applications, pro- ceeded to the indicated charge rates.6 higher

C. The Superior Court’s Decision trial, After a bench herein, the superior court filed its statement of decision which fills 85 It pages. limited its to the rate as to scope rollbacks and the 20th order. It found and Century rollback concluded effect. following Garamendi, 6In Fireman’s Fund page Ins. Co. v. F.Supp. put at the court 4,089. number of insurers at 460 and “rollback-exemption” applications the number were in effect 20th is moot. The rate regulations during The not litigation its to determine liability hearing applied and were Century’s rate rollback Century in the rollback order. 20th expressed rate rollback as rate liability, Whether and the order. latter stands. has both the challenged regulations 20th than effect—or were in effect at times other not the former are in or the noted that no here. It was rollback Century’s hearing—is consequence had the that the rate position regulations Insurance Commissioner taken review hence fall outside the OAL come within the rate-setting exception, and therefore not invalid because of OAL disapproval. requirement, resolved. was well taken was not Whether his position threshold, At whether standards of review are the applicable. Various the Insurance Commissioner to rate adopt regu- authorizes Proposition initiative, the rate the rollback lations to implement specifically requirement Next, whether the rate regulations is examined independently. provision, to consistent with the commissioner as rollbacks are by the actually adopted contrast, whether the rate is also examined By measure independently. as to rollbacks are neces- the commissioner actually by regulations adopted is scrutinized for arbi- for the initiative’s implementation sary proper 20th rate the capriciousness. Finally, reviewing Century trariness and/or commissioner, to the court is weigh rollback order issued by required its and then to sustain the evidence in accordance with independent judgment it if it if finds and to strike down evidentiary decision it adequate support does not. review, as are not regulations

Under the rate to rollbacks independent 103 authorizes invalid on their face as statutorily unsupported. Proposition to rate to the rate the Insurance Commissioner adopt regulations implement it him to de- rollback More particularly, empowers requirement provision. investments],” the relevant fine or “unreasonable imprudent expenses [or base, thereto to corresponding and a rate of return applicable capital of return. lower of reasonable rates boundary range Nevertheless, review, to roll- the rate under independent formula. backs are invalid on their face with to ratemaking respect to adopt 103 does not authorize the Insurance Commissioner rate provision. formula to rollback requirement ratemaking implement with, to frame not the commissioner empower To initiative does begin rates It him set formula whatsoever. does any ratemaking permit Rather, matter, him himself. as a allows merely approve general insurers, here) (as relevant applying rates individual disapprove proposed it re- As rollbacks specifically, standard. “excessive”/“inadequate” above minimally him to rate that is any quires approve proрosed other, rate falls even if such other any disapprove “inadequate” (Under require- the rate rollback below the “excessive.” other point some section in Insurance Code the terms ment use appearing provision—to “exces- 1861.05, if (a)—a confiscatory subdivision “inadequate” of the and above percent if more than minimally nonconfiscatory sive” Further, the ratemaking not him to frame rate.) it would empower It is also That formula is “recursive.” “unique” formula in question. used” “similar statutes containing widely without “precedent” among addition, it is inconsistent: internally standard. In “excessive”/“inadequate” factor, standards, the variable expense of the efficiency through operation factor, the individual insurer’s and the a rate covering leverage precludes rate of return of service of its base—a percent cost plus percent capital of the of boundary range on the base defined as lower being capital the formula is also reasonable rates of return. such Through preclusion, financial within hardship" Confiscation does not confiscatory. require “deep Rather, whenever a rate does not Central. it arises meaning Jersey to earn reasonably which an investor could “produce[] profit expect risks and which is sufficient to other businesses with investment comparable attract capital.”

In as to rollbacks are invalid in view of the the rate foregoing, regulations order, relevant and the 20th rate rollback issued part Century pursuant thereto, is void.

In the resolved event an court court appellate might disagree, superior other issues as follows. significant standard,

Under the rate as to roll- regulations arbitrary-or-capricious backs insofar are not invalid on their face as that an insurer’s they require be measured in capital accordance with statutory accounting principles SAP, limit which base to used and apparently operate capital capital useful for insurance. In this are providing regard, they necessary proper for the 103’s rate rollback implementation Proposition requirement pro- The Insurance vision. court stated that Commissioner could superior have concluded that not a return on reasonably insureds “need provide which is not for insurance business.” It that he could capital required implied have concluded as well that need not a return on reasonably insureds provide that is not for that capital actually employed purpose. standard,

Under the the rate as to roll- regulations arbitrary-or-capricious backs are not as the invalid on their face as define 10 they insofar lower of return. In this they reasonable rates boundary range regard, for 103’s rate necessary proper Proposition implementation observed: “It is really The court superior rollback requirement provision. can be that all models rather obvious from the record herein [econometric] of rates return.” great range to produce manipulated/applied review, to roll- regulations Under (apparently) independent the line of earthquake backs are on their face insofar as treat invalid they the Insurance insurance as do. 103 does not authorize they this sort the rate rollback Commissioner to adopt regulations implement in that they are unsound question provision. requirement a firm’s insurers to direct which does ratemaking, recognize subject reinsurance, reasonable. In this regard—the superior even if expenses Constitutions, offend the United States and California court implied—they The and due clauses. regula- their respective takings process specifically, on also unsound in that substantial they part tions in are question depend for the In this regard— individual incurred losses rollback year. insurer’s violate the initiative’s implied—they proscription court superior 1861.05, (a): cal- section subdivision rates in Insurance Code “inadequate” for the loss from a calculations year; culations are based on data single however, line, from than one be based on loss data more should earthquake others) with of “low- because line with is one losses this (along year, line, if based earthquake calculations for the “high-severity”; but frequency” losses, to the relatively data with small are skewed single year on loss from a confiscatory. review, roll rate as to regulations

Under (apparently) independent factor. are invalid on their face insofar as they incorporate leverage backs to adopt 103 does authorize Insurance Commissioner Proposition sort to the rate rollback implement requirement provision. this regulations Cal court declared—the United States and Indeed—the effectively superior their tak ifornia Constitutions stand in specifically respective prohibition, The and due clauses: reflects risk. Commissioner ings “[L]everage process leveraged more this as to rates recognizes prospective allowing highly actual use rather than insurers to ‘normative factor’ leverage lower] [their] [a result rate of return to compensate is a allowed [higher] leverage. higher risk.[7] such No such normative factor greater applies insurer[s] [their] sur [Hence,] . . a of actual rollbacks. . amount ‘proper’ significant is on or This result confiscatory “disallow .... disregarded] plus” [ed] its face.” review, to roll- regulations

Under the rate (apparently) independent an “individualized” backs are invalid on their face insofar as they preclude return," accurate, result,” allowed “higher a “higher 7“The but rather to be not a allowed return.” insurer’s rate rollback liability. on an individual hearing Insurance Commissioner to of this adopt regulations does not authorize the the rate rollback Indeed—the requirement provision. sort to implement California Con- court declared—the United States and effectively superior their and due stitutions stand in specifically respective takings prohibition, in the follow- clauses. The are regulations “preclusive” process question First, or variances two do not allow variance regulations ing respects. sufficient for rate to avoid confiscation: the adjustments necessary only all available variances each inadequate, separately togeth- potentially narrow; er—the “one-line” variance is too vari- “entering-the-market” same; is the and the variance is too ance “insurer-insolvency” demanding. Second, bar,” which regulations impose “relitigation assertedly confiscation and of itself the lower operates prevent proof (including retiran), of reasonable rates of if boundary range even there were a stated, sufficient variance variances. As confiscation does not require financial within the Central. “deep hardship” meaning Jersey review, Under the rate as to rollbacks are not independent uniform, invalid their face insofar as maximum rate for the they require rollback and a uniform refund year, percentage premiums overcharged therein, and without overpaid to claimed “excessiveness” or “inade- regard quacy” individual lines. 103 authorizes the Com- Proposition Insurance missioner to rate of this to the adopt regulations sort rate rollback implement requirement provision. . review,

Under the rate as to rollbacks are not independent regulations invalid on their face insofar as the insurer to interest on the they require pay dollar amount of and for the rollback premiums overcharged overpaid year. authorizes the Insurance Commissioner to rate adopt regu- lations of this sort to the rate rollback implement requirement provision. Indeed, as construed in Calfarm, him to demand of enjoins payment interest: must refund excess collected the rollback premiums “insurer[s] [for with year] interest.” Ins. Co. (Calfarm v. 48 Cal.3d at Deukmejian, supra, added.) Also, standard, italics under the the rate arbitrary-or-capricious as to regulations rollbacks are not invalid on their face fix insofar as the they annum, rate of interest at 10 In percent per this uncompounded. regard, they are and for necessary the initiative’s “It is not proper implementation: unreasonable or the to court—“for the Com- arbitrary”—according superior missioner to choose the same rate for rollbacks” that the chose Legislature 481.5; for unearned in Insurance not premiums Code section he is con- XV, Constitution, strained article section 1 by of the California which in relevant for a maximum rate of interest on a of 10 part provides judgment if set at that level the or 7 percent, by the absence Legislature, percent, the “is the constitutional provision inapplicable action the Legislature; can on because obligation interest rollbacks obligation pay insurer’s ”; furthermore, in Code of Civil Procedure be viewed as a hardly ‘judgment’ has in fact set the rate of interest on Legislature 685.010 the section standard, the at 10 under Finally, arbitrary-or-capricious judgment percent. face insofar as as to rollbacks are not invalid their the rate 8, 1989, the of the rollback the accrual date at May midpoint year. set they too, for the initiative’s necessary In are regard they proper imple- this the court—“the Commis- superior mentation: “Arguably”—according as the accrual year chosen the rollback beginning sioner could have is all.” of the fair to certainly date. The choice midpoint standard, the rate regu- Under the independent-judgment-on-the-evidence as to 20th 20th lations as to rollbacks invalid applied Century, void, order issued thereto is pursuant following rollback Century Second is 10 as ratemaking six First is formula itself. percent particulars. reasonable rates return: least range lower boundary is for 20th Third the treatment is figure Century. appropriate direct is rate- Century subjected the line of insurance: 20th earthquake the firm’s reasonable rein- which does recognize expenses making, moreover, the firm an year; insupport- surance for the rollback experiences outcome, its incurred able inasmuch as it is treated because unfavorably small. Fourth the variable factor. expense losses for rollback were year of an “individualized” Fifth is the factor. Sixth leverage preclusion on rate rollback therein is a fundamen- liability—included finding hearing It tal in the conduct of the hearing. foregoing unfairness appears bases, determinations to the statutory involving have constitutional latter 103 and as to the former confiscation and offense to Proposition arbitrariness, discrimination, irrelevance to legitimate pol- and demonstrable time, invalid as to rollbacks are not as At same rate icy. regulations void, and order thereto is not as to the applied, require- issued pursuant uniform, rate the rollback and a uniform year, ment of maximum for therein, without refund of and percentage premiums overcharged overpaid It in lines. to claimed “excessiveness” or individual regard “inadequacy” under constitutional and that the determination was made appears foregoing 103 and no offense to statutory implying finding principles, arbitrariness, discrimination, irrelevance no or demonstrable confiscation or to legitimate policy. decision, its court rendered

In accordance with statement of the superior al., Allstate, Hartford, State Farm et and of 20th Century, favor judgment it or- Voter Revolt. Specifically, the Insurance Commissioner and against dered, (1) and that: certain of the decreed adjudged, invalid, viz., the formula as such and of its ratemaking many rollbacks are 2644.12, 2644.3, (Cal. Code tit. Regs., individual components §§ 2645.5, 2645.6, 2644.15, 2645.3, (b) & (a), (b) (c), subds. subds. subd. & 10, 2646.4, (id., (e)), and the “insurer- (c)), bar” tit. subd. “relitigation § 10, 2646.4, (id., (c)(8)); (2) variance tit. subd. and a peremp- insolvency” § (a) set writ of mandate should issue the commissioner to commanding tory order, (b) rate rollback reconsider the matter light aside the 20th Century decision, (c) regula- court’s and refrain from enforcing superior The tions referred to above or order made thereto. any pursuant superior caused issuance of the described writ of mandate. court also peremptory The Insurance and Voter filed notices of Commissioner Revolt separate Allstate, insurers, 20th and Hartford with other Century, appeal. together Farm, State filed notices of including separate appeals cross-appeal. were docketed the Court of Second cross-appeals Appeal, Appellate District, in No. B074704. the Insurance Commissioner and Voter Revolt filed

Thereupon, separate Allstate, transfer to this court. 20th petitions requesting predecision Century, Hartford, answers, (20th and State Farm filed separate Century, supporting Hartford, Farm) and State (Allstate) at least not opposing requests. Allstate, The commissioner also submitted a ofwrit petition supersedeas. Hartford, and State Farm submitted answers in Conclud- separate opposition. that it was to consider ing unless until we ordered premature supersedeas transfer, we declined file of these any pleadings. time, we ordered

Subsequently, transfer. At the same effectively filing answers, relevant we petition denied supersedeas.

III. Discussion In their the Insurance Commissioner and Voter appeal, Revolt and amici curiae (hereafter their supporting the Insurance Com- position collectively missioner or the commissioner) raise numerous claims of error regarding Allstate, decision of the court. In their 20th superior cross-appeal, Century, and Hartford with other insurers and amici curiae their together supporting (hereafter position insurers) the raise numerous of collectively claims their own.8 Union, 8Consumers appearing as amicus the Insurance supporting curiae Commissioner’s

position, requested judicial has “flyers” purportedly us to take notice of of certain the contents Revolt, during distributed campaign, allegedly by the 103 one Voter the other allegedly by opposition. the California State Automobile There is no Neverthe- Association. 270

A. Mootness threshold, court determined that the litigation the superior

At the the contend that nor insurers not Neither the Insurance Commissioner moot. in so. this regard. Rightly there was error that the rate as rollbacks regulations

We with the court agree superior were hearing rate rollback and in time of 20th Century’s were effect the as its rate the liability, expressed to determine rollback applied order, and 20th has both the challenged rollback and that Century the order. court, however, following regard. the beyond superior

We the go above, as noted that the Insurance Commissioner’s We believe position, as to and generally specifically well taken. The rate regulations—both hence fall come within the rate-setting exception, rollbacks—do indeed and are not invalid because OAL review therefore outside the requirement, (Cf. State Ins. Fund McConnell (1956) v. Comp. of OAL disapproval. 330, conclusion under P.2d at a similar [arriving Cal.2d 343 [294 440] Code, similar, former (see, Gov. e.g., a scheme legislative predecessor 1362, 1, 2933; Code, 1953, 11380, Gov. former (a)(1), Stats. ch. p. subd. § § 1953, 515, 1, 1755) 11421, (a), to certain “regula Stats. ch. as subd. § § establishing Insurance Commissioner and “fixing tions” the adopted by insurance]; see also insurance rates” workers’ premium compensation Assn, etc., Homes Inc. v. Williams Nursing (1970) Cal.App.3d California McConnell with 800, [effectively distinguishing Cal.Rptr. 590] [84 less, request. persuade the we Consumers Union has failed to us that contents decline 450, must, Code, (See may, judicially or even be noticed. Evid. either of these documents §§ however, 451,452.) in fact reflected passing, note in that the matters embraced therein are We Hence, analysis. in the record. we consider them in our Farm, position, has conjunction supporting insurers’ State with brief amicus curiae excerpts Best’s judicial Aggregates take notice of the contents certain from requested us to (51st 1990), Reports, Property- Averages, Property-Casualty and Best’s Insurance & ed. 459, course, Code, (a)) (Evid. (1992). Casualty judicial We of’ subd. may, of “take notice § “[fjacts reasonably dispute capable and are propositions subject that are indisputable reasonably accu- accurate resort to sources of immediate and determination 452, (id., (h)). grant racy” opposition. request. subd. There is We contents no § (Cf. Redevelopment Agency required. kind v. both of these documents constitute facts of 904, (1985) [holding Cal.Rptr. P.2d in substance Gilmore 38 Cal.3d [214 794] Moody’s Reserve of such Investors Service and the Federal that contents documents as Code, (h)].) We State subject accept notice” Evid. subd. judicial Bulletin “are under § industry commonly rely on “[p]articipants . . representation Farm’s in the . [insurance] accepted well as an and authoritative Best’s as an accurate factual source it is accurate source of insurance data.” argument, completion holding of briefing After oral Allstate and before ground proceeding requested parties to this related insurers us to dismiss them granted request. they had Commissioner. We reached settlement the Insurance with

271 to a the Director of Health regard regulation adopted by Care Services for reimbursement to and convalescent providing homes for medical nursing assistance rendered to covered persons by Medi-Cal program].)

B. Standards Review of

Before we undertake to review the substance of the court’s superior decision, we must determine what standard of review is We appropriate. may summarize the thus. governing principles

“Questions of fact concern the establishment of historical or physical facts; their resolution is reviewed under the Ques substantial-evidence test. rule; tions of law relate to the selection of a their resolution is reviewed Mixed independently. of law and fact concern questions of application the rule to the facts and the determination whether consequent the rule is satisfied. If the of pertinent inquiry with requires application experience affairs, human is question factual and its predominantly determination is If, contrast, reviewed under the substantial-evidence test. inquiry consideration, context, a critical requires a factual of legal principles values, their underlying is question its determi predominantly legal nation is (Crocker reviewed independently.” National Bank v. City 881, San County (1989) 139, Francisco 49 Cal.3d Cal.Rptr. [264 of 278].) P.2d It is plain the decision of the court is superior subject whole, review. independent Considered as a it amounts to the resolution of a congeries questions law and mixed questions law and fact that are predominantly legal, including course that of confiscation. De novo scrutiny In proper. its parts, embraces the resolution of of law questions and mixed questions of law and that are fact de predominantly legal. Again, novo scrutiny proper. review,

After we independent believe that the court’s superior determination of the standards of review to its task was appropriate correct.

That is to whether say, Proposition 103 authorizes the Insurance Commis sioner to adopt regulations to implement initiative is indeed exam Assn, ined (See, independently. e.g., Providers v. Psychology California (1990) 1, Rank 796, Cal.3d 11-12 2]; P.2d Cal.Rptr. [270 Association Retarded v. Department Developmental (1985) Citizens Services Cal.3d 390-391 150].) [211 696 P.2d Cal.Rptr.

Whether the rate regulations actually adopted, including the incorporated determinations, generic are consistent with 103—and with the 272 Assn, (See, e.g., also examined independently. law generally—is California 11-12; Rank, 51 Association v. Cal.3d at supra, pp. Providers Psychology of Services, Department Developmental supra, v. Retarded Citizens

for 390-391.) Cal.3d at pp. the Com- Insurance regulations actually adopted by But whether the rate determinations, missioner, are generic necessary the including incorporated 103 is scrutinized for for the implementation and proper Assn, Psychology (E.g., arbitrariness and/or capriciousness. California 11, 11-12; Rank, fn. see id. at v. 51 Cal.3d at pp. Providеrs 11350, (b), . . subdivision . also that “Government Code section [noting determination invalid if ‘the agency’s a court to declare regulation permits the to effectuate necessary purpose that the regulation reasonably decision, statute, of law which is being imple- court or other provision mented, is not by made the by regulation supported interpreted, specific evidence[]’”].) substantial 20th rate rollback order issued by the

Lastly, reviewing Century Commissioner, to the required weigh the court is superior the Insurance to sustain the with and then independent evidence in accordance its judgment to down if it does strike it evidentiary order if it finds adequate support 1861.08, which was added by Proposition not. Insurance Code section the insur for the commissioner on rates individual hearings by provides initiative, 1861.09, was added the ers. Code section which also by Insurance commissioner’s thereto. the decisions relative review of judicial provides be in with” Insurance review shall accordance “[jjudicial It specifies 1858.6, determi “Any finding, which the initiative: Code section antedates rule, nation, rates “shall be or order made the commissioner” on ruling by on State In such by proceedings to review the courts the .... subject review, its the is authorized and directed to exercise independent court unless the of the evidence the evidence and weight supports judgment commissioner, determination, rule, the same or order of ruling findings, . In court’s findings, shall be annulled. . .”9 reviewing superior substantial by court considers whether they supported appellate 130, 143, (1971) Cal.3d fn. [93 evidence. v. Pierno Bixby (E.g., 242].) 481 P.2d Cal.Rptr. erred by determining

The insurers contend that the court superior review, to the inde standard as opposed arbitrary-or-capricious test, whether question pendent-judgment-on-the-evidence applicable purport 1858.6 does passing 9It should be noted that Insurance Code section review rollback order and to independently superior authorize court itself only disagrees, if it but place substitute its own views in of the Insurance Commissioner’s underlying the order. evidence independently review Commissioner, the rate regulations actually Insurance includ adopted determinations, the are and ing incorporated generic for the necessary proper 103. implementation Proposition the reject

We claim. The standard of review is the arbitrary-or-capricious rule as to whether and for the regulations necessary proper implementa- tion of a statute. There is no reason to create an here. Our exception follows. explanation

As in incorporated Proposition indirectly through Insurance Code section 1861.09, 1861.08 and Insurance Code section directly through Insur- ance Code section 1858.6 the applies independent-judgment-on-the-evidence standard of review to decisions the Insurance by Commissioner on the rates of individual insurers. The does not extend the provision test to the commis- sioner’s adoption rate That regulations. causes no Such surprise. authority as the commissioner have under the may initiative to promulgate regulations of this sort is initiative, and not We implied cannot find in the express. either elsewhere, in Insurance Code section or the 1861.09 what insurers purport discern, i.e., an intent to all require determinations by commissioner on rates to be bearing to the subject independent-judgment-on-the-evidence test.

Insofar 103, as it be said to may outside operate Insurance Code section 1858.6 functions That is to similarly. say, applies independent-judgment-on-the-evidence standard of review to various deci- sions by Insurance Commissioner on the rates of individual insurers and related matters—specifically, “any charged, rating plan, rating system, rule followed or underwriting insurer or adopted by [any] rating organi- (Ins. Code, 1858, zation” (a)). subd. But it does not extend the test to the § commissioner’s of rate adoption The fact that it regulations. contains the “rule[s],” term which is sometimes synonymous with regulations, terms “finding[s]” “determination^],” which are always implicated regulations, be of might if consequence construction only statutory indulged It hypertechnical does not. parsing.

That Insurance Code section 1858.6 so functions is its supported by legislative 1947, It was history. (Stats. 805, 1, added ch. 1906) and p. § (Stats. 1949, amended ch. 406) as p. part former “open § competition” system That regulation. did not system for the provide adoption rate regulations.

On the matter of legislative the insurers direct history, our attention to the Insurance McBride-Grunsky Code, (Ins. Act of Regulatory 1850.4 et § (hereafter seq.) Act), which McBride-Grunsky established the “open competition” system regulation and added Insurance Code section 1858.6. Act, to the source of the McBride-Grunsky also direct our attention They recommended legislation which was certain “model rate regulatory . (Weinstock . . .” & of Insurance Commissioners National Association Preface, Law of Insurance Historical History Development Maloney, Cal., ed.) LXVII.)10 The model (1972 legisla Ins. Code p. 42 West’s Ann. under which the system, adoption embodiеd a kind “prior approval” tion therefrom, of rate would be inappropriate. Departing under which Act set competition” system, McBride-Grunsky up “open LXVII (See Weinstock & Maloney, supra, [stating was true. opposite is the method hindsight Act’s “enforcement approach the McBride-Grunsky is of such enforcement the of power the principal instrumentality Commissioner”].) the statute in the As superior examination which the vests concluded, Act did not con the McBride-Grunsky “clearly court correctly but was concerned with rating plans of template regulations, adoption . the intent that underlies rules . . .” To identify and underwriting 1858.6, seek to behind the McBride go Code section the insurers Insurance do. The may Act the model This not intent legislation. they to Grunsky of that enacted the Act McBride-Grunsky controls is that the Legislature It is not that of the National Association with its “open competition” system. the with Insurance Commissioners that recommended model legislation of of its kind system. “prior, approval” 379], (1984) Cal.Rptr. the court set out the Cal.App.3d 10In Zalta 154 953 Karlin v. [201 background McBride-Grunsky Act. 168, (1868) (8 Wall.) Virginia in v. 75 U.S. 183 Supreme “The United States Court Paul 357, “[issuing] policy of is not a transaction of L.Ed. held insurance 361] [19 interstate conduct of the of insurance does constitute commerce” and that the business beyond the of law. regulate left the states free to such business reach federal commerce. This later, Seventy-six in v. Assn. years question the was reviewed U.S. Underwriters [Citation.] 1440, (hereafter South-Eastern). (1944) To the 533 64 322 U.S. L.Ed. S.Ct. 1162] [88 industry, that the insurance business was consternation of the insurance the court concluded subject regulation to federal under commerce engaged indeed in interstate commerce applicable was that the Sherman Antitrust Act clause of the United States Constitution and decision, Congress produced by passed this operation. Responding

its to the shock waves Act) (hereafter expressly declaring that it was in McCarran-Ferguson McCarran in 1945 Act regulation and public business of to continue under state interest insurance operation laws the extent specifically exempted business from the of federal antitrust such 1, 1948, (and provided January regulated by A was until that was state law. moratorium authority.” 30, 1948) regulatory until to enable the states exercise their extended June 966-967, (Karlin Zalta, omitted.) supra, Cal.App.3d pp. at fn. v. 154 Act, 1907, Cartwright [formerly adopted “In an antitrust law which was California had relatively about Act had been dormant until patterned believed to after the Sherman be] 1946, years In two after the landmark the time the McCarran Act was enacted. [Citation.] case, Speegle in v. Supreme our Court rendered its decision decision in South-Eastern Cartwright (1946) was Act] 34. . . held that [the Board Fire Underwriters 29 Cal.2d . [It] of Zalta, (Karlin Cal.App.3d pp. v. 154 of . .” applicable the business insurance. . 967-968, omitted.) fn. federal application shortly prior expiration “In moratorium the to the California regulation, in absence state laws to the business of insurance antitrust 968.) (Karlin Zalta, supra, Cal.App.3d p.at McBride-Grunsky v. Act. enacted” that, The insurers then be understood to for standard- may argue of-review the rate as to rollbacks should not be deemed purposes, regulations The an regulations. regulations by administrative adoption is, nature, an action that rather than agency quasi-legislative quasi- Code, (See, Gov. that the adjudicative. e.g., [implying “adoption § . . . of . . . is an “exercise of see regulations” quasi-legislative power”]; id., 11342, (b) also subd. [defining “regulation” pertinent part “every § rule, order, regulation, standard general application”].) sense of the seems to be argument that the question rather than or at least more the former quasi-adjudicative quasi-legislative, than the latter. matter,

As a an “administrative action is general quasi-legislative” when the “administrative a new rule for agency future creating application . . . .” (Dominey (1988) v. Department Personnel Administration 729, 737, 620]; accord, fn. 4 Cal.App.3d v. Cal.Rptr. Strumsky San [252 28, 35, Diego County (1974) Retirement Assn. Employees Cal.3d fn. 2 that, Cal.Rptr. 520 P.2d [stating [112 “[generally speaking, 29] action is the legislative formulation of a rule to be to all future applied cases"]; Wilson v. (1967) Hidden Mun. Valley Water Dist. 256 Cal.App.2d 271, 280 similar Cal.Rptr. effect: action . . . [63 “quasi-legislative 889] [to what the law shall be in ‘prescribes ”].) future cases under it’ arising contrast, an By “administrative action is . . . when quasi-adjudicative" the “administrative ... an agency rule to applying existing existing facts.” Administration, v. (Dominey Personnel Department 205 supra, of 737, 4; accord, at fn. Cal.App.3d p. v. San Strumsky Diego CountyEmployees Assn., 35, Retirement that, 11 supra, Cal.3d at 2 p. fn. [stating “[generally ... an speaking, act adjudicatory involves the actual of . . .a application rule to a facts”]; set of specific Wilson v. Hidden Mun. existing Water Valley Dist., supra, 256 at Cal.App.2d 279-280 similar effect: pp. “quasi-judicial [to is, . . . action . . . ‘determines what the law and what the rights parties are, with reference to ”].) transactions had’ already The classification of administrative action as quasi-legislative quasi- adjudicative (Pitts the function “contemplates . . . .” v. Perluss performed (1962) 824, 19, 58 And, think, Cal.2d 834 83].) Cal.Rptr. 377 P.2d we [27 only function performed. that,

Under these we principles, believe for standard-of-review purposes, the rate regulations as to rollbacks must be deemed surely regula tions. They quasi-legislative not quasi-adjudicative. noted,

As the rate regulations (1) as to rollbacks include: regulations called, viz., so strictly rules to all generally insurers formulated in applicable 276 de- (2) regulations incorporating generic proceedings;

quasi-legislative viz., terminations, in all or least several insurers made relating to at findings with pro- conducted accordance ‍‌‌‌‌​​‌​​‌‌‌‌‌​​​‌‌​​‌​​​‌‌​​​​​​​‌​‌​‌‌​‌​‌​‌​‌‍quasi-adjudicatory consolidated hearings regulations. and then as adopted cedures of the rate as to rollbacks regulations adoption

In whole and part, (Dom . for future . . application the creation “new constitutes rule[s] Administration, supra, Personnel 205 at iney Department of Cal.App.3d p. v. Retirement Diego County Employees 737, 4; accord, Strumsky San v. fn. 35, Assn., Valley v. Hidden Mun. Water 2; Wilson fn. supra, 11 at p. Cal.3d Dist., 280.) It not amount to the 256 at does supra, p. simply Cal.App.2d (Dominey Department v. facts.” existing of “existing application rule[s] Administration, 737, accord, 4; at fn. supra, Personnel Cal.App.3d Assn., supra, Retirement 11 Cal.3d Employees v. San Strumsky Diego County Dist., Mun. Water 35, 2; Valley supra, fn. Wilson Hidden v. at p. 279-280.)11 at Cal.App.2d pp. 938, Garamendi, supra, F.Supp. opined, the court albeit Fund Co. v. 11InFireman’s Ins. quasi- present, rate as to rollbacks are that the in a context different from 947, 10, 956-958.) (Id. misstepped. It quasi-legislative. pp. fn. adjudicative and regulations as to rollbacks Fund court characterized the part, In the Fireman's applica- for future ground they do not amount to “new quasi-adjudicative rule[s] 737, Administration, supra, p.at Department Cal.App.3d (Dominey v. Personnel tion” added) existing in the 103 as they implement law form italics because fn. Garamendi, F.Supp. (See p.at Fund Co. v. Fireman’s Ins. construed Calfarm. obligations making of a rule for is not ‘the determination of the insurers’ rollback 957 [“The task Calfarm, Supreme delegated to the Commissioner the the California Court the ftiture.’ In is, law; existing Proposition] obligations under determining the insurers’ rollback (Italics reasoning, such all original.)] in Under by modified decision.” as Calfarm law, by existing quasi-adjudicative at supported be since all are regulations would deemed mind, indeed “new regulations question To our in are some extent. That cannot be. least to they gaps. in its They change But do fill may general not lines initiative.

rules.” regulations as as rate to rollbacks part, Fund court characterized the In the Fireman’s job is to ground “ultimate quasi-adjudicative on that Insurance Commissioner’s (Fireman’s v. . . .” Fund Ins. Co. Gara- much insurer must refund . determine how each mendi, 957.) In Consumers supra, may That be. But it is not determinative. F.Supp. p.at 790 124, (1979) Cal.Rptr. Monopolies Lobby Against [160 Utilities Com. 25 Cal.3d 891 v. Public 41], reducing prospective rate are “fixing of a and the of that 603 P.2d we held that the rate Mosk, J.); (Id. (lead opn. by p. at application quasi-legislative character.” 909 Richardson, ordering accord, (cone. J.).) We further held that the p. opn. id. & dis. at 916 rates,” charged were question the rates in refund rates is to a reduction in when of a “akin Mosk, (Id. (lead J.); opn. by legality p. a . . .” at 910 “pending . [their] determination Richardson, accord, J.).) holdings, (cone. the rate opn. of Under these p. id. at & dis. 916 quasi-legislative. regulations indeed as to are rollbacks regula- that rate misstepped. recognized It not have The Fireman’s Fund should court Garamendi, (Fireman’s Ins. Co. v. Fund quasi-legislative.” tions “as to future are rates ... 956-957.) regulations recognized have that the supra, “[a]s It should F.Supp. 790 at pp. (Id. 956.) both former and latter p. at In obligations” to rollback the same. are in the latter in form and substance. That applications, are similar regulations the rate

277 Our conclusion that the rate as to rollbacks quasi-legisla- tive is unremarkable. When an performed by administrative rate- agency, (See, has been considered a action. making uniformly quasi-legislative e.g., (1979) Hotel & Motel Assn. v. Industrial Com. 25 Cal.3d California Welfare 200, 840, P.2d 211 that an administrative Cal.Rptr. 599 [implying [157 31] orders, rules, a function” when it agency legislative “adopt[s] “exercise[s] rates].) to fix” regulations, That is because is an policies “ratemaking Serv., (New act . . . .” Orleans Pub. Inc. v. New essentially legislative 350, 298, 319, (1989) 2506].) Orleans U.S. 371 L.Ed.2d S.Ct. 491 109 [105 That is true far so as creation of rules is self-evidently general (See, concerned. Hotel & Motel Assn. v. e.g., Industrial California Welfare Com., 25 Cal.3d at 211 an supra, p. administrative [implying agency rules, function” when it . . legislative . “adopt[s] regulations, “exercise[s] rates].) to fix” policies But it is true well so far as the such rules in individual application (See, cases is involved. e.g., (1908) Prentis v. Atlantic Coast Line 211 U.S. 210, 150, 158-159, 226 L.Ed. S.Ct. 9 that the “establishment [stating [53 67] of a rate ... an kind”]; act legislative not Wood v. judicial Public (1971) 288, 455, Utilities Commission 4 Cal.3d 481 P.2d Cal.Rptr. [93 rates, “in [stating fixing commission regulatory 823] exercises legis not, lative functions . . . and does in so doing, vested interests or adjudicate 1861.08, render decisions”].) quasi-judicial That Insurance Code section which provides hearings the Insurance Commissioner the rates of insurers, individual the use of requires (Ins. procedures quasi-adjudicatory Code, 1861.08 shall be [“Hearings conducted to Sections 11500 pursuant § Code,” 11528 of the through Government which relate to administrative adjudication]) is not inconsistent. The of certain “presence elements usually characteristic of the judicial the” process” does “mean that commission er’s “action” is (Wilson quasi-adjudicative. v. Hidden Water Valley Mun. Dist., 279; accord, Cal.App.2d City Santa v. Local Cruz Agency (1978) Formation 873]; Com. Cal.App.3d Cal.Rptr. [142 see v. Corp. (1983) Camarillo City 149 Cal.App.3d Pacifica 670]; Cal.Rptr. [196 Patterson v. Regional (1976) Central Coast Com. 58 833, Cal.App.3d 169].) 841 Cal.Rptr. [130

The insurers argue to the effect that is a ratemaking ultimately judicial function, course, at least when the of question confiscation is Of present. application they happen brought to be to bear the in question charged after rates were “pending (Consumers a legality” Lobby Against determination of Monopolies [their] v. Public Com., supra, (lead Mosk, Utilities 25 p. J.)) Cal.3d at opn. by 910 does not render them quasi-adjudicative quasi-legislative. instead of

278 whenever rates are set. at least is implicated, potentially, confiscation always is fact, that beyond ratemaking is peradventure In of that established spite Line, 211 U.S. v. Atlantic Coast supra, not function. Prentis (E.g., a judicial 158-159].) is the insurers employ at analysis at 226 L.Ed. p. pp. [53 is after a has taking of compensation just That determination what the inapt. which ratemaking, to the courts about says nothing been effected belongs a in the first taking set to avoid prices effecting other to goals seeks among review. But that is another is to ratemaking subject judicial Obviously, place. Further, To a take is no current. longer the insurers approach matter. the animated Lochner v. New York by their discussion is lesser greater degree, 937, 539], its and 25 S.Ct. and ancestors (1905) U.S. 45 L.Ed. 198 [49 however, line, to what Contrary is since dead. long That progeny. belief, the is when” courts could to their day gone “use[] be appears “[t]he other any provision Clause of the Fourteenth Amendment”—or Due Process laws, of strike down state regulatory of United States Constitution—“to the unwise, conditions, bemay because they improvi business and industrial v. dent, (Williamson a school of particular thought.” or out of with harmony 572, 563, 461].) S.Ct. (1955) U.S. L.Ed. 75 Lee Co. Optical [99 to rollbacks are quasi- conclude the rate as To regulations of the “finding” not that their involved legislative deny adoption “facts,” called and strictly of the so both in the formulation determinations. making in the perhaps especially generic the belong quasi- indeed the of such “facts” does “finding” But when, here, the administrative case as legislative function. That the data, well economic and social as “was to receive and consider agency’s task wide sectors numbers of large people and argument, covering opinion at statutory aimed of to select series of economy; positions its selec finally, express but discretion objectives shaped policy; broad classes relatively tion in rules the future conduct regulating (1968) (Rivera Cal.App.2d v. Division Industrial persons.” Welfare 739].)12 Cal.Rptr. [71 function, “finding” belong quasi-legislative “facts” only does the of such 12Not informed in nature. All are quasi-legislative be viewed as “found” must themselves “facts” considerations, generic in the including implicated policy, those legal, with and technical factor, standards, return, leverage etc. concerning efficiency rate of determinations (Crocker National physical facts" Consequently, is similar to the sort of “historical or none Francisco, 888) p. typically found City supra, at County 49 Cal.3d Bank v. San however, quasi- their similarity, would defeat adjudication. Any course administrative Line, at (See p. L.Ed. 211 U.S. legislative [53 Prentis Atlantic Coast nature. v. might be legislative process] “questions fact that considered [implying [in 159] legislative into a act trial a case" does not transform the same that would arise act].) judicial

279 as to rollbacks are to conclude that rate regulations quasi- Similarly, to that their entailed the use of is not legislative deny adoption quasi- in determinations. generic adjudicatory procedures making fact are under regulations quasi-adjudica But the that formulated stated, does not undermine their nature. As tive procedures quasi-legislative of certain elements characteristic of the usually judicial “presence pro “mean cess” does not that the” Insurance Commissioner’s “action” is quasi- Dist., (Wilson Valley v. Hidden Mun. Water adjudicative. supra, 279.) at Cal.App.2d exercising p. quasi-legislative powers “[Administrators uncover, resort to the in commonly at least [judicial] hearing procedure facts arrive at a sound and fair part, necessary legislative deci . . . Hence the sion. certain characteristics common to the presence does not nature . . judicial change of. process basically quasi-legislative (Ibid., omitted; accord, of that citations and fn. proceedings” type. City of Com., Santa v. Local Agency supra, Formation at Cal.App.3d p. Cruz True, 388.) “to hold take hearings, evidence and make creates findings characteristiсs (Rivera shared . . . .” Divi by adjudicatory v. proceedings Nonetheless, sion Industrial at Welfare, supra, 587.) Cal.App.2d “does not the function with (Ibid.)13 an character.” stamp adjudicative C. The Validity General the Rate as to Regulations Rollbacks court that superior determined the rate as to roll regulations are backs not invalid on their face as statutorily unsupported. review,

In our we must address a briefly threshold issue. The insurers contend in this proceeding contended they Calfarm viz., 103’s rate Proposition rollback requirement Insurance Code provision, 1861.01, (a), section subdivision which sets the maximum rate for the rate, rollback at 80 year invalid as facially confisca- Their tory. arguments were weighed and found wanting There Calfarm. no reason to simply revisit the issue here. may 13The insurers be to argue understood the independent-judgment-on-the-evidence applicable standard is question to the regulations actually adopted whether the rate by Commissioner, including determinations, Insurance the incorporated generic necessary are proper implementation for the ground regulations on the that the question implicate the United argument States and/or California Constitutions. An of this sort allow would the rule of arbitrary-or-capricious by up purported review to be swallowed “exception.” charters, That is because all involve federal and/or state at least degree. must, should, to some persuaded We not pursue that we such a even course. Pierno, Bixby supra, 4 Cal.3d v. which is relied on together the insurers with similar decisions, is not the contrary. applies Its reasoning quasi-adjudicative to actions that are Strumsky Diego County Employees (See those that are quasi-legislative. v. San Assn., Retirement pp. 2.) Cal.3d & fn. 34-35 not invalid as as to rollbacks are regulations the rate Without question, In procedure. Calfarm, to we they as relate statutorily unsupported insofar There, in this we authority sphere. determined the Insurance Commissioner’s rules and adopt regula- “has broad discretion to held that commissioner in regard. (Calfarm welfare” this tions as to promote public necessary 824.) at Co. Cal.3d Deukmejian, p. Ins. v. as as to rollbacks invalid statutorily rate regulations

Neither are the did In we not Calfarm, relate to substance. they unsupported insofar in this We do so Commissioner’s authority sphere. determine the Insurance the rates set In we held that if an insurer “believes Calfarm, by here. 1861.01, (a), are subdivision confiscatory” section Code] [Insurance rate,” the commissioner higher ... for of a approval an application “file[s] rate, other rate than the “the initiative’s or some less must determine whether . Co. Deukme- fair reasonable . . .” Ins. v. (Calfarm insurer charged, so, 825.) at To do the commissioner must establish jian, supra, Cal.3d p. An to interstitial and technical issues. rules resolve various legal, policy, frame rules in quasi-legislative pro- administrative official may deliberately Or rules ad hoc in the course he ceedings adopt regulations. may develop to We believe that 103 authorizes review. quasi-adjudicatory in to we made plain Calfarm, commissioner take the former As path. be im- such . . . ... as may fairly commissioner exercise “may powers internal marks and italics from the initiative. quotation plied” {Id. view, omitted.) In our of substantive one of these regulations adoption Calfarm, Proposition effectively requires As construed powers. to him to commissioner establish rules. It implicitly proceed by empowers Included, course, him so. does bar from regulation. Certainly, doing called, i.e., so rules all regulations strictly generally applicable are insurers formulated the commissioner in by quasi-legislative proceedings. determinations, i.e., well regulations generic Included as are incorporating commissioner to all at least several insurers made findings relating by with in consolidated conducted accordance hearings quasi-adjudicatory This from our and then him as follows procedures regulations. adopted that the could cases” Calfarm commissioner implication “consolidate] job whatever reduce generally steps necessary “tak[e] is, doubt, There novel in the {Ibid.) nothing size.” without manageable (Cf., determinations. Cal. adoption regulations incorporating generic e.g., reimbursement tit. for Code et rates Regs., [setting seq. §51536 beneficiaries]; to Medi-Cal see services hospital inpatient provided program id., §51536, subd. a “market basket classifica- (g)(3) especially [defining tion”].) rollbacks are indeed insurers that the rate as to argue do They

invalid as insofar as relate substance. statutorily they unsupported stated, that, For as construed in not the reasons we believe persuade. 103 does indeed authorize the Insurance Commissioner Calfarm, Proposition to substantive rate to the rate rollback adopt regulations implement require- assertion—viz., in ment The insurers’ Insurance Code section provision. 1861.08, initiative the commissioner to conduct on requires hearings of rates individual insurers means of by quasi-adjudicatory procedures—is draw—viz., The correct. inference that to the commissioner they attempt cannot do else relative to rates other means—is unsound. anything by any initiative, We cannot find in the in either Insurance Code section 1861.08 elsewhere, discern, i.e., what the insurers to an intent to all purport require determinations commissioner rates be made in by bearing quasi- on the rates of individual insurers. adjudicatory proceedings The insurers then that the rate as to are argue rollbacks regulations invalid as insofar statutorily unsupported as relate substance because they are they impermissibly “retroactive.”

It is unclear whether and to what extent the court made any superior did, determination in accordance with insurers’ as it Insofar argument. erred.

The rate toas rollbacks be regulations considered may properly prospec tive. The “fixing of a of that rate reducing prospective . (Consumers . .” application. Lobby v. Public Against Utilities Monopolies Com., Mosk, accord, (lead J.); 25 Cal.3d at p. 909 opn. by id. at p. (conc. & Richardson, J.).) dis. of opn. of a ordering refund rates is rates,” when, here, “akin a reduction in as the rates were question charged “pending (Id. determination of . . . .” legality p. [their] Mosk, (lead accord, J.); opn. by (cone. id. at & dis. p. Richard opn. son, J.).) It follows that the of a ordering refund rates is itself prospective. refund, Since the regulations in serve question such be may they soundly viewed to its share character. But even if the rate as regulations to rollbacks be deemed “retroac- might “

tive,” cannot they be deemed impermissibly so. ‘Primary’ retroactivity” coin—to a phrase—obtains when regulations the past legal conse- “alter[] quences (American actions.” past Min. v. (9th Cir. Congress U.S.E.P.A. 759, 1992) 769, 965 F.2d italics see original; National Medical Enter- prises, Inc. (9th 1992) v. Sullivan 671.) Cir. 957 F.2d That is not present “ here. ‘Secondary’ occurs when retroactivity” regulations “affectf] fu- ture legal consequences (National past transactions . . . .” En- Medical Sullivan, terprises, Inc. v. supra, 957 F.2d at italics in That original.) ‘ is indeed such present. “secondary” is an retroactivity’ entirely “[B]ut and does itself rulemaking much agency lawful consequence {Ibid.) “entirely That it is an lawful consequence” invalid.” render a rule law, the United States itself any including it does not offend means that: just clauses. due process Constitutions and their respective and California of the rate “retroactivity” In their argument impermissible making rollbacks, on Bowen v. Georgetown the insurers rely 493, 488 204 L.Ed.2d 109 S.Ct. (1988) 468]. U.S. Hospital University [102 as it does certain Medicare is concerning That decision distinguishable, of actions” the “altering past legal consequences past cost-limit regulations 507], at italics at L.Ed.2d p. p. under regulations. [102 predecessor {Id. Scalia, J.).) (cone. of opn. original were the rate as to rollbacks We observe in that passing regulations may cannot itself render them the rollback That fact year. not until after adopted of a to approval “retroactive.” For about year prior impermissibly of the rollback require- were on actual notice insurers Proposition ment itself.14 provision With to Respect Rate as to Rollbacks Validity Regulations

D. The of the Ratemaking Formula are as to rollbacks determined that rate regulations court superior formula. their face with to respect ratemaking invalid on further, do two observations. we we would well to make Before proceed narrow, his accounting. of In is and concerns matters One relatively Gas v. Hope in the landmark decision of Power Comm’n separate opinion (hereafter sometimes (1944) Co. 320 U.S. L.Ed. 64 S.Ct. 281] [88 is mere accounting Justice commented: “To make a fetish of Hope), Jackson movements, causes, forces, and to from deeper shield examination the an . is hardly conditions which should rates. . . govern [B]ookkeeping business, of a it exact science. As a of the condition trend representation in constant flux. uses to values that actually symbols certainty express It or or business any be said that in commercial investment may banking not account- credit success on what to believe depends extending knowing books do not Few concerns into or whose ing. reorganization go bankruptcy However, for . . our quest show them solvent and often even . profitable. as appear argue to are invalid insurers the rate rollbacks 14The that prohibited constitutionally We no such bar in they insofar as relate to substance. find depend point may United To the extent that this States California Constitution. function, question ultimately judicial at least when ratemaking assertion that is ante.) III.B., (See rejected. present, pt. is it must be confiscation an ardent we irrational reverence to a that technique certitude is so that pay us certainty, uses even warns symbols though experience again again 643-644, (Id. fn. 40 L.Ed. at are delusive.” they pp. (opn. 367] [88 Jackson, J.).) We shall no such reverence. pay broad, The other observation concerns matters relatively policy. arm, Under as construed in insurers were allowed Calf file An insurer that filed such an “rollback-exemption” applications. appli- for cation should be approval and “penalized” having charged, pending refund, a rate the rollback subject year higher than maximum rate 1987 rate. That obvious. But neither should be appears “rewarded” for done That so. seems less obvious. It is having nonetheless stated, As true. formula ratemaking designed yield premium the insurer should from receive its insureds in order to earn a sum amounting (1) to the of reasonable cost the (2) insurance and used and providing capital useful for insurance a fair of providing rate return. multiplied by By charg- a rate for higher the rollback insurer ing year, the “increased” its cost of insurance, providing for for by liability added commis- example, incurring sions, tax, state and federal income tax on the added It premium premiums. return, also “increased” its a rate of capital multiplied by by specifically base, its for “increasing” capital by added example, triggering surplus back the added up Such “increases” would inflate premiums. the premium were, the yielded by ratemaking formula. cannot be They recognized. If they a higher rate would be the that the insurer self-justifying: charged such fact a rate would it right a to have done That grant so. cannot be. There is surely no that, unfairness nonrecognition. Insurers were notice a charging rate, higher they were at their own risk: had to proceeding they establish rate; their entitlement to it did not its entitlement within itself. carry illustration, For let us consider the Insurer A following example. and B Insurer $1,000. situated. rate for each similarly was A maximum rate for rate, viz., the rollback of 80 year percent $800, is and nonconfiscatory otherwise lawful for each under the rate rollback matter, of requirement 103. the provision Not disputing Insurer A $800. reduces its a Filing “rollback-exemption application,” $1,200.

Insurer B takes the and increases its opposite path rate to In so B doing, Insurer “increases” its cost of insurance by providing incurring at, liability (1) for: added commissions the rate of 20 say, customary percent $400, $80; on the added (2) of premium added state equaling tax premium at, $400, the say, established rate of 2.37 on the percent added of premium $9.48; (3) at, equaling added federal income tax the say, rate of marginal $400, on the $136—to added premium total of equaling B a rate of return. multiplied by $225.48. “increases” its capital Insurer also base, so, its added capital by triggering by “increasing” It does specifically, 1:1, at, ratio of to back the added leverage up simplest say, surplus $400, $400. Let assume a rate of return amount of us in the premium a rate of its Insurer B “increases” capital multiplied by thereby percent. “increases,” if were they recognized, $40. total of Insurer B’s return $265.48— formula ratemaking by the premium yielded would inflate In $40 for component plus component. $225.48 for the “cost” “capital” “increases,” words, would “in- they B’s if were recognized, other Insurer $1,065.48. $800 from They its rate for the rollback year crease” maximum it $400 B has too much: must refund be Insurer charged cannot recognized. That means that overcharge. It suffer no its “penalty”

that amount. should (exclusive interest). But neither should be $400 only it must refund refund That means that it must indeed overcharge. a “reward” for its given Otherwise, interest). There would (exclusive $400 would result. inequity B, A Insurer which would be treated Insurer be unfairness between Insurer A rate rollback subjects provision, requirement dissimilarly $800 B with maximum rate of rate of and Insurer with maximum B its in- $1,065.48. Insurer There would also be unfairness between sureds; the latter and the latter overpaying the former overcharging $265.48. there unfairness between amount of would be Lastly, former B, A and the of Insurer who would be treated the insureds of Insurer insureds of the rate rollback requirement provision, as beneficiaries dissimilarly the latter $200 in rates receiving equaling former the mandated decrease $265.48. in increase rates receiving equaling a prohibited court rested its superior first of two bases on which the The major are invalid with respect that the rate as to rollbacks determination effect: following Prop the formula was its conclusion to the ratemaking to to the Commissioner adopt any osition 103 does not authorize Insurance to the rate rollback requirement formula whatsoever ratemaking implement matter, himself; it him to rates as a provision; general it does not set permit individual by allows him to rates merely approve disapprove proposed standard; insurers, here) (as relevant the “excessive”/“inadequate” applying him rate that as to rollbacks it to specifically, requires approve any proposed other, if even above the disapprove any is minimally “inadequate” other some other below the “excessive.” such rate falls at point is erroneous. regard substantially court’s conclusion this superior outset, the Through At the we must make the observation. following formula, not himself “set” the Commissioner does Insurance ratemaking Rather, the or rates that the rates for insurers. he determines rate simply

285 insurer itself set within the constraints of may individual 103 Proposition For the “prior system, ratemaking construed the approval” Calfarm. fix the formula is used to for the individual insurer the of rates within range rollback, with of the and the For rate bounds “excessive” the “inadequate.” concerned, its we is which are here used to fix for the individual insurer rate 103 the maximum rate under as construed in Proposition Calfarm—i.e., or such 80 that is 1987 rate rate than percent greater percent rate as is minimally nonconfiscatory. who Calfarm, In we stated that under insurer “any Proposition 1861.01, (a), believes rates set section subdivision by [Insurance Code] file an with Insurance Commissioner confiscatory may application for of a rate. that is higher If filed before November approval application 1989, the insurer may immediately begin charging higher pending from the commissioner. After date approval insurance rates subject use, 103 must be by commissioner to their approved prior . . the but. commissioner can an interim rate her approve pending [his or] rate, final decision. the commissioner the initiative’s or some other If finds reasonable, rate less than the insurer charged, the insurer must fair insurer, however, excess collected with No premiums interest. will be refund compelled rates set charge initiative unless it either acquiesces that rate or is unable that a prove higher rate constitutionally required.” Ins. (Calfarm Co. v. Deukmejian, supra, 48 Cal.3d at italics added omitted.) and fn.

As construed in Calfarm, does in Proposition 103 fact authorize Insurance Commissioner to formula to adopt ratemaking implement rate rollback whether, requirement to determine provision—specifically, insurer, an individual a maximum rate for the rollback than year higher and, so, rate is to avoid confiscation if what required higher such maximum rate is. terms,

itsBy very 103 sets Proposition a maximum rate for the rollback year.

As in Calfarm, construed 103 the Insurance Proposition requires Commis- sioner, if he finds the initiative’s maximum for confiscatory rate an individ- insurer, ual to determine a rate higher maximum that is minimally noncon- so, must, were, To fiscatory. that, do he itas And to “make” rate. do we believe, he Indeed, formula may proceed by rather than case case. is it that arguable he should in that the proceed fashion. One of purposes 103 “to Proposition consumers from protect insurance rates arbitrary 103, 2, . . . .” Gen. (Prop. (Nov. 8,1988) Elec. in Ballot reprinted Pamp., § Amends, Const, Stats, voters, to Gen. arguments to Cal. with Proposed Case- 8, 99.) goal. furthers that 1988) ratemaking Formulaic (Nov. Elec. p. Pierce, (Cf. & Administrative 1 Davis does by-case opposite. ratemaking commentators, 6.7, (3d 1994) years, Law ed. Treatise [“Over § in virtues unanimity extolling have shown near and Justices judges, case-by- through ‘rules’ making over the process process rulemaking is, doubt, in the use novel nothing There without case adjudication.”].) et tit. (Cf., seq. Cal. Code e.g., Regs., formulas of all sorts. § to services provided for for hospital inpatient rates reimbursement [setting id., beneficiaries]; [establishing see Medi-Cal especially program § formula”].) “reimbursement determines the Insurance Commissioner

It without when goes saying nonconfis- minimally than 103’s that a maximum rate higher Proposition insurer, “set” a This bears point he does not rate. for an individual catory court: For the it was inexplicably ignored by superior because emphasis rates; the insurer set its own each and year, strictly speaking, every rollback Commissioner set not a one. Insurance 103 as court read

In concluding superior Proposition contrary, from setting the Insurance Commissioner preclude construed Calfarm rates or rates and to allow him merely approve disapprove himself insurers, here) (as the “excessive”/ individual relevant proposed,by applying This was a misreading. standard. “inadequate” the Insurance Commis- 103 as construed requires Proposition Calfarm sioner, for an individ- finds maximum rate confiscatory if he the initiative’s insurer, determine a maximum that is noncon- minimally ual rate higher He does “set” a in so doing. not fiscatory.

Further, it is case that 103 as construed not the Calfarm insurer- merely disapprove allows the Insurance Commissioner to approve That standard. standard rates under the proposed “excessive”/“inadequate” from rates November governs to the which belongs “prior approval” system, rollback, 8, 1989, It to the rate which into future. does extend 8,1988, Even for rates November 1989. through obtained from November did, recognized effectively if it would matter not. The court superior if rollback above an individual insurer’s maximum rate year, rate, nonconfiscatory: must minimally of the 1987 be that which is in Under rate use the terms appearing the rollback requirement provision—to 1861.05, if (a)—a rate is Insurance Code section subdivision “inadequate” and minimally nonconfiscatory and “excessive” if more than confiscatory substance, form and It would exalt over above 80 of the 1987 rate. percent to entail the needless time and hold that the commis- expense money, could numberless sucсession insurer- only disapprove perhaps sioner he rates fixed above the until minimally nonconfiscatory finally proposed to such a rate that to hit the level— was required approve happened proper the determining instead of at the simply minimally nonconfiscatory outset. 103 as construed in does not the com- Proposition require Calfarm missioner to take a role when an active one is not barred.15 passive to

In the court’s conclusion the effect that supporting superior 103 does not Proposition authorize Insurance Commissioner to any adopt formula whatsoever to the rate rollback ratemaking implement requirement the insurers the same provision, take fatal That is to misstep. say, they misread in Proposition as construed Their how misreading, Calfarm. ever, even more would appears profound. They apparently the rate abrogate rollback in its provision the commissioner requirement entirety by requiring i.e., to proceed under the “prior approval” system, any approve rate that is below the proposed “excessive” and above the The “inadequate.” stated, commissioner not do As may so. under rate rollback requirement 1861.05, use the terms Insurance provision—to Code section appearing (a)—a subdivision rate is if if and “excessive” “inadequate” confiscatory more than and minimally above of the 1987 nonconfiscatory rate. At the heart argument insurers’ is an assertion to the effect that invalidated rate rollback and substituted requirement provision Calfarm its place substantive standard of the “prior approval” system. assertion is unsupported. invalidated the procedural mechanism Calfarm relief from the rate rollback and not the requirement rate rollback provision provision It requirement itself. substituted the mechanism for the procedural “prior and not approval” system the substantive standard of the “prior approval” system. Pipeline Trans Alaska (1978) 631, 15Cf. Rate Cases 591, 607, 436 U.S. L.Ed.2d [56 (“Petitioners disagree S.Ct. do apparently 2053] that the [Interstate Commis Commerce] suspend reasonableness, sion can a tariff wrong because it falls on side the line of but they prevent here, would in suspending stating, Commission from tariff as it did where dividing the tentative line lies. . . But principle . this is untenable: No requires of law engage Commission to a pointless [regulated desiring charade in which to exercise firms] rights their . . . the Interstate required [under Commerce submit resubmit Act] tariffs until one finally goes below an point undisclosed maximum of reasonableness and is all, allowed to take process, effect. The administrative after is not modeled on ‘The Price is here, therefore,

Right.’ condemnable, What the Commission being did from far is an intelligible practical .’’) suspension power exercise of its . . . may It be passing noted in that former effectively section 1850 the Insurance Code 1947, denied the Insurance “power (Stats. Commissioner to fix and determine” rates. ch. 805, 1, 1896.) p. provision, however, That repealed by § was (Prop. 103. Stats, Amends, (Nov. 8, 1988) Gen. Elec. reprinted in Pamp., Proposed Ballot § Cal. Const, arguments voters, (Nov. 8, 1988) with 141.) Gen. Elec. the of the two bases which major superior The second rate to rollbacks are its that the court rested determination formula was conclusion to the to the its ratemaking invalid with respect the Insurance Commis effect: 103 does authorize following formula the rate ratemaking the question implement sioner to adopt “recursive”; formula is and that “unique” rollback provision; requirement statutes the used” widely “similar among containing without “precedent” standard; internally through op inconsistent: “excessive”/“inadequate” factor, standards, the and the variable expense eration of the efficiency factor, cost of it a return the insurer’s service covering leverage precludes on the base—a 10 rate return percent capital its capital plus percent rates the lower reasonable boundary range base defined as being return; also confisca confiscatory; the formula is such through preclusion, Jersey within meaning financial the tion does not require “deep hardship” Central. too, is substantially the court’s conclusion

In this regard superior erroneous. sure, But is indeed “recursive.”

To be formula ratemaking vigorously court’s evident belief and the insurers’ to the superior contrary It is merely is not pejorative. that is no vice. The adjective urged position, value solved for it in this context that the means descriptive. Simply put, desires to determine the solution itself. For an insurer example, figures $100 net after paying it its insureds to charge rate must formula, in which to its It uses the “recursive” following commission agents. - = = r; $100; r $100 r r r + 0.2 0.2 0.8 “r” to the rate to be charged: refers = = itself, $100; To objectionable. $125. “recursiveness” is not r In and mere “recursiveness” to goes complex the extent that complaint beyond so. formula is not unduly complicated, ratemaking fails. ity, Although 22, reim tit. et rates for (Cf., seq. [setting Cal. Code Regs., e.g., § to Medi-Cal bursemеnt for services program inpatient provided hospital id., beneficiaries]; a “reimbursement see 51549 [establishing especially § formula”].) without “unique” formula

Similarly, ratemaking apparently used” “exces- the widely “similar statutes among containing “precedent” court’s evi- to the standard. But again contrary superior sive”/“inadequate” is no vice. The that urged dent belief and insurers’ vigorously position, functions in the So formula reason is short far as ratemaking simple: rollback, from November regulatory regime operated temporary 7, 1989, 8, 1988, to do with the “prior it has nothing November through No- obtains from regulatory regime approval” system, permanent future. That the two are distinct regimes apparent vember into the in in our construction of the initiative in 103. It remains such Proposition Calfarm. event, that the

In we must observe standard any “excessive”/“inadequate” defined in 103 is itself without Proposition apparently “unique” as In of (a) “similar statutes . . . .” subdivision Insurance among “precedent” 1861.05, the Code section it shows itself to be from others: distinguishable excessive, or “In whether rate is discrim- considering unfairly inadequate the given no consideration shall be to the of inatory, degree competition shall rate the commissioner consider whether the reflects mathematically our insurance investment income.” insurers direct attention company’s 8, to what to be a statement made to the November purports campaign prior 1988, Revolt, General Election Voter of by the proponent to the effect that in the initiative is “prior approval” system “[biased tested in effect 19 states.” The statement system says only that [a] initiative’s is based on similar It not “prior system does approval” systems. that is identical to one. The say any insurers substance that the argue standard as defined in be “excessive”/“inadequate” the initiative should in accordance with the or the interpreted insurance actuarial industry’s of profession’s understanding its terms. We believe that operative subdivi- (a) 1861.05, above, of sion Insurance Code section as stands in the quoted way.

Further, the formula is not ratemaking inconsistent. internally to the Contrary court’s evident superior formula assumption, ratemaking not does purport guarantee individual insurer a rate its covering cost service plus its percent base of the various capital independent etc., exclusions, adjustments, incorporated therein.

We do not think it or otherwise—for improper—constitutionally rate as to rollbacks to as the recognize insurer’s cost service the reasonable cost of only insurance. It not providing that objectionable formula’s ratemaking efficiency standards define the operate reason able cost of insurance after providing the insurer’s . . subjecting . “expenses to downward (Massachusetts normative pressure.” & Auto. Accident Rating Prevention Bureau v. (1980) Commissioner Ins. 381 Mass. 602 [411 762, 768].) N.Ed.2d The insurers that such devices are charge unprecedented outside the monopoly public That utility does to be the setting. appear (See case. 411 N.Ed.2d at 768-769.) pp. It is also not objectionable formula’s ratemaking variable factor excludes from expense the reasonable cost insurance providing such commissions and state taxes premium would have been avoided had the insurer a rate for the rollback charged year no higher than the maximum rate set by Proposition as construed rate or such rate greater is 80

Calfarm—i.e., nonconfiscatory. surely as is minimally of the 1987 rate “[I]t than 80 percent that each and every expen for an investor to assume be cannot reasonable & Cent. Power (Jersey authorities.” . . . be allowed regulatory diture will Starr, F.E.R.C., J.).) (cone. at of opn. F.2d supra, p. Co. 810 1193 v. Light as to the rate regulations we think it for improper Neither do and used only capital as the insurer’s base capital rollbacks to recognize & Co. v. Cent. Power (See Jersey Light insurance. for useful providing F.E.R.C., rule at that the “used useful” [holding 810 F.2d 1175 supra, p. clause].) On this of under the ratemaking” takings is a “permissible” “tool[] accord, is that insureds acknowledging court in expressly the superior point, which for insurance return on is not required “need not a capital provide that need not a insureds acknowledging provide business” and impliedly for that As stated purpose. on that is not actually employed return capital (i.e., above, its available industry’s surplus that insurance appears assets, is represented by appreciating up premiums) greatly capital backing time, the same At one and surplus assets. depreciating as opposed is, back what is useful to up premiums— surplus surplus—that beyond to the disadvantage rate set thereon any inflates the insurer’s base capital income from and also investment produces appreciating of its insureds to assume that each cannot be reasonable for an investor assets. surely “[I]t . . . authorities.” [recognized] by regulatory will be every [investment] F.E.R.C., 810 F.2d at Light Power & Co. v. (Jersey supra, p. Cent. Starr, J.).) (conc. opn. of addition, we do think it for the rate regulations

In improper useful income on used and capital to rollbacks to take account of investment is law judge for insurance. observation the administrative by providing utilities, need not other businesses such as insurers public sound. “[U]nlike may keep into assets a but power plant, transform their like capital physical stocks and bonds. simulta Surplus them instead in assets like liquid may Cer the insurance business and earn investment income.” neously support of Insurance Code under the the words tainly, approval” system, “prior 1861.05, that the (a), requires section subdivision 103 expressly Insurance consider the rate mathematically Commissioner “shall whether thereby reflects the insurance investment income.” The initiative company’s that the shall offset the latter commissioner impliedly against requires that, insurers, former. We note to the benefit of the regulations question for take no of income on not used and useful account investment capital insurance. commissioner They thereby prohibit providing effectively out mandate from of such investment income in any carrying considering whether, insurer, i.e., maxi for individual a Calfarm, determining rate is than of the mum rate for the rollback year higher percent and, so, if avoid confiscation what such maximum rate is. higher required words, that In other of investment income would they prevent portion reduce an insurer’s maximum rate the rollback from year doing otherwise so. bears the 10 rate return

It on individ emphasis base, ual insurer’s which defined as the lower capital boundary return, is not reasonable rates an entitlement conferred rate range as to rollbacks. It is simply ratemaking component Garamendi, (Fireman’s Fund Co. v. formula. Ins. F.Supp. course, 948.) Of return can a rate any given generate operate much too or much too high low. The result how the depends directly determined insurer’s base is how of its cost service capital indirectly overstated, If the is base is the defined rate return specified. of will capital a return that is if the the of produce unduly high; same rate return opposite, will a return that is produce unduly low. if the cost of is Similarly, service inflated, the of will itself without covering “expenses” generate profit return; regard to the rate defined of if the the of opposite, “covering” will not expenses avoid a loss unless the same of rate return generates an offsetting profit.16 inconsistent,

Not is the only ratemaking formula not it internally is also or confiscatory or arbitrary, discriminatory, irrelevant to demonstrably legitimate policy.

At rehearse, on, this we would point, do well to and elaborate out set in principles Calfarm.

The Fourteenth Amendment United States provides Constitution relevant that state part of . .. deprive any person “[no] [shall] property, without due of law process ....’’

“The standard whether a determining state price-control regu lation is constitutional under the Due Process is Clause well established: ‘Price control is “unconstitutional ... if or de arbitrary, discriminatory, ” irrelevant to the monstrably is free to . . policy legislature adopt. (Pennell (1988) 1, 1, 14, v. San Jose 485 U.S. 11 L.Ed.2d 108 S.Ct. [99 849].) A “legitimate and rational goal price of is regulation protection (Id. consumer 15].) welfare.” at 13 L.Ed.2d at p. p. [99 16The complain they insurers ratemaking “rigidity.” what call formula’s Their that, objection actuality, seems be dissimilarly the formula treats situated insurers not, similarly. It does judge at least to from the to show orders cause issued the Insurance insurers, to 14 including Century, Commissioner 20th the matter their rate rollback liability. It is the insurers themselves have directed our attention to these orders show cause.

292 the due process under constitutional presumptively regulation

Such 1989) (1st Cir. v. Consumer (See, Tenoco Oil Co. Dept, e.g., clause. Affairs 1022, “rests on 1013, 15.) otherwise proving” “The burden F.2d fn. (Ibid.) For the . It “is not met. easily . . .” violation asserting the party acts no unless courts have challenged governmental half-century, upheld last establish a rational relationship set of facts could conceivable reasonably (Ibid., ends.” italics legitimate and the government’s between the regulation correction, at hand for and that there an evil enough “It is in original.) toway . . measure was a rational that the . thought particular be might Co., U.S. at Lee (Williamson Optical [99 it.” v. correct of “business and of state regulation [speaking generally L.Ed. p. 572] conditions”].) industrial declares as the United States Constitution perti Amendment to Fifth be taken for use without public

nent here that “private property [shall not] binds the states through This compensation.” prohibition just Amendment, above, that state mandate of the Fourteenth quoted “[no] [shall] . .” without due law . . of . . . property, process deprive any person U.S. 235-241 (1897) R’D v. (Chicago, Burlington Chicago [41 &c. words, 984-986, 581].) Fifth Amendment’s In other L.Ed. S.Ct. the states Fourteenth through clause is enforceable takings against due clause. Amendment’s process of states to limits the takings regulate,

The clause power control, consumers for services. goods or fix that charge prices producers 299, (1989) Co. v. Barasch 488 U.S. 307-308 (See, e.g., Duquesne Light 646, 656-657, 609].) S.Ct. L.Ed.2d 109 [102 is but one of species price-fixing. indeed

“Rate-making [Citation.] of reduce the may like other of the fixing police power, prices, applications But that the value is of is the fact being value which property regulated. (Power v. not mean is invalid.” Comm’n regulation reduced does Co., 344].)”17 Gas 320 U.S. at 601 L.Ed. at supra, Hope p. p. [88 is the rate set is just The crucial under the clause whether question takings Barasch, at Co. v. 488 U.S. (See, supra, and reasonable. Duquesne Light e.g., reasonable, it 656-657].) it is 307-308 L.Ed.2d at If not just pp. pp. [102 (Ibid.) (Ibid.) it is invalid. If it is confiscatory, confiscatory. “[I]t (Power controlling.” result not the which is reached method employed Co., 591, Hope supra, of 17Power Comm’n v. Gas which defined the “standards” 320 U.S. 821, (52 effectively seq.), et delimited Natural Act of 15 717 Gas 1938 Stat. U.S.C. § are no constitutional scope “requirements” the United States Constitution: “[T]here (Power Hope Comm’n v. exacting . requirements the standards of the Act. . .” more than Co., 347].) supra, Gas p. at L.Ed. p. 320 U.S. 607 at [88

293 Co., 345]; at v. Gas 320 U.S. at 602 L.Ed. see Hope supra, p. p. Comm’n [88 Barasch, Co. v. 488 U.S. at 310 L.Ed.2d at supra, Duquesne Light p. pp. [102 traditional, 658-659].) The method of course be may may involve data condition and ratemaking reflecting performance case-by-case using (see an But it be firm as individual also novel regulated entity. may Barasch, Co. 316 at Light supra, v. U.S. L.Ed.2d Duquesne p. p. [102 that the of a as a theory ratemaking [stating “designation single 662] which constitutional would foreclose alternatives requirement unnecessarily investors”]), could benefit both consumers and may formulaic implicate 747, (see (1968) Permian Basin Area Rate Cases ratemaking 390 U.S. 312, 336-338, 1344]) 768-770 L.Ed.2d 88 S.Ct. using data reflecting [20 (see condition and of a of regulated firms id. at performance group pp. 335-349]; 766-790 L.Ed.2d at Giles v. pp. Lowery Stockyards Dept, [20 321, (5th 1977) Cir. Agriculture 565 F.2d ‘just and reasonable’ [“The does ‘that the principle cost each be ascertained and require company its rates fixed with to its own costs.’ It is respect permissible for [Citation.] an agency use costs rather than average the costs of individual” regulated firms.]). It is not examination: “The subject piecemeal economic judg- ments required are often proceedings and do not hopelessly complex admit of a correct result. The single Constitution is not to arbitrate designed Barasch, these economic Light niceties.” Co. v. (Duquesne 488 U.S. at And, course, 661].) p. L.Ed.2d at courts are not [102 equipped (See, out such task. carry Harris v. e.g., Growth Investors Capital XIV (1991) 614, 52 Cal.3d Cal.Rptr. 805 P.2d [stating [278 873] “we ill to make” equipped decisions’’].) “microeconomic long “[S]o rates as a whole afford regulated just compensation [the firm] [its] over-all services to the public,” (B. are not & they O. R. Co. v. confiscatory. United States (1953) 912, 916, 345 U.S. L.Ed. 73 S.Ct. 592].) [97 That a particular not cover may the cost or service particular good does not work confiscation in and of (See itself. id. at 147-150 L.Ed. pp. [97 914-916].) words, at In pp. other confiscation is an with toward judged eye the regulated firm as an enterprise.

The answer to the question whether the rate set is just reasonable on a depends balancing interests of the producers goods or services under regulation and the interests of consumers of such goods or services.

In Co., Power 591, Comm’n v. Gas Hope 320 supra, U.S. the court spoke Justice through Douglas.

The Hope court made that plain the consumer ahas interest in legitimate freedom from (See Co., exploitation. Power v. Comm’n Gas 320 Hope supra, 294 L.Ed. at [recognizing “exploitation”

U.S. at 610 p. 349] p. [88 “evil[]”]; was an see of natural gas companies” “at the hands consumers 575, (1942) 315 U.S. 606-608 Comm’n v. Co. Pipeline [86 Power generally, Black, 1060-1061, (conc. 62 opn. Douglas, S.Ct. L.Ed. 736] JJ.).) Murphy, that, “has a made for its the producer court also Hope plain part, the investor financial .... From integrity concern with

legitimate [its own] of view it is that there be revenue enough point important company costs of the business. but also for the expenses capital only operating dividends on the stock. By include service on the debt and These [Citation.] to the owner should be commensurate with that standard the return equity risks. That in other having corresponding returns on investments enterprises return, moreover, confidence in the financial should be sufficient assure so as to maintain its credit and to attract capital.” enterprise, integrity Co., 320 U.S. at 603 L.Ed. at (Power Comm’n v. Gas Hope supra, p. p. [88 345].) be that the describes an interest that

It must emphasized foregoing demand. That interest is and not a that it can may pursue right producer constitutional calculus of reasonableness.” one of the variables “only Cases, L.Ed.2d at (Permian Basin Area Rate 390 U.S. at supra, p. p. [20 . . . .” 337].) “A has no constitutional to a right regulated profit [firm] F.E.R.C., at 1180- Power & Co. v. 810 F.2d (Jersey Light supra, pp. Cent. 1181; accord, Co., Power Comm’n v. 315 U.S. Pipeline supra, p. [86 business shall L.Ed.2d at does not insure that the p. [“regulation 1052] Co., revenues”]; v. Gas 320 U.S. at Hope supra, net Power Comm’n produce Co., 345], v. L.Ed. at Power Comm’n Pipeline p. p. quoting [86 Indeed, 1051].) such a firm has no 315 U.S. at L.Ed.2d at p. [86 (See Street R. Co. v. Comm’n constitutional even a loss. Market right against 1171, 1183, 65 S.Ct. (1945) [holding 324 U.S. L.Ed. 770] [89 even if it a regulated a rate is not necessarily “confiscatory” “compel[s]” loss”].)18 firm “to at a operate for a

In the relevant and consumer interests just balancing producer rate, zone of reasonableness” and reasonable one is concerned with a “broad Cases, (Permian Area Rate supra, not with therein. Basin any particular point set is within 338].) U.S. at L.Ed.2d at So as the rate 390 770 p. long p. [20 zone, {Ibid.) no . . . .” that “there can be constitutional objection 508, 515, Guaranty (9th 1990) language Nat. Ins. Co. v. Gates 18In F.2d there is Cir. 916 “guarantee^]” erroneously constitutionally a may producer be read to state that the is “ ” retum[,]’ necessarily be above the “break ‘fair and reasonable and that such a return must reading. indulge even” level. We will not in such a interests, one consumer to balance producer In attempting both But one or even parties. that disappoints arrive at a rate of course may not necessarily does detriment to the producer’s of the balance striking a it Indeed, when only prevents confiscation it can threaten confiscation. work impliedly successfully”—as phrase from “operating producer this, viz., operating used in and is expressly defined in prior opinions market to then-existing and subject the rate during period successfully conditions.19 enable the com which held that

The court itself Hope expressly “[r]ates attract integrity, to maintain its financial successfully, to operate pany risks assumed certainly its investors for the and to compensate capital, invalid, only even though they might produce cannot be condemned Co., at 320 U.S. (Power supra, Comm’n v. Gas Hope return . . . .” meager later, this 346].) holding the court restated L.Ed. at A year p. p. [88 ‍‌‌‌‌​​‌​​‌‌‌‌‌​​​‌‌​​‌​​​‌‌​​​​​​​‌​‌​‌‌​‌​‌​‌​‌‍Jackson: “a company in a unanimous Justice by even terms opinion simpler it for the was allowed made possible if the return which complain [cannot] Comm’n, v. (Market supra, Street R. Co. successfully.” company operate 1184].) at L.Ed. at 324 U.S. p. p. [89 five ago, vital. Just years court’s Hope holding indisputably 299, court, Barasch, in an opinion Co. v. 488 U.S. Light supra,

Duquesne own of’ its Chief Justice undertook to 90 years Rehnquist, “review[] Nowak, & Treatise (2 . . . rate Rotunda “cases concerning regulation” 15.12, on to (2d 1992) 504), and then went Constitutional Law ed. p. § set out holding in the Hope, “reaffirm teachings” quoting process the[] Barasch, v. 488 U.S. at Light p. [102 above Co. (Duquesne it defined a 658-659]). L.Ed.2d at with Hope, effectively pp. Consistently as to destroy rate thus: “A rate is too low if it is ‘so unjust “confiscatory” and in which it was value of for all the for acquired,’ property purposes [the] due without process so owner doing property ‘practically deprive[s] ” 657], &c. (Id. Covington 307-308 L.Ed.2d at p. quoting pp. law[.]’ [102 560, 567, L.Ed. (1896) Co. v. 164 U.S. Turnpike 597 [41 Sandford 198].) S.Ct. Thus, if the rate of confiscation only question producer may complain from the does This conclusion follows not allow to successfully. operate it to court’s that it cannot if it enables Hope operate holding complain Tribe, 1988) (2d ed. (See American Constitutional Law successfully. whenever, 19Otherwise, successfully” producer “operating could be deemed to be by imprudently example, merely “healthy” cash flow position it was in the to create a against borrowing anticipated liquidating past by unreasonably assets in the funds amassed the future. That cannot be. the most egregiously a that only “standard [characterizing Hope fn. 3 word, In a difficulty meeting”].) structure would have rate confiscatory not a sufficient— necessary—but is a successfully inability operate of confiscation. condition Central, for the District the United States Court Appeals

In Jersey Bork, Circuit, bank, ex through Judge in and speaking Columbia sitting there is a circumstances under which ... Hope, only “Under plained: of rate virtue by regulation of a of investors’ taking property possibility in of financial described difficulty is in the sort when a [regulated firm] viz., Cent. (Jersey financial hardship.” “deep Justice Douglas’ opinion,” F.E.R.C., 3.) fn. The firm 810 F.2d at p. & Co. v. Light supra, Power revenue for both it does not earn enough such when hardship may experience business,” including and “the costs of capital “operating expenses” stock,” that would on the of a magnitude on the debt and dividends “service “commensurate with returns on to the owner” that is allow a “return equity risks” and “sufficient corresponding investments in other enterprises having so as to the financial integrity enterprise, to assure confidence in Co., Gas (Power Comm’n v. Hope and to attract maintain its credit capital.” 345].) “But absent the sort deep at L.Ed. at 320 U.S. supra, p. p. [88 court, Central Jersey concluded financial described hardship Hope,” F.E.R.C., & Co. v. Light . . . .” Cent. Power (Jersey “there is no taking that, under 3.) from the fact at fn. This follows 810 F.2d supra, p. if the rate is confiscatory only firm claim that may Hope, regulated circumstances, firm is In such not allow it to successfully. does operate as a financial hardship” characterized as experiencing “deep not inaptly result of the rate. unanimous, on this at least the point was not Jersey Central

Although Mikva, Judge “In stated majority. Hope,” dissenters were accord with the that the rates fixed by [regulated “the Court faced an assertion firm] this unreasonable. In testing were so low as to be unjust the [regulator] the Court whether [regulated firm’s] challenge, essentially questioned was examined what about. The Court shareholders had anything complain that the of view’ and found ‘from investor ‘important’ company point Ac interest. investor rate at issue satisfied fully any legitimate [Citation.] from the not be condemned held that the rate could the Court cordingly, Jackson, later, One Justice speaking investor year viewpoint. [Citation.] Comm’n, 324 U.S. at supra, court Market Street R. Co. v. a unanimous [in 1184], holding Hope-. the Court’s ... L.Ed. page restated] [89 if return ‘All that a could not complain that was held was company successful operate for the company which was allowed made possible ” F.E.R.C., 810 F.2d at p. Co. v. Cent. Power & ly.’ (Jersey Light Mikva, J.).) (dis. opn.

When, here, whether a is viola regulation arises question as face, is whether its terms clause on its the question tive of the takings to the regulated of a rate that is and reasonable as just the setting preclude firm, (Cf. Ins. Co. v. Deukmejian, supra, nonconfiscatory. and hence Calfarm statute]; Ins. Co. of a but see Fireman’s Fund 48 Cal.3d at 816 [speaking p. Garamendi, is not that a [implying regulation v. supra, F.Supp. p. in whole or in to a facial either challenge part].) subject takings properly under the due clause the law Finally, process I, Constitution and the article sections 7 and 15 of the California takings of I, of that same instrument is in accord with the clause of article section 19 foregoing principles. this formula cannot be deemed

Against background, ratemaking irrelevant to It arbitrary, discriminatory, demonstrably legitimate policy. relevant to the welfare—a consumer demonstrably policy protection that the voters were free to and did in fact policy adopt, adopt, approving Further, 103. it is not an to rates that arbitrary, taking approach one, is a reasonable not the such it is not although Lastly, only approach. To the extent that it be said to disfavor insurers and discriminatory. may insureds, favor their it does so well within the limits marked out due since at least the late process 1930’s. jurisprudence Neither can the formula be deemed Its ratemaking confiscatory. terms do not themselves of a rate that preclude setting is just rate, reasonable. Put differently, they do themselves impose quote Central, Jersey that inflicts on insurers “the sort of financial deep hardship F.E.R.C., described in . . . .” Cent. & Co. v. Hope (Jersey Light Power 3.) 810 F.2d at fn. This It crucial. deserves court point special emphasis. superior case, this, committed fundamental error. At least in the general such confiscation does indeed financial within the mean- require “deep hardship” Central, i.e., of Jersey of the firm ing inability regulated operate firm to successfully—meaning, again, inability regulated operate the rate and market successfully during period subject then-existing (Accord, (D.C. 1988) conditions. Rural Coalition v. F.C.C. Cir. Telephone 838 F.2d Central to hold [following Jersey App.D.C. [267 357] Hence, ”].) “absent financial . . . there is no it ‘deep hardship taking’ arise, believed, does not as the court whenever a rate superior erroneously does not which an investor could simply “produce^ profit reasonably to earn in other businesses expect with investment risks comparable is, course, which is sufficient to attract Profit of that capital.” magnitude not a can But it is pursue. right the producer may an interest that in the one constitutional calculus It is variables “only demand. Cases, U.S. at (Permian supra, p. Basin Area Rate 390 769 reasonableness.” 337].) (1979) v. Co. 439 U.S. Producing at In FERC L.Ed.2d p. Pennzoil [20 declared, 782-783, 765], S.Ct. the court with L.Ed.2d [58 that is a that the “notion Hope, regulator] required [a from quotation maintain, maintain the exclusion of other consider- or even allowed to ations, of is margin [regulated incompatible the profit any particular firm] ‘The of like . . rate other regulation. fixing prices, . with a basic precept of the reduce the value which may of the police power, property applications is mean But that the value is reduced does not that the fact being regulated. ” invalid.’ the is regulation the formula cannot be deemed ratemaking confiscatory In that concluding a rate its the that is setting on the terms themselves ground preclude reasonable, we attention to the definition of 10 have given just special the rates of return. The as the lower reasonable boundary range percent insurers, an those including Fund court considered argument by Fireman’s here, the Commissioner is the constitu- “that the 10% of return set by minimum, expenses, and that disallowed any improperly improper tional have which rate of return is the the base to the capital applied, decreases (Fireman’s the the rate below constitutional minimum.” effect lowering Garamendi, 948.) The court at supra, p. Fund Ins. Co. v. 790 F.Supp. selected assume that the Commissioner rejected point. insurers] “[The itself, has constitutional in a vacuum. no figure By figure 10% what is not on the issue of constitutes the judicata dimension. And it res out, As points minimum rate. the Commissioner nonconfiscatory ‘[t]he It is not “end result” of the but merely component.’ regulations are in (Ibid.) is end result that counts.” We accord. expressly be that the rate as rollbacks

It must remembered for rate adjustments necessary for variances the final mechanism provide results, it We believe if confiscation nonetheless avoid confiscation. We turn to that question the variances. shall charged against properly DLL, (See below. pt. post.)20 103 does court’s conclusion that Proposition

In supporting superior formula Commissioner to the ratemaking not authorize the Insurance adopt ratemaking confiscatory superior formula is 20To the extent court determined that the “precedent” among “similar statutes apparently “unique” because and without simply it is standard, it erred. Our discussion in the containing widely “excessive”/“inadequate” used” employed which is disposes point. not the method text is the result reached “[I]t (Power Co., Hope supra, p. Comm’n Gas p. at L.Ed. at controlling.” 320 U.S. [88 v. Barasch, Light supra, 488 U.S. Indeed, (see Duquesne Co. v. 345].) may the method be novel (see Permian Basin ratemaking 662]) implicate at at formulaic p. 316 L.Ed.2d [102 Cases, 336-338]) using data Rate pp. Area pp. 390 U.S. at 768-770 L.Ed.2d [20 the insur- provision, the rate rollback requirement to implement in question and answered have been anticipated Most arguments. number of ers make a un- Their ultimate constitutional premise discussion. in the preceding case, this, does confiscation such as least in the To At general sound. repeat: Jersey within meaning financial hardship” “deep indeed require believed, arise, Hence, court erroneously as the it does superior Central. an investor could which a rate does not “produce^ profit whenever with investment comparable in other businesses to earn reasonably expect is, of Profit of that magnitude to attract capital.” which is sufficient risks and that it course, But it is not a right that the may pursue. an interest producer in the constitutional calculus of one of the variables can demand. It is “only Cases, at (Permian Basin Area Rate 390 U.S. supra, p. reasonableness.” 337].) L.Ed.2d at p. [20 on what the formula against ratemaking appears

The insurers also argue Constitutions that the United States and/or California prohibit be the ground formula, the of such a at least when constitutional rights implicated. use court and the United More than 50 in this years regulatory jurisprudence States Court refute the assertion. Supreme formula with what

The insurers further argue against ratemaking to be even more to be an assertion that the formula may prove appears of Proposition than the rate rollback “confiscatory” requirement provision maxi- 103 itself. The former offers a of relief from the latter’s possibility mum rate. It cannot reduce that rate further. simply addition, formula

In the insurers the ratemaking argue against the individual thus: the formula looks toward factors including improperly insurer’s least to 20th Century— formula—at profits; proper according would on the rates of insurers general generally.21 impose “price caps”

We do not think the formula for toward looking ratemaking improper factors the individual insurer’s The insurers that such say including profits. an orientation would be in the utility setting, proper only monopoly public which do not does not include the insurance assertedly industry. They persuade.

The is that the insurers their The of their gist argument press position. of other insurance- voters’ 103 and their approval Proposition disapproval ballot, 100, an related measures on the same reveals especially Proposition id. (see reflecting pp. at performance group regulated the condition and of a firms 766-790 335-349]). pp. at L.Ed.2d [20 course, noted, “price ratemaking effectively imposes individual 21Of it must be formula individually. caps” of a sort on the rates of insurers remarkably out to be intent to establish that turns system regulation similar to that of “open competition.” But it falls its own weight. point urged strongly. clear, to do

If else is this is: 103 was intended nothing control with The initiative competition” system. provides away “open rollback, of rates means of regulation—initially through 8, 1988, through from November regulatory regime operated temporary 7, 1989, November through approval” system, then “prior 8, 1989, that obtains from November into regime permanent regulatory of rates be said to existed future. Such control as have under the may “open through was market forces alone. That competition” system essentially were, seeks, initiative laws open competition by “repeal[ing] bar from Co. v. selling (Calfarm Deukmejian, . . . banks insurance” Ins. 103, 8, (Nov. 1988), Gen. Elec. [referring Prop. Cal.3d p. Amends, Const, Stats, in Ballot to Cal. reprinted Proposed Pamp., § voters, (Nov. 1988) 141]) does not arguments with Gen. Elec. of the the That one initiative’s “open competition” system. pur preserve 103, is a insurance (Prop. “to poses encourage competitive marketplace” Stats, 8, 2, 1988), (Nov. Elec. in Gen. Ballot reprinted Pamp., Proposed § Const, Amends, 8, voters, (Nov. Gen. Elec. and to Cal. with arguments that 1988) 99) not another of is to deny subject does that its purposes that interme to rate one of initiative’s marketplace regulation. Similarly, diate of a insurance is goals encouragement “competitive marketplace” fair, its does ultimate “insurance goal guaranty deny available, (Ibid.) and affordable for all Californians.” looks

We with insurers that formula that agree ratemaking toward would have fit factors individual insurer’s including profits quite 100, (See the context Gen. Elec. within 100. easily Proposition Prop. Stats, Amends, (Nov. 1988) in Ballot and reprinted Pamp., Proposed § Const, voters, 8, 1988) (Nov. to Cal. with Gen. Elec. arguments pp. 131-132.) in

But we that a formula sort is out of place of this disagree ratemaking 103. setting of Proposition stated, the rate Most to be that under argument insurers’ seems broadly were, determined, rollback, that rates must be Proposition requires abstract, in in a formula or elsewhere without consideration ratemaking condition, in cost of of the as revealed performance individual insurer’s service, base, return, That be. As approved by etc. cannot capital 1861.01 voters, (b) of Insurance Code section the initiative in subdivision on a rollback provision dependent relief from the rate requirement made the individual “Insolvency” implicates of “insolvency.” substantial threat the initiative Calfarm, and condition. As construed insurer’s performance Ins. Co. v. Deukmejian, on “confiscation.” (Calfarm makes relief dependent 816-826.) the individ- “Confiscation” also implicates 48 Cal.3d pp. condition. ual insurer’s performance than rather by “price caps”

As to 20th Century’s argument regulation the administrative law judge’s factors we find including persuasive profits, rather than An of this sort is bottomed argument “policy” response. that “would have us ignore emphasis law—specifically, “policy” Calfarm’s of rates on” such factors as “and 103’s call for reduction profits of whether the rates were low or indus- industry-wide,” “regardless high (Italics standards . . . .” added in of underscoring original.) try place the terms Under the rate rollback use requirement provision—to appearing 1861.05, (a)—a Insurance Code section rate is if subdivision “inadequate” and “excessive” if more nonconfiscatory than confiscatory minimally above 80 rate.

E. The Validity the Rate as to Rollbacks With Regulations Respect the Measurement Insurer Capital determined court as to roll that the rate superior

backs are not invalid on their face insofar as that an insurer’s they require be measured in accordance with capital accounting statutory principles SAP, which to limit the to used and base apparently operate capital capital insurance, useful instead of providing accounting generally accepted or principles GAAP.

We agree.

The use of which are more conservative statutory accounting principles, than generally to measure an insurer’s accepted accounting cap- principles, stated, ital is As altogether appropriate. statutory accounting principles “rules that state insurance have to . . . departments developed regulate insurance ... their companies guarantee (Meyers continuing solvency.” end, v. Moody, 1218.) 693 F.2d at To this “mandate” the supra, p. they of “conservative in “in employment methods” assets considering valuing calculating (Ibid.) financial condition . company’s . . .” That to limit the insur- statutory accounting principles apparently operate er’s base to used and useful for insurance is capital capital providing noted, its back- an insurer’s is available capital As unexceptionable. surplus in Insurance stating court was that the right The ing premiums. superior up “need not have concluded insureds reasonably Commissioner could which is for insurance business.” a return on not required provide capital sound: insureds do not The commissioner’s is have underlying position benefit. for what not them give marginal Surplus surplus—i.e., does pay insurer’s is useful to back what surplus beyond up premiums—inflates insureds, set its disadvantage base and thereon to the capital any income from while at the same time it investment produces appreciating commissioner was also that the assets. The court superior right implying not on concluded that need a return reasonably provide could have insureds that is for insurance business. The commis- not actually employed capital sound as well: do not have to here insureds sioner’s underlying position them whatsoever. any for what does not benefit give pay that an insurer’s There is nothing confiscatory requirement certainly be in accordance with statutory accounting principles measured capital (See also Fireman’s instead of accounting principles. generally accepted Garamendi, that a Ins. Co. v. F.Supp. [implying Fund either a facial subject takings challenge regulation properly there arbitrary, discriminatory, whole or in Neither is part].) anything con- to the of the legitimate protection irrelevant demonstrably policy welfare. sumer

F. The the Rate as to Rollbacks With Regulations Respect Validity of Rate 10 Percent a Reasonable Return rollbacks are court determined that the rate as to superior lower insofar as define 10 as the

not invalid their face they percent of the of reasonable rates of return. boundary range findings At this be to call to mind point, may pertinent profitable as the lower and conclusions of the administrative law judge: return based “on of reasonable rates of was boundary range the between industry historical of return achieved average by rates actually by determined 1980 and rather than theoretical investor expectations models”; return ... “industry average econometric earned an 9.1% from “over the 10 1989” under and accounting years statutory principles, accounting a 10% return” under both statutory 1989 averaged (internal quotation principles generally accepted accounting principles omitted); of return than inher- marks of actual historical rates rather “[u]se is . . . of investor ently speculative projections expectations hypothetical , . . . for a now reasonable time period already past.” particularly determination, In its court making superior applied appropriate standard of review and to arrive at the conclusion there- proceeded proper under. Its discussion deserves to be quoted length. review the determinations”—one of which scope [generic]

“[T]he as the lower percent of reasonable rates of boundary range return—“is the standard.” arbitrary/capricious science,

“Determining rates of return is not an exact and indeed requires of judgment. exercise The different rates of return found to be reasonable by Commissioner and Commissioner Garamendi for the rollback Gillespie year are an of how reasonable example minds can arrive at different results and how evidence is available to serve as basis for conclusions. varying [a] Garamendi,

.. Commissioner after all the ‘considering evidence pre- sented,’ found that . . . rate of return of 10% . . . to the corresponds [a] returns, lower of reasonable boundary range that such a ‘rate of ” return is nonconfiscatory.’ [Citation.] “Evidence supporting Commissioner’s determinations included the Safir,. that, testimony Dr. Andrew . . in his 10.3% rate of return opinion, . . . was the lower reasonable rate of return. This boundary was opinion based on the individual performance between of a sample insurers business doing in California” and on a view that “investors’ expec- tations are historic shaped largely by levels of the profit companies making up industry.”

“The of Dr. Safir’s validity 10.3% rate of return as at the lower boundary reasonable rate Thus, of return was confirmed other evidence. his figure was above the level characterized as norm’ for ‘accepted profitability by A.M. Best Co. Furthermore, the ten during years [Citation.][22] when the industry had been 10% average return on substan equity, surplus grew and even at tially, that low level the had been able to meet debt industry obligations and pay dividends. [Citations.] 22Dr. Safir testified part Key follows: “. . . I consulted Rating the 1990 Best [A.M.] Insurance, Guide for Property-Casualty in order to company determine what used as an ‘accepted norm’ policyholders’ return to surplus. specific rate of return ratio I calculated for purposes, rollback net average income after as a policyholders’ taxes surplus, However, is not used by Best for purposes. evaluation very [A.M.] close to the ['] n I employed: test net prior-year-end income after policyholders’ taxes to surplus. Accord Guide, ing to Key Rating acceptable range currently [Best’s] for this rate-of-retum is from 3% to 10% . . . .” As the insurers acknowledge through represen themselves State Farm’s 8, ante), (see tation fin. “[pjarticipants industry commonly rely . . . [insurance]

Best’s as an accurate accepted factual source and it is well as an accurate and authoritative source of insurance data.” to of earned one up

“Dr. looked at a number companies Safir .), (between and 10.3% . . rate of return 9.3% less his recommended than had growth, adding companies, surplus and that out 48 such found fell below 10.3%. $1 net which during year they billion [Citation.] witness, Dr. 20th Timothy the above was confirmed by Century “Some of most of Dr. Crichfield confirmed that the surplus Crichfield. For example, not attraction of new capital was from retention growth earnings, [cita- were able not to only that a number of low-earning companies and tions] retain but attract capital. earnings, [Citations.]

“Further, evidence the record showed in 1989 insurance on or on an return of 9.6% statutory equity earned 9.1% average industry 1980-1989, the 10% GAAP Over the ten years industry averaged [citations]. Nevertheless, the accumulated return SAP GAAP. industry’s on both and omitted.) (Underscoring capital grew significantly.” the whole on industry’s “The insurers criticize approach relying [the] cost of and for determine capital historical average industry average for rollback .... yeаr As the indeed to the historic average approach.

“There are limitations out, firm had low profits the fact that an has industry insurers point it is a low-risk necessarily five or ten does mean that years years rates Similarly, or can even with low of return. enterprise attract capital the result consid- average number of chosen to include in the affects years Thus, 10.4%, erably. four-year average ... the five-year average 12.4%, Garamendi chose a and the 11.8%. Commissioner average three-year (Commissioner had his conclusion. ten-year average Gillespie previously on used a of return this basis a rate determined 15-year average.) Certainly, and evidence .... has be viewed with caution in the context of other economists, and “The Dr. presented testimony Appel insurers [David] Weide, estimat- Dr. two theoretical models for Vander regarding [James H.] necessary of the return ing investor determination profit expectations (‘DCF’) attract cash model assets capital discounted flow capital: and 16.6% rates (‘CAPM’). model These models 16.98% pricing produced rates, too, could vary on these return. Depending assumptions, [Citations.] based Dr. Vander Weide also estimated cost capital substantially. [Citation.] method, “Dr. (15.5%) on the at a similar result.” risk premium arriving returns, model, based the DCF was Vander Weide’s of reasonable range It is rather obvious from really between 13.8% 20.3% [citation]. record all be produce great herein that models can manipulated/applied of rates return.” range

“The also utilities are less Pacific Gas argued although risky, insurers Electric and Southern California Edison were allowed a 13% rate of in the Public Utilities Commission. return 1989 by utilities, “The Commissioner that the unlike insurance responds compa- nies, assets, Commission, hold and the Public Utilities unlike depreciating Commissioner, was not for a rate at the lower looking boundary reasonable rates of return for a one-time rollback. purposes determining determination, unlike

“In to his considered that Commissioner coming utilities, do not insurers raise investors or generally capital by attracting [citations], therefore, internal and that borrowing, primarily by growth but. such is free of the transactional costs associated with capital acquisition securities markets. In all of the evidence the Commis- evaluating presented, utilities, sioner considered also that unlike where stock and bond heavy issuances market data on cost of market data was provide only poor capital, and, therefore, available as to insurer cost of less credence could capital be on such data placed by regulator.

“In that unrealized must be taken concluding gains into account in capital ratemaking ‘avoid rates than process setting higher appropriate,’ Commissioner considered the distinction between again utilities and insur- Thus, ers. the Commissioner found that the insurers have been able to attract because, behind returns that capital despite other industries unlike other lag industries, much of their investment value is investments. appreciating Thus, while the insurance property-casualty industry [Citations.] 9.6%, 13.1%; a return of its reported while income of surplus grew reporting billion, $11.2 the insurance $15.5 were in value companies increasing billion. [Citation.]

“The event, Commissioner also stressed that the rollback is a one-time unlike utilities where the rate of return for the indefinite future. A applies rates, reasoned, rate of return at the lower one-year end of reasonable he to affect investor likely so that expectation attracting capital plays diminished role in the fair rate of return calculus. Commissioner, to the

“According while utility ratemaking prospective, rollbacks a rare instance where the financial con- ‘present ditions for the relevant period known. . . .’ His determina- [Citation.] tion to data, on available rely annual historical and not industry-wide rely exclusively analysts’ on what should have hypothetical rates projections been, is not . . . arbitrary capricious. data, factors, “Use of with past other along reasonable determining rate of return for a limited (one rollbacks) in the case of the past period year is not . . . improper. the the serious flaws in evidence supporting

“The have pointed insurers the reasonable rate of 10% as lower boundary determination Commissioner’s . . . of return. standard, however, this court cannot re-

“Under the arbitrary/capricious its for that of Commis- judgment and substitute own the evidence weigh sioner. Dr. Safir’s only opinion testimony, considered not

“The Commissioner He of as further considered number other evidence the record well. but businesses, from other the insurance business distinguish factors which utilities particular. the Commissioner”— factors relied by

“The court considers all “matters not included” in the record” of File No. RCD-2 and both “evidence ’ “ ”—“relevant and proper rubric of ‘legislative therein under the fact[s] rate of return on the reasonable boundary considerations in lower setting Of rollbacks. determining of reasonable rates return in particular range event, to a is a one-time applicable is the fact that the rollback significance is, thus, of investors less to affect future expectations likely past period same 10% lower boundary if rates to be limited than all future were rate of return. review, its court concludes that the narrow this scope

“Constrained by the 10% lower bound- is substantial evidence in the record support there determina- rollback such year, reasonable rate determination ary tion not arbitrary capricious.” erred by determining

The insurers contend that the court superior invalid on their face insofar as the rate as to rollbacks are not of reasonable rates the lower boundary range define they percent at the threshold by also contend that the court erred They of return. superior of the inde of review instead standard arbitrary-or-capricious applying test. pendent-judgment-on-the-evidence demonstrates that the

We the latter claim. Our above reject analysis (See of review is indeed applicable. pt. standard arbitrary-or-capricious IH.B., ante.) mind, the court’s claim To our superior

We the former as well. reject Commissioner It establishes that Insurance discussion persuasive. range lower boundary could have defined 10 as the properly on both the an attack based reasonable rates of return. The insurers mount But cannot show that the commissioner acted they simply law and the facts. note, their strenuous to what the objection We for example, unreasonably. They commissioner’s “historic average approach.” court called the superior cannot determine a reasonable substance that this maintain in “approach” rate of return. The “historic of return but an actual only averages” however, which the insurance industry derive from a during question, period do, reflect a rate of was as to rates. Because they they largely unregulated least, market, have considered “reason- return that the would apparently “the . . . “over averaged” able.” It is true that the “10% return” that industry omitted) (internal from marks was the 10 1989” years quotation on that the Evidently, calculated its entire apparently capital during period. assert, would and the commissioner would that all that deny, insurers capital useful for insurance. To the extent that the insurers was used and providing be understood to of the defined rate of return because it is may complain to a base not their entire capital comprising capital during applied rollback but that that the factor to define as year only part leverage operates insurance, used and useful for their is not with the rate providing complaint of return but will be in with factor. That addressed actually leverage due III.H., (See in course. There is pt. post.) certainly nothing confiscatory definition of 10 as the lower of the of boundary reasonable range Garamendi, (See of rates return. also Fireman’s Fund Ins. Co. v. supra, 790 is not to a F.Supp. [implying regulation subject properly facial either in whole or in Neither is there takings challenge part].) anything or irrelevant to the arbitrary, discriminatory, demonstrably legitimate policy of consumer welfare. protection G. The Validity Regulations Rate as to Rollbacks With Respect the Earthquake Line Insurance court determined that the superior as to roll regulations

backs are invalid on their face insofar as treat the line of they earthquake insurance as they do.

We disagree.

We do not share the court’s view that the rate as to superior regulations rollbacks are unsound insurers direct they subject ratemaking. observed,

As the administrative law direct is an account- judge ratemaking convention; it is used ing insurers 20th generally, including Century; it consistent treatment guarantees of all insurers.

True, direct does not an insurer’s ratemaking recognize expenses for reinsurance in the form of ceded to a reinsurer. But neither does it premiums form of ceded revenue reinsurance losses the insurer’s

recognize from that the nonrecognition court implied to that same reinsurer. The superior and due clauses process offends the takings reinsurance expenses It to have assumed that States and California Constitutions. appears United be to recover its entire cost service—at least the insurer must permitted of one or both these guaranties. insofar as is reasonable—by operation be an element of its cost of That A firm disallowed regulated may so. a denial suffering taking service—even one that reasonable—without Court has so concluded under the The United States Supreme of due process. States, (B. 345 U.S. at pp. charter. & O. R. Co. v. United federal 914-916].) We the same conclusion under L.Ed. at come to 147-150 pp. [97 court that either law organic that of the state. Any suggestion by superior out conventions must be of hand. accounting rejected controls the choice of court’s view that the rаte Neither do we share superior in that substantial they depend part to rollbacks are unsound for year. incurred losses the rollback individual insurer’s that, rate regula- in court that the regard, implied Recall this superior to violate 103’s proscription “inadequate” tions as rollbacks 1861.05, (a): calculations are in Insurance Code section subdivision rates for the insurer’s data from a calculations single year; based on the loss however, line, on from more than one should be based loss data earthquake “low- others) one this line with with losses (along because year, line, if based but calculations for “high-severity”; earthquake losses, frequency” skewed to the data with small are single year relatively on loss from confiscatory. administrative The regulations rate agree judge:

We with the law broadly insurers, outcomes for individual as rollbacks yield generally supportable favor those incurred losses small and disfavor those whose although they event, do not themselves incurred losses are in large; any whose they earned the minimum permitted determine the insurer’s rate rollback liability; be in isolation as an end for the line must not viewed premium earthquake result; each of the with the minimum earned for premium together permitted lines, refund insurer’s other it functions as an intermediate only step calculation.

Nevertheless, court. Cal- we of the superior cannot dismiss concerns line, from a year if based on loss data single culations the earthquake losses, end for do indeed toward the low verge with small incurred relatively any given insurer. above, toward the with an judged eye

But as stated confiscation is context firm an That is this say, depends as regulated enterprise. the condition of the insurer as a whole—and not on the fortunes one any lines, turn may or more of its Confiscation including perhaps earthquake.23 insurer line on an insurer’s line if the writes that alone. But it earthquake insurers, if this condition. satisfy few appears any, what we have stated. The Be that as it we state may, again already as to rollbacks for variances as the final regulations expressly provide If mechanism for rate to avoid confiscation. confis- adjustments necessary results, it (See cation nonetheless the variances. charged against properly DLL, pt. post.) to the there is the treatment of

Subject foregoing, nothing confiscatory (See the line of earthquake insurance. also Fireman’s Fund Ins. Co. v. Garamendi, that a is not F.Supp. [implying regulation to a facial either in or in properly subject challenge whole takings part].) Neither is there anything irrele- arbitrary, discriminatory, demonstrably vant to the of consumer welfare. legitimate policy protection

H. The Validity Rate as to With Regulations Respect Rollbacks Factor Leverage court determined that the rate as to roll superior backs are invalid on their face insofar factor. they leverage incorporate stated,

As factor leverage is crucial the determination rates. The formula is to a ratemaking that the insurer should designed yield premium receive from insureds its in order earn a sum (1) to to the amounting reasonable (2) cost of and providing insurance the used and useful for capital insurance providing a fair rate of return. The multiplied by factor leverage contributes to the directly definition of the deemed is used and capital useful for insurance providing inverse the lever- by higher the relationship: ratio, age the smaller the used-and-useful the lower the capital; leverage ratio, the the greater used-and-useful It follows that the capital. leverage factor contributes to the itself indirectly the rate inverse setting ratio, higher the the the relationship: smaller the used-and-useful leverage rate; ratio, the capital hence smaller the the lower the the leverage Thus, the greater used-and-useful hence the the rate. so capital greater concerned, far as the determination of rates is the insurer favors a generally lower ratio and its leverage insureds favor a ratio. generally higher leverage Calfarm, 23In recognized might subsequently we that a presented court be with a claim that 103’s maximum year confiscatory particular rate for the rollback “is as to a (Calfarm Deukmejian, supra, and line insurance.” insurer Ins. Co. v. p. Cal.3d at fn. added.) recognition italics complaint Our was it factual: concerns the nature of the that an might insurer judged make. It was not normative: it does mean that confiscation is other eye than with an toward the insurer as a whole. inval- in determination of superior the court’s major part,

Expressly factor is leverage confiscatory. on a finding rests idity however, Confiscation, The factor functions as appear. leverage does not rule. That rule is a an of the “used and useful” “permissible” application Light Cent. Power & takings (Jersey under the clause. ratemaking” “tool[] F.E.R.C., 1175.) The court itself superior Co. v. 810 F.2d a that insureds “need not return capital acknowledged explicitly provide acknowledged which for business.” It further is not insurance required a return on that is not capital that insureds need not implicitly provide for that As extent that explained, actually employed purpose. useful, not used and it also excludes from leverage recognition capital factor (See derived therefrom. pt. excludes from investment income recognition m.D., ante.) is to insurer’s detriment. latter is The former exclusion other its of investment income that would benefit: prevents portion so. wise reduce its maximum rate for the rollback from doing year Nevertheless, confiscatory, factor leverage superior finding the rate system, court to this effect: Under the “prior approval” reasoned ‘norma- more insurers use highly leveraged [a lower] regulations “allow[] tive factor’ rather than actual [higher] leverage leverage [factor]” [their] read, “higher order to obtain a . . . rate return “higher return”] [sic: have done risk.” should greater They such compensate [their] insurers] not, they the same under the rate rollback. Because did they “disallow[] . . .” amount of actual . disregard^ surplus significant ‘proper’ “In The Insurance Commissioner’s sufficient: response prior approval the leverage to the the amount surplus insurer regulations impute To the extent that the factors specified regulations imply. [Citation.] This it will be able to retain extra highly leveraged, profit. insurer more write more insurance than the insurer with the incentive to salutary provides insolvency. of somewhat risk of higher it otherwise albeit at cost might, actual, than the The decision to use” the rather Commissioner’s specified, small, that the risk is ratio “in reflects his leverage prior judgment approval How- .... when with effective solvency regulation particularly coupled ever, nor the incentive write more insurance the risk insolvency neither to so, to for the rollback period, relevant longer policies, 1988-1989 any [is] ratio, as leverage for the use of “the insurer’s actual regulations provide” ratio actual ratio is no less than leverage as insurer’s long leverage less, ratio is that means leverage in the If the actual adopted regulations. was reasonably necessary support the insurer had more than capital insurance, on the extra profit and the insurer is not extract permitted Therefore, (Fn. omitted.) what from its California surplus policyholders.” found to be “actual that is “disal- court ‘proper’ surplus” superior in fact or not “actual It was disregard[ed]” ‘proper’ surplus.” low[ed] “useful” as well as “used.” not event,

In the rate as to rollbacks regulations any expressly provide as the final mechanism for rate to avoid adjustments variances necessary results, If confiscation it is confiscation. nonetheless properly charged III.I., (See the variances. pt. post.) against and in minor

Impliedly part, court’s determination inval- superior rests on a idity finding that factor is or leverage arbitrary, discriminatory, irrelevant to the demonstrably legitimate of con- policy protection sumer welfare. Such not does The factor functions an leverage as appear. of the “used and useful” rule. That rule is application under the permissible view, sure, our clause. In it is takings To be permissible generally. factor leverage may be said to favor the over insured the insurer. But not so. unreasonably I. The the Rate as Validity Regulations to Rollbacks With Respect to

Hearings court determined that the rate superior regulations rollbacks are invalid on their face insofar as an they preclude “individual ized” on an hearing individual insurer’s rate rollback liability: they (1) because do not “preclusive” they allow a or variance variances sufficient for rate adjustments (2) to avoid necessary confiscation and because they bar,” impose which “relitigation assertedly prevent proof operates itself, confiscation in and of even if there were a sufficient or variance variances.

To the extent that the superior court’s determination of invalidity bar,” is based on the it is “relitigation unsound. bar,” above,

The “relitigation as noted is this: in a “Relitigation hearing an individual insurer’s rates of a determined matter either these already by or generic determination is out of order and shall not be However, permitted. the administrative law judge shall admit evidence he or she finds relevant to the determination of whether the or rate is excessive (or, in inadequate the case of a proceeding [concerning a rate for the rollback relevant to the year], determination of rate), the minimum nonconfiscatory whether such evidence is these expressly regulations, contemplated by the evidence provided is not offered for the a purpose matter relitigating already determined these by or a regulations by (Cal. determination.” generic 10, 2646.4, Code tit. Regs., (e).) subd. § bar.” in the “relitigation “preclusive”

There nothing are bar” without effect. Its wоrds that the “relitigation That is not to say insurer’s of a matter in a on an individual rates plain: “Relitigation hearing a determination by generic determined either these already 10, (Cal. . Code tit. . .” Regs., is out order shall be permitted. 2646.4, added.) (e), italics subd. § Rather, In unobjectionable. adjudica- bar” is “relitigation effect law; tion, he not entertain the question declared does judge applies sound. That is as it should be. Other- its are premises whether underlying standardless, wise, hoc would result. decisionmaking Similarly, quasi- ad law applies reg- administrative proceedings, judge adopted adjudicatory ulations; he whether their underlying does not entertain question be, for the reason. The That is also as it should same sound. premises that, in to an determining bar” is assure effect of “relitigation simply does rate rollback administrative law liability, judge individual insurer’s rate regula- whether the premises underlying not entertain the question is, doubt, novel about nothing as to rollbacks are sound. There without tions 22, et (Cf., Code tit. seq. a Cal. e.g., Regs., such prohibition. § to rates services hospital provided for reimbursement [setting inpatient 51550, id., beneficiaries]; (b)(8) see subd. Medi-Cal especially [in program § limitations, certain to rate challenge an administrative adjustment proceeding interim used to calculate the “methodology a not attack the may provider rate”].) rate we 103’s

It must be held Calfarm, emphasized face, rates “is not on its but the rollback invalid requirement provision to of an insurer right established are to the thereby necessarily subject it, is, a rate.” a rate as applied confiscatory demonstrate that particular 826.) Ins. at Note Deukmejian, right Co. v. Cal.3d (Calfarm supra, p. is, that a rate as we declared therein: the to demonstrate “right... particular , a do else.24 . . . a rate”—not confiscatory anything applied right not, does bar” does not of confiscation—it “relitigation proof prevent words, its to demonstrate that the insurer ... deny “right Calfarm’s is, it, Ins. Co. v. (Calfarm rate.” applied confiscatory particular terms, case of a 826.) 48 Cal.3d “in the Deukmejian, By very at its a rate for the rollback admission requires concerning year, proceeding” the minimum nonconfisca- evidence found “relevant the determination of 10, 2646.4, (e).) subd. (Cal. rate . . . Code tit. .” tory Regs., § Garamendi, supra, 24In Fireman’s Fund Ins. Co. v. F.Supp. page footnote in the “relitigation “preclusive.” For the reasons stated effectively the court found the bar” text, it erred. bar” is not whether the “relitigation prevents proof The question Rather, It does not. is whether there is a variance confiscation. question such More on this or variances sufficient to accommodate immedi- proof. below. ately

To the extent that the court’s determination of superior invalidity variances, on it is also unsound. is based

There is nothing the variances. “preclusive” that, variances, is It true out of three are to rates eight only applicable variance; (1) (2) under the rate rollback: the “one-line” the “entering-the- variance; (3) the market” and It is variance. also true “insurer-insolvency” that the first and second are each of limited is availability and third demanding. considered, were,

But the three applicable variances should not be as it isolation, each but all rather within full together their context. There is formula itself. It is ratemaking a designed yield nonconfiscatory the individual insurer even before variance come any into might play. in, Because it has built “safety” does to need appear “safety valves” different from ‍‌‌‌‌​​‌​​‌‌‌‌‌​​​‌‌​​‌​​​‌‌​​​​​​​‌​‌​‌‌​‌​‌​‌​‌‍those the variances. Be that provided by as it there may, a “variance,” also separate mandated independent constitutionally which was properly recognized by the law administrative It be judge. would confiscation, available to the individual insurer on proof to say, that the proof regulations in question would otherwise be as confiscatory applied.

In view of the the variances must foregoing, be deemed sufficient for rate adjustments necessary avoid confiscation.

J. The Validity the Rate Regulations to Rollbacks With Respect Maximum Rates Percentage Uniform Uniform Refunds The superior court determined that the rate as to roll backs are not invalid uniform, on their face insofar as they require maximum rate for the rollback year, a uniform refund percentage therein, premiums overcharged and overpaid without to claimed regard “excessiveness” in individual “inadequacy” lines.

We agree. As construed in uniform, Calfarm, expressly requires maximum rate for the rollback year—i.e., rate or such

314 minimally as is noncon- than 80 greater percent of the 1987 rate percentage fiscatory. claim, with “discrimination” between lines to insurers’ any the

Contrary the minimum against and “inadequate” rates—judged apparently “excessive” as intermediate in steps that are determined only earned permitted premiums deemed “unfair.” Such “discrimination” be refund calculation—cannot It in fact a kind of nondis- was 103. by Proposition intended evidently is, rate or 80 of the 1987 perсent crimination: the maximum rate uniformly, is minimally than 80 as such rate greater percent percentage can “discrimination” between lines Be that as nonconfiscatory. may, any It is who set the underlying the insurers. they be hardly complained a reduc- merely and The initiative imposes “excessive” rates. “inadequate” “discrimination” between it found in Any tion and freeze on rates place. to that be to those rates and those ultimately must therefore attributed lines themselves. set them—the insurers arm, a uni- in 103 impliedly requires As construed also Calf uniform, refund of and over premiums charged paid

form percentage Otherwise, an refund might fully insurer year. maximum rate for the rollback more to insured one premiums by returning and overcharged overpaid would be an from him and to another less. This than had been extracted initiative, It would frustrate one of purposes unreasonable result. and practices.” from insurance rates which is “to consumers protect arbitrary 8, 1988), in (Nov. §2, Pamp., Elec. Ballot reprinted Gen. (Prop. Const, Stats, Amends, voters, Gen. to Cal. with to arguments Proposed above, (Nov. 1988) 99.) As whether rates individual Elec. p. explained Again to be or does not matter. “inadequate” lines could be said “excessive” claim, with the insurers’ “discrimination” between lines to contrary any cannot be deemed “unfair.” “excessive” rates “inadequate” uniform, of a in the nothing confiscatory There is certainly requirement refund of maximum rate for the rollback and a uniform percentage year, (See Fireman’s Fund Ins. therein. also overcharged premiums overpaid Garamendi, regulation Co. v. at [implying F.Supp. to a either whole challenge part].) facial properly subject takings irrele- there or demonstrably Neither is anything arbitrary, discriminatory, to of consumer welfare.25 vant legitimate policy protection may to may argue regulations 25The be the rate rollbacks insurers understood year point more than 20 operate reduce maximum rate for the rollback an insurer’s rate, permitted earned They below its least in some lines. treat the minimum text, explained in the that is though it were maximum rate. As premium for each line as Rate as to With Validity Regulations K. The Rollbacks Respect Interest roll court determined that the rate as to superior (1) are invalid on their as the insurer

backs not face insofar they: require for interest the dollar of overcharged amount and pay premiums overpaid annum, (2) fix the rollback the rate of at 10 year; percent per interest 8, (3) and set of the accrual date at the uncompounded; May midpoint the rollback year. with the as

We court to the of interest. Neither agree superior requirement the Insurance Commissioner nor the insurers contend otherwise. could They In not. we held Calfarm, that must refund excess expressly “insurer[s] collected the rollback v. premiums year] with interest.” Ins. Co. (Calfarm [for added.) Deukmejian, supra, 48 Cal.3d at italics We also with the agree court as to the of superior of the rate fixing interest. The the superior court was of that the view Insurance Commissioner could chosen reasonably have as the for percent rate over- premiums for the rollback charged overpaid because the had year Legislature chosen the same rate for unearned premiums Insurance Code section sure, We 481.5. are in To be accord. overcharged premiums overpaid not identical to unearned premiums. But are indeed similar. they Unearned premiums are dollars distributed rata pro beyond what has be- effectively come the of term a as reason of cancellation. policy, by Overcharged are, were, itself, as it overpaid premiums dollars beyond the policy being of excess what the Further, insurer could have the properly demanded. court was of superior the view that the commissioner is not constrained by XV, article section 1 the too, of California On Constitution. we this point, are in In accord. relevant the part, constitutional provision cover purports the maximum of only interest on a if judgment—10 percent set at that level the by Legislature, as it been has in Code of Civil Procedure section 685.010; or 7 in the absence of percent such action the There by Legislature. here, is no judgment but rather a statutory obligation refund overcharged and overpaid premiums. argue insurers to the contrary. the claim that court They superior erred

at the threshold the by applying standard of review arbitrary-or-capricious instead the independent-judgment-on-the-evidence test to the fixing rate of interest the Insurance Commissioner at 10 Our percent. analysis above (See III.B., disposes ante.) point. pt. then claim They permitted case. The minimum premium only earned line each functions as an intermediate step in refund calculation. in fixing the commissioner upholding on the merits by court erred superior of interest did. do indeed show that imposition as he They the rate interest to be lower than 10 suggest happen rate—the rates they some market they But do not show that imposition been reasonable. have percent—would such demon- was in fact unreasonable. Without of interest at 10 percent stration, be an We not find 10 impermissible fails. do point an “windfall” for their insureds. impermissible for insurers “penalty” accrual court to the setting with superior we Finally, agree interest, the Insurance Commis- neither date. As with the requirement court, we otherwise. Like the superior nor insurers contend sioner fair to the rollback . . . year] “choice the midpoint [of believe all.” (See of with to the matter interest.

There is confiscatory respect nothing Garamendi, at supra, p. Fund Ins. Co. v. 790 F.Supp. also Fireman’s a facial chal- to takings that a is not regulation properly subject [implying arbitrary, whole or in Neither is there anything either in lenge part].) of the irrelevant to the legitimate policy or demonstrably discriminatory, of consumer welfare. protection Asserted Against The as to Rollbacks Regulations

L. Rate Validity of “Retroactivity” Impermissible to court determined that

It is whether and what extent unclear superior to are invalid their face as the rate as rollbacks on regulations impermissibly determination, it Our such erred. “retroactive.” Insofar as made any “ III.C., ante.) does (See ‘Primary’ retroactivity” above controls. analysis pt. “ does, but it is an lawful entirely not obtain. ‘Secondary’ retroactivity” law, hence does not itself offend rulemaking any of consequence and their including respective the United States and California Constitutions due clauses.26 process may argue that United States and/or California 26The insurers be understood subject face to regulations Constitutions us to the rate as to rollbacks their require imposes no independent regard to well as The federal charter review with method as result. (Duquesne Light Co. obligation. designed economic niceties” such It “is to arbitrate [such] Barasch, supra, 661]): p. p. at is the result reached not the v. 488 U.S. at L.Ed.2d “it [102 Co., (Power supra, Hope Comm’n Gas U.S. at controlling” employed method which v. 345]). be p. p. The of the state charter. There can little doubt L.Ed. at same is true [88 of decisions” that would be equipped courts “are ill to make” the “multitude microeconomic XTV, (Harris 1166.) Capital no Growth Investors It makes demanded. v. 52 Cal.3d provi regulations implicate and state constitutional question difference that federal order, do, reviewing a rate sions. All regulations may a court potentially. at least It be that in regulation [regulator] employed has the methods of

“must examine the manner which the The Rate as Validity as to Rollbacks Regulations Applied M. and the the 20th Rate Rollback Century Century 20th Effectiveness Order court determined that the rate as to rollbacks are superior regulations as invalid 20th and that the 20th rate rollback applied Century, Century void, (1) order issued thereto is in the six pursuant following particulars: itself; (2) 10 formula as the lower ratemaking boundary range return; (3) the treatment of the line of earthquake reasonable rates insurance; factor; factor; (4) (5) (6) the variable expense leverage of an “individualized” on rate rollback hearing It preclusion liability. appears that the determinations have constitutional bases to con- foregoing relating arbitrariness, discrimination, fiscation and and demonstrable irrelevance to course, and also bases legitimate policy statutory relating, 103. time,

At the same court determined that the rate as superior to rollbacks are not invalid to 20th applied and that the 20th Century, rate rollback order issued Century thereto is not void as to the pursuant uniform, of a maximum requirement the rollback and a uniform year, therein, percentage premiums refund overcharged without overpaid to claimed regard “excessiveness” in individual lines. It “inadequacy” that the appears foregoing determination was made on the constitutional and bases identified statutory above. further,

Before let us proceeding state the rules. We derive governing III.D., them from the ante.) (See discussion out set above. pt. selected,

which it has itself and must decide whether each of the order’s essential elements is (Permian supported by Cases, substantial supra, evidence.” Basis Area p. Rate 390 U.S. at 792 350-351].) (See L.Ed.2d at pp. we are yet reviewing pt. [20 But not rate & order. ÜI.M. fn. 31, post.) superior concerning Our review of the validity court’s determinations the facial vel non of regulations the persuades rate general as rollbacks of the regulations. us soundness of the regulations—both We generally specifically concluded above the rate and as to rollbacks ratesetting exception, —come within the fall requirement, hence outside the OAL and review (See III.A., ante.) therefore not invalid because of OAL disapproval. pt. proceeding But merits, the for disagree the reasons stated in the text we the with OAL’s conclusion that the rate regulations generally are beyond authority conferred the Insurance Commissioner by Proposition (see Code, 11349.1, (a)(2)) 103 аs construed in Gov. subd. and are § Calfarm (see id., 11349.1, inconsistent with (a)(4)) the initiative’s terms ground subd. on the § they impermissibly right confiscatory “restrict an insurer’s to obtain relief from rates.” We broad, reject attempt by an challenge the insurers to mount a facial to the rate as insurers, to rollbacks based by on orders to show cause issued the commissioner to 14 including Century, 20th in the liability. quote matter their rate rollback To the commis- [citation], sioner: “An order containing to show cause functions like an accusation agency’s preliminary liability ordering assessment of the insurer’s rollback the insurer either to refund that or prove amount otherwise . . cannot support weight placed . .” It by on it the insurers. 318 of the due process is as violative regulation challenged

aWhen case, whether, in is it is particular the question as applied, clause legitimate irrelevant to demonstrably policy. discriminatory, arbitrary, rate itself is as challenged is for when a order The same called analysis clause. of the due process violative as clause is violative takings

When a regulation challenged case, whether, its set a is terms the particular applied, question confiscatory. unreasonable and hence unjust that is clause, as violative of the takings a rate order itself is challenged When meets the that order ‘viewed its entirety’ [rele “the is whether question the . . and reasonable’ it ‘just .... Under . standard requirements vant] not method which controlling. [Cita result reached employed (Power but the rate order which counts.” It is theory impact tions.] 345]; Co., at p. U.S. at 602 L.Ed. p. v. Gas 320 Hope supra, [88 Comm’n Barasch, accord, 488 U.S. at 310 supra, [102 Co. v. Duquesne Light p. 658-659].) is not bound “to the service any at pp. regulator L.Ed.2d Co., (Power Comm’nv. Pipeline combination of formulas.” formula or single 1050]; accord, Power Comm’n v. 315 at 586 L.Ed. at supra, U.S. p. p. [88 344-345].) Co., at L.Ed. at It is p. pp. Gas 320 U.S. 602 supra, [88 Hope which be called may “free ... make pragmatic adjustments Co., (Power Comm’n v. U.S. Pipeline supra, circumstances.” particular Co., accord, 1050]; v. Gas at at Power Comm’n p. Hope L.Ed. p. [86 344-345].) L.Ed. U.S. at pp. [88 not a reasonable is just Judicial as to whether or rate is inquiry Area in Permian Basin Rate years ago, difficult. More than necessarily 312, 349], Cases, the court declared: 390 U.S. 790 L.Ed.2d supra, [20 standards law nor economics has devised yet generally accepted “[N]either was . . . .” The declaration valid rate-making for the evaluation orders Barasch, (See v. 488 Duquesne Light supra, then. It remains valid now. Co. 657], Permian Basin citing U.S. at 308 L.Ed.2d at and p. p. quoting [102 Cases, 349].) at at p. Area Rate U.S. 790 L.Ed.2d supra, p. [20 390 is as to a rate is and reasonable also Judicial whether inquiry just Indeed, it “is at an end” total effect of the rate order cannot limited. the “[i]f be to .... The fact that the method said be and unreasonable unjust is not then important.” to reach that result contain infirmities may employed Co., 602 L.Ed. (Power 320 U.S. at at p. Comm’n v. Gas Hope supra, p. [88 accord, Barasch, 345]; 488 310 supra, Co. v. U.S. p. Duquesne Light [102 659].) the order . . carries the L.Ed.2d at who would rate . p. upset “[H]e is is a that it invalid because it heavy making convincing showing burden (Power v. in its Comm’n Gas consequences.” Hope unreasonable unjust Co., 345].) p. p. 320 U.S. at L.Ed. at supra, [88 court one in which “he who would the identified situation Hope upset order” bear that burden.” “Rates which enable the rate could not “heavy its to operate maintain financial attract company successfully, integrity, and to for the its investors risks assumed capital, compensate certainly invalid, be as even though might cannot condemned they produce only Co., (Power return . . . .” meager Comm’n v. Gas 320 U.S. at Hope supra, 346]; accord, Barasch, L.Ed. at Co. p. v. p. Duquesne Light supra, [88 658-659].) 488 U.S. at L.Ed.2d at “a p. pp. More simply, company [102 if the return allowed made which was complain [cannot] the possible (Market Comm’n, Street R. Co. v. company operate successfully.” 1184].) 324 U.S. at L.Ed. at p. [89

We believe similar to principles substantially the control foregoing when is as regulation challenged violative of Proposition 103 as and when a rate order applied, itself as offensive to challenged the initiative.

Let us turn to the task at hand. alone,

On one matter court superior accepted position stated, Insurance Commissioner. As it determined rate as regulations to rollbacks are not invalid as to 20th Century, 20th applied void, Century rollback order issued thereto is not pursuant to the uniform, aof requirement maximum rate for the rollback and a year, uniform therein, refund of percentage premiums without overcharged overpaid regard claimed “excessiveness” or in individual lines. This “inadequacy” is sound. The our analysis conclusion supporting the facial concerning validity this regard applicable (See here as well. pt. III.J., ante.) 20th Century’s situation does not an require exception. matters,

On the other court superior rejected position Insurance Commissioner. We shall consider points seriatim.

The court superior determined the rate as to roll regulations backs are invalid as to 20th and that the 20th applied rate Century, Century void, rollback order issued thereto is with pursuant to the ratemaking respect formula itself.

This is error. does not require on the belief that confiscation

The determination is based does, It at Jersey within the of Central. meaning financial hardship” “deep case, this. erroneous belief taints such as This fatally least in the general on as it rests the constitutional insofar question—directly, conclusion confiscation; rests insofar as it on the constitutional indirectly, of ground arbitrariness, discrimination, and demonstrable irrelevance ground on the statutory grounds. and also policy, legitimate addition, rate the facial of the invalidity In determination on depends formula. In this as to rollbacks with respect ratemaking regulations III.D., however, (See valid. facially pt. question regard, regulations does an ante.) exception. 20th situation not require Century’s that the The court also determined rate superior Century to 20th and that the 20th Century, rollbacks are invalid as applied void, is with to 10 rollback order issued thereto respect rate pursuant rates return. lower of the of reasonable range as the boundary too is This error. tainted the erroneous that confisca-

The determination is belief fatally of Jersey does not financial within require meaning tion “deep hardship” Central, case, not even in the such as this. general

Moreover, the determination unsound in and itself. of the The to be that the lower reasoning appears boundary underlying cost of of return for a firm is its reasonable rates range regulated was to be at for 20th found least 20 Century percent. capital—which that a firm is to its cost One seems to be entitled assumption regulated matter, a firm has an in this it has no Although right. such interest capital. Cases, L.Ed.2d (See Permian Area Rate 390 U.S. at Basin p. [20 with the “Regulation consistently p. [stating may, [United 337] investment, Constitution, recovered limit the return stringently States] one constitutional investors’ interests of the variables in the only provide reasonableness”]; calculus id. at L.Ed.2d at [implying p. [20 350] that, its ... to conjec- “cannot confine accordingly, regulator inquiries United market”].)27 about the tures prospective responses capital stated, a Constitutions As States California make point plain. 1991) Pipeline 27Tennessee Gas F.E.R.C. (D.C. App.D.C. Co. v. F.2d 1206 Cir. [288 333], contrary. 20th That Century rely, on which and the other insurers Energy might utility’s of return on Regulatory Federal Commission to set “endeavorQ a firm no even loss. Manifestly, has constitutional right against regulated to the contrary. 103 is not Propositi.on of seems to be that cost is as to the dispositive

Another assumption capital here, cost of to liability. which concerns rate rollback Although capital, issue rate- administrative law be may “pertinent the quote judge, prospective under the of the rollback system, “implementation “prior approval” making” does but rather the determination of a require ratemaking not prospective (Internal for a now minimum return nonconfiscatory period past.” quotation omitted.) marks be

It must that the evidence of 20th cost of Century’s emphasized capital to derive from a which 20th other like appears period during Century, insurers, was largely unregulated as to rates. To accord such evidence would 20th from compelling weight effectively Century regula- rate exempt tion. A result commanded of this sort is barred 103. is not It law, other of by any provision the United States and California including Co., (See Constitutions. FERC v. Producing 439 U.S. at supra, p. Pennzoil L.Ed.2d at with pp. from Hope, [58 [declaring, quotation 782-783] maintain, that: The “notion that is or even regulator] required [a allowed considerations, to maintain to the exclusion of other the of profit margin any is . . particular [regulated . with a basic of rate incompatible precept firm] ‘The like regulation. fixing other prices, applications police power, reduce value of the may which fact property being But the regulated. that value is reduced not ”].) does mean that the regulation invalid.’

The court was of view superior that the rate as to rollbacks regulations as to 20th applied 20th Century, rate rollback order issued Century thereto, pursuant improperly preclude 20th cost of covering Century’s base, service plus its percent of the definition of 10 capital spite as percent the lower of the boundary reasonable rates of return. range Contrary its evident such is not assumption, any preclusion improper and of itself: the formula not ratemaking does guarantee purport individual insurer a rate its cost covering of service of its plus base capital exclusions, independent etc., various incor- adjustments, porated (See Garamendi, therein. Fireman’s Fund Ins. Co. v. 948.) at p.

F.Supp. court determined superior as well that the rate as to rollbacks are invalid to 20th applied Century, 20th Century rate rollback void, order issued thereto is pursuant with respect treatment line insurance. earthquake

equity {id. its equity capital” 1208) at cost of policy as a matter of does mean regulator another must do the sаme compulsion. under constitutional

This is error. too belief about the erroneous tainted fatally The determination confiscation.

Moreover, rate invalidity on the facial the the determination depends of the line of to the treatment as to rollbacks with respect regulations however, the in question In this insurance. regard, earthquake III.G., does (See ante.) 20th situation not Century’s require facially valid. pt. the 20th regulations subject to the fact that That applies an exception. to the the regulations It also fact ratemaking. applies direct Century to the incurred losses for rollback Century’s on 20th in substantial depend part mind, the To our regulations yield were small. relatively which year, treating 20th it unfa- Century, although outcome for generally supportable for the rollback were relatively its incurred losses vorably year because event, 20th Century’s do not themselves determine they small. In any for earth- minimum earned the premium rollback The liability. permitted an result. viewed in isolation as end Together must not be line quake for each of 20th Century’s earned premium with the minimum permitted lines, an in the refund it functions intermediate only step five other calculation.

Further, determination rests the constitutional falls insofar as it on be be confiscation can The assumption appears basis of confiscation. in and of itself. 20th line of insurance Century’s earthquake effected within above, with toward the stated confiscation is an eye Not so. As judged context, an In this on condition depends firm as regulated enterprise. one or more of its as a whole—and not on the fortunes any insurer lines, turn on an may That confiscation perhaps including earthquake. if alone is of line the insurer writes that line purely insurer’s earthquake condition, is, not interest. fact 20th does satisfy theoretical Century We recognize since it writes five lines addition earthquake. line, loss since are based on calculations for 20th Century’s they earthquake losses, do indeed verge data from a with small incurred single year relatively that is enough. toward the low end. But “The repeating:

The observation of the administrative law bears judge related to 20th Century’s Earthquake rollback calculation component , . . . as if it line somewhat harsh when it is viewed isolation may appear in the calculation. were final result rather than an intermediate only step However, be issue of confisca- 20th rollback must Century’s judged result. From that perspective, impact tion based on overall [Citation.] whose is a multi-line insurer is not 20th confiscatory. Century [Citation.] ($8.7 line 1.35 its business million accounted only Earthquake million) rollback and its $641.7 reinsurance year, unrecognized ($4.5 its accounted for 0.7 of business Earthquake only premiums percent million). $641.7 It suffered losses admittedly million low very [Citation.] was line that and its cost of that year writing its Earthquake coverage [citation]), (estimated . . . to be as low as five so it per small dollars policy, case, the that line. In calculation of high any Earthquake enjoyed profit is one of to of the rollback the intermediate many component merely steps omitted.) concerned, (Fn. the So far as the line is final rollback.” earthquake $8.7 $1.06 to the “final rollback” amounts 12.203 million or million.28

The also court determined the rate as to superior regulations that rollbacks are invalid as to 20th 20th applied Century, Century void, rate rollback order issued thereto to pursuant is with respect variable factor. expense too

This is error. The determination is tainted fatally by erroneous belief about confiscation.

Moreover, the determination is unsound in and of itself. The variable factor is sum of the commission expense rate and the tax state premium formula, rate. Within the ratemaking functions to such recognize only amount commissions and state taxes as are attributable to the premium maximum rate for the rollback set year construed in The Otherwise, court this It not. superior thought objectionable. Calfarm. a above rate the maximum would tend an justify itself—surely untenable It result. is not unreasonable fail to recognize that amount commissions and state premium taxes that would have been avoided had 20th Century a rate charged below the maximum for the rollback year.

The superior court determined as well as to regulations are rollbacks invalid as to 20th and that the 20th applied Century, Century rate rollback void, order issued thereto pursuant with respect factor. leverage too

This is error. The determination is tainted fatally by the erroneous belief about confiscation. court, 28In this Century attempts incorporate 20th analysis into the treatment its

earthquake line the treatment liability” of its “other and “inland marine” lines. incorpo Such ration does not affect result. Moreover, of the rate invalidity on the facial the determination depends to the factor. In this leverage regard, rollbacks with respect as to regulations III.H., (See ante.) 20th however, valid. facially pt. situation, to involve does high leverage, require which appears Century’s recognition excluded from factor leverage apparently an exception. from It also excluded apparently of 20th Century’s capital. $12 about million derived there- the firm’s investment income $1 million of about recognition of the firm’s investment that portion from. It thereby apparently prevented rate for the rollback have reduced its maximum would otherwise income that from so. doing year as to court also determined that the rate regulations

The superior 20th Century to 20th and that the Century, are invalid as applied rollbacks void, with to the thereto is respect rate rollback order issued pursuant rate rollback liability. on the firm’s hearing of an “individualized” preclusion This too is error. threshold, determination the superior we observe that in its making

At the erred by holding that the administrative law judge court concluded of Jersey within the hardship” meaning financial requires “deep confiscation indeed so court that erred. Confiscation does Central. It is rather superior case, in the such as this. at least require, general of the rate invalidity the determination on the facial In depends part, this bar.” In to rollbacks with to the “relitigation as regulations respect III.I., however, ante.) 20th (See are valid. facially pt. regard, regulations same, All the what we does not an situation Century’s require exception. law effec- judge bears now: the administrative stated previously repeating evi- to introduce lifted the bar” to allow 20th Century tively “relitigation of the regulations question. dence challenge premises of the rate In facial invalidity other the determination part, depends of a variance as to rollbacks with to the absence regulations respect In confiscation. variances sufficient for rate to avoid necessary adjustments III.I., too, ante.) (See valid. regulations facially pt. this regard, noted, concerning As included in the court’s determination superior rate rollback on 20th Century’s of an “individualized” hearing preclusion of the hearing. fundamental unfairness in the conduct is a liability finding conclusion on the court’s To the extent that this is based finding superior that confiscation that the administrative-law erred holding requires judge within the Central—this seems hardship” meaning Jersey financial “deep if not sole it is the court that ground—it Again, the ultimate fails. superior not the the extent is erred and administrative law To that this judge. finding conclusion, based on other than that it fails as well. We have anything the conduct of the that was examined have decided it funda- hearing, and otherwise in accordance law. fair with mentally It is unclear whether and to what extent the court determined that superior as to as rollbacks are invalid to 20th applied Century determination, “retroactive.” Insofar as it impermissibly made such any “ III.C., ante.) (See erred. Our above controls. analysis retro- pt. ‘Primary’ does, does activity” not obtain. but it an “‘Secondary’ retroactivity” lawful entirely consequence and hence does not itself offend rulemaking law, any United States and including California Constitutions and their due clauses.29 respective process in the

Implicit court’s decision is superior its ultimate determina tion that the 20th rate rollback order Century unjust unreasonable its and therefore consequences confiscatory. Indeed,

This is the court’s ultimate error. is superior this determination that is most tainted its fatally erroneous belief that confiscation does not require Central, financial “deep within the hardship” meaning Jersey case, even in the as general such this.

The analysis set out above establishes that the whether the 20th question rate rollback is Century order unjust unreasonable its consequences and therefore on a confiscatory depends interests of 20th balancing III.D., and its (See insureds. Century ante.) pt. insureds,

The interest of 20th Century’s is in freedom simply from put, exploitation. contrast,

By the interest of 20th is in Century itself having enough revenue for both business,” “operating expenses” and “the costs of the capital stock,” “service including on the debt and dividends on the of a magnitude that would allow a “return to the owner” that is equity “commensurate with returns on investments in other enterprises having risks” and corresponding “sufficient to assure confidence the financial of the so integrity enterprise, 29The may insurers be understood to argue that the United States and/or California require Constitutions to subject us the rate regulations applied as rollbacks as to indepen regard dent review with method well as result. Neither nor federal charter that of imposes (See state ante.) obligation. such also fn. (Power Comm’n v. attract Gas capital.” Hope its credit and to as to maintain Co., 345].) L.Ed. at p. 320 U.S. at supra, p. [88 interest, however, interest, not a is that: it is an right. just 20th Century’s calculus of reasonable- variables in the constitutional It is one of the “only Cases, U.S. at Basin Area Rate (Permian supra, p. ness.” [20 337].) “has no constitutional to a right at 20th Century profit L.Ed.2d p. F.E.R.C., 810 F.2d at supra, Cent. Power & Co. v. Light pp. . . . .” (Jersey Indeed, even a loss. 1180-1181.) it has no constitutional right against court veered onto its It at this that the superior path is point apparently error, for a what is an interest that 20th Cеntury may pursue right mistaking that it can demand. the 20th rate rollback order Century unjust

To determine whether and therefore confiscatory, unreasonable in its consequences superior ‘viewed in its meets have asked “whether that order entirety’ court should (Power of interests identified above. balancing requirements” Co., 345].) Gas 320 U.S. at L.Ed. p. Comm’n v. Hope [88 reached not . . standard of and reasonable’ it is the result “Under the . ‘just It is not but controlling. theory the method which employed [Citations.] order of the rate order which counts. If the total effect of the impact unreasonable, . . . is at an cannot be said to be unjust judicial inquiry reach that result contain may end. The fact that the method employed (Ibid.) is not then infirmities important.”

And in whether the 20th rate rollback order is unjust determining Century and unreasonable in its and therefore confiscatory, supe- consequences rior court should of course have focused on its are these: consequences. They 20th ordered to refund each insured an amount to the was Century equal for the rollback a refund premiums paid year multiplied by percentage with annum from 12.203 interest calculated at 10 percent, simple percent per 8, 1989, maximum rate for the to the date of 20th May payment. Century’s rollback was set at about 98.89 of the 1987 rate effectively year percent confiscation, rate, of that as avoid rather than at 80 percent required 103 in the rate rollback Put provision. differently, requirement 20th maximum rate for the rollback was reduced to a a Century’s year point rate, 20 mere 1.11 below its rather than to a percent point percent 1987 below that rate.30

In view of the it cannot be that 20th said foregoing, Century “carrie[d] rollback burden of a rate convincing showing heavy making [its [its] year was Century may 30 20th be understood to claim that its maximum rate for the rollback (at lines), contrary point 20 below its rate least some reduced to more than 1987

327 and unreasonable in its consequences.” invalid because it is unjust order] Co., at 602 L.Ed. at v. Gas 320 U.S. (Power supra, p. p. Comm’n Hope [88 345].) when, here, “return as

That is because such a showing precluded for the successful- operate which was allowed made possible company Comm’n, (Market Co. v. 324 U.S. at 566 L.Ed. at supra, p. Street R. ly.” [89 Co., accord, 1184]; 605 Power Comm’n v. Gas 320 U.S. Hope supra, p. p. 346].) L.Ed. at p. [88 the rollback It

20th did indeed successfully during year. Century operate as It asserts that its “rate of growth throughout admits much. practically from since it was founded in extending years 1958”—including period 8, 1988, been November November through “phenomenal.” 1989—has From all that 20th would have successfully appears, Century operated under, of, rollback and in rollback. Its during year spite growth would have been slowed down. But as the administrative law surely judge stated, it cited “has no case that a slowdown is confisca holding growth otherwise, Put tory.” its business would have been “less prosperous result of’ the rate rollback. v. (California Maloney, supra, Auto. Assn. value, however, 793].) U.S. at L.Ed.2d at Such a “diminution in p. p. [95 {Ibid.) has never mounted to the of’ confiscation. dignity Since the “total effect” of the 20th rate rollback order “cannot be Century unreasonable,” said to be (Power our . . . is at an end.” unjust “inquiry Co., Comm’n v. Hope 345].) Gas 320 U.S. at L.Ed. at To supra, p. p. [88 further would lead us to go the rate “micromanage regulation process F.E.R.C., . . . .” Cent. (Jersey Power & Co. v. 810 F.2d at Light p. (conc. Starr, J.).) opn. (Ibid.) That is not our function. It is clear beyond peradventure to examine each detail of the obliged “[w]e (Permian decision . . . .” Basis Area Rate [Insurance Commissioner’s] Cases, supra, 336].) 390 U.S. at We do so. L.Ed.2d at will not p. [20 confiscation,

To 20th an that com frames prove argument Century the amount of the refund of pares its rate rollback premiums required by order, which the superior interest), $78 court found to be million about (plus with the amount of its after-tax revenue for which the court superior $76 found to be about million.

At first glance, substantial. The between argument appears comparison $76 about $78 million in and about million out seems to show coming going $2 loss about million. requirement provision the rate rollback Proposition 103. Such an assertion must be dismissed as baseless. however, consideration, out to be turns argument specious. On closer both the would account for comparison With an matching, appropriate i.e., of the refund of the amount 20th by Century, revenue “forgone” order, which the court found rate rollback superior its by premiums required million, “avoided” 20th Century, $78 and the expenses to be about tax, commissions, tax, which state federal income premium including Under there is a comparison, profit $29 to be about million. such appear on what a rate of return of about percent $27 about million—representing $243 million be a base of about (equaling 20th declared to capital Century accordance with statutory accounting calculated in its mean 1989 surplus of return of this confiscation With a and rate magnitude, profit principles). does not appear. in effect, revenue “forgo” that it must objects “really”

In 20th Century in the $78 but that it does not “avoid” “really” expenses million amount defeat matching by accepting $29 This seems an effort to amount of million. are not. those that conventions that are favorable rejecting accounting for having an to obtain a “reward” it seems effort fundamentally, More 103’s for the rollback than year higher a rate charged III.D., ante.) In (See any of the rate. pt. rate of 80 maximum event, its rate rollback in Century, attempting upset let us recall that 20th order, that it is a convincing showing “carries the burden heavy making (Power it is and unreasonable its unjust consequences.” invalid because Co., 345].) In L.Ed. at Gas 320 U.S. at p. Comm’n v. Hope [88 have to of its 20th would Century apparently prove the context objection, tax, i.e., federal income it could not recover the expenses question, Indeed, tax, indications It to do so. all and commissions. fails state premium to the in the record are contrary. not make an 20th does Century

We observe in may passing its rate rollback order based on the fact that solely for confiscation argument The reason is and to interest thereon. it to refund requires premiums pay and its insureds It is called The refund 20th Century manifest. equity. puts the former not over would each have had occupied into the situation they III.D., (See the latter and the latter not the former. pt. charged overpaid ante.) of interest. with to the Similarly payment respect Century the 20th nothing

It follows from what has that there preceded irrele- demonstrably discriminatory, rate rollback order that is arbitrary, of consumer welfare.31 vant to the legitimate policy protection validity vel non concerning determinations superior 31Our review of the court’s they generally Century us that applied persuades to 20th as to rollbacks as sound. Disposition IV. above, we must reverse we conclude that stated

For the reasons court to render judgment and direct that court superior judgment 20th Voter Revolt and against Insurance Commissioner favor Farm, Hartford, et al. State Century,

It is so ordered. J., Arabian, Baxter, J., Kennard, J., J.,

Lucas, J., Werdegar, George, C. J., concurred. course, concur, I have for the in the

MOSK, J. prepared opinion —I 103’s that neither Proposition I concur in its conclusion court. Specifically, as to rollbacks nor the rate regulations rollback provision rate requirement of the Fifth Amendment under the clause takings are facially confiscatory States the United Constitution. address the following question:

I write separately insurer, either the through operation Can individual any to roll- or the rate rate rollback requirement provision 103’s backs, Amendment? under the clause takings Fifth suffer confiscation No.

Evidently, Amendment “It is well Clause of the Fifth Takings established that to so-called effected by government price applies ‘regulatory takings[]’” (Garelick v. Sullivan (2d 1993) 916.) F.2d Cir. regulation. not does “It is” “well established that price regulation equally government is not required constitute where taking property regulated group order, obliged examine each reviewing Century although In the 20th rollback “not 336]) Cases, (Permian p. we p. 767 L.Ed.2d at [20 detail” Basis Area Rate 390 U.S. at employed has have in fact the manner in which the Commissioner] “examine[d] [Insurance selected, each regulation the methods of which has [have] decide[d] [that] [he] [himself] by p. evidence” supported [20 of the order’s essential elements is substantial {id. 350]). L.Ed.2d at Century in made 20th 20th superior We note that the court denied “as moot” a motion such testimo- Century testimony judicial II “to admit rebuttal and/or notice expert [take] [of deleted) (We ny]” relating note that the (capitalization capital. to its cost of should also concerned, does seem superior expressed judicial court its far as the notice is it view “[a]s .”) There really type judicially to me that this is of matter that is noticed. . . properly “testimony” question was is no need to remand the cause for redetermination. The significance. essentially marginal cumulative in substance if not in form. It was without Indeed, 352 on the probably under Evidence Code section should have been excluded consumption of time . . . .” ground that its admission would have undue “necessitate[d] 330 See, 321 in the Bowles v. industry. e.g., Willingham,

participate regulated (rent 503, do not constitute (1944) 517-18 . . . controls prohibited U.S. apartments not landlords to offer their for because statute does taking require Facilities, Minnesota rent); Depart Ass’n Health Care Inc. Minnesota [v. [442,] [(8th Cir.1984)] (state F.2d 446 statute ment Public 742 Welfare], may homes in Medicaid Program charge fees limiting nursing participating not within of the Fifth Amend meaning non-Medicaid taking to patients not homes admit medical nursing because ‘the state does require ment (Whitney v. Program’).” residents and in Medicaid participate assistance 963, 972, omitted.) 1986) citations (11th Cir. 780 F.2d parallel Heckler owner be to legally engage price-regulated “A must compelled property v. Willingham, rise to See Bowles taking. to activity give Heckler, 963, 503, F.2d (1944); . v. 780 972 Whitney 321 U.S. 517-18 . . cert, denied, (11th Cir.), (1986); 813 . . Minnesota Ass’n 479 U.S. . 442, v. Pub. F.2d 446 Dep’t Welfare, Facilities Minnesota 742 Health Care cert, denied, (1985). . (8th Cir.1984), U.S. 1215 . . For exаmple, public 469 to and must furnish under a state serve the statutory duty public, utilities are at rates. W. demand to all government-determined ‘service on applicants’ Pond, A to Public Rates: Fixing Utility Response The Law Governing (1989) 1, 41 5 Admin.L.Rev. Misconceptions, Recent Judicial and Academic 299, Barasch, 488 (hereinafter Co. U.S. ‘Pond’); see also v. Duquesne Light to their (1989). . . utilities are compelled employ 307 . Because generally requires to the Fifth Amendment public, services property provide for their ser- utilities with reasonable provide compensation regulators 446; Pond, Ass’n, at 5. at see also vices. See Minnesota 742 F.2d contrast, in a price- where a service voluntarily participates “By provider service is no to provide there regulated program activity, legal compulsion Bowles, ; U.S. 517-18 . . thus be See 321 at . taking. there can no Servs., 1362, 934 F.2d Burditt v. United States Health and Human Dep’t of Ass’n, 972; 742 F.2d at (5th 1991); F.2d Minnesota 1376 Cir. 780 at Whitney, 348, 446; Rico, Puerto Inc. v. Ocasio Rodriguez, F.Supp. Texaco Comm., Anco, Fin. (D.P.R.1990); Inc. v. State Health and Human Servs. Thus, (1989). Willingham, Supreme 441-42 . . . Bowles v. S.C. the statute did sustained a rent ordinance because Court regulation of renting landlords remain the business apartments. require plaintiff and/or dispose The landlords were free to their vacant keep buildings (albeit regula- the rent their on the market prices depressed properties tions) Consequently, without being subject government price regulations. 321 U.S. at See the statute at issue did not rise to give regulatory taking. Heckler, ; v. 714 F.2d Hosp. . also St. Francis Ctr. 517-18 . . see from value (7th 1983) curiam) (diminishment resulting of market Cir. (per ‘full rise to where owner retains taking property will not regulation give cert, denied, investment’), . . net 465 U.S. 1022 and control over . rights 916, Sullivan, citations (Garelick F.2d at supra, p. parallel . . . .” v. 987 omitted.) in a

A “service be said to may “voluntarily participate] price- provider” Sullivan, (Garelick F.2d at supra, p. or v. 987 regulated program activity” Rico, (Texaco Inc. 916) when it has the to withdraw” therefrom Puerto “right 348, 372, (D.P.R. 1990) italics and initial Rodriguez v. Ocasio 749 F.Supp. omitted; accord, when, 359). id. at Such a exists even right capitalization p. matter, and financial withdrawal would be enormously costly “as practical (1968) (20 U.S. L.Ed.2d .... Permian Area Rate Cases 747 [Basin 312, 1344)] 88 S.Ct. teaches that so [government price regulation] may limit with that individual even those stringently profits providers, major be be forced to investment whom abandonment capital may costly, may (Texaco choose abandonment rather than remain the regulated industry.” Rico, 372-373.) Puerto Inc. v. Ocasio Rodriguez, at supra, F.Supp. pp. course, Of is valid even if it is government price regulation arguably (Id. 372.) at wisdom of . . . decisions . . . “irresponsible.” p. policy “[T]he 372-373, (Id. is a matter for the not the bench.” at italics in polling place, pp. original.) insurer, to the I cannot avoid no

Turning present question, concluding 103’s rate rollback through operation Proposition requirement provi sion, can suffer under of the Fifth Amend confiscation clause takings ment. As a service in a “where explained, provider voluntarily participates price-regulated or there is no to program activity, legal compulsion provide Sullivan, service and (Garelick thus there can be no v. taking.” supra, 916.) F.2d at to As also a “service be said p. explained, provider” may in a when it “voluntarily participate] price-regulated activity” program Rico, (Texaco has the “right withdraw” therefrom Puerto Inc. v. Ocasio 372, Rodriguez, at italics and initial supra, 749 F.Supp. p. capitalization omitted; accord, 359). id. at Insurers “service are p. obviously providers.” 103, Before the insurer had the each and passage Proposition every “right withdraw”; after its (See continue to have that same right. passage, they 82, Travelers (1990) Co. v. Indemnity Gillespie 50 Cal.3d 92-98 [266 500].) 785 P.2d the withdrawal the normal case Cal.Rptr. process “[I]n 92.) is . . . (Id. other than at In [nothing] simple expeditious.” p. face of their some insurers chose to exercise Proposition “right (50 87-92.) (See ibid.) withdraw." Cal.3d at not to. Others chose pp. latter 103’s rate thereby voluntarily subjected themselves Proposition result, rollback suffered As a could not have requirement provision. they confiscation “enor as matter law. That withdrawal have been might Rico, (Texaco to them Inc. v. Ocasio mously costly” matters not. Puerto 372.) the “wisdom” Neither does Rodriguez, F.Supp. (Ibid,)1 103. Proposition above, I concur in the conclusion that neither

For the reasons stated rate 103’s rollback nor the regula- requirement provision clause ‍‌‌‌‌​​‌​​‌‌‌‌‌​​​‌‌​​‌​​​‌‌​​​​​​​‌​‌​‌‌​‌​‌​‌​‌‍confiscatory under the takings tions as to rollbacks facially Amendment. Fifth 29, 1994, for a was denied September petition rehearing

Respondents’ was to read as above. modified printed opinion Casualty Surety & Co. v. Commis contrary in The 1Uniquely to the is the decision Aetna “[Ijnsurers required (1970) sioner Insurance 358 Mass. N.E.2d [263 698]: due process, rates out of This is “substantive” confiscatory go either submit business.” Indeed, in Bowles v. pure simple. It dead at least the late 1930’s. has been since 641], (1944) Supreme States Willingham the United 321 U.S. L.Ed. S.Ct. [88 dealing which involves Court—declaring flatly that a situation are not here with “[w]e (id. 905])—validated governmental p. a certain “taking” property” L.Ed. at [88 [assertedly] required price regulation effectively residential “to either submit landlords confiscatory or go rates out of business.”

Case Details

Case Name: 20th Century Insurance v. Garamendi

Court Name: California Supreme Court

Date Published: Aug 18, 1994

Citation: 878 P.2d 566

Docket Number: S032502

Court Abbreviation: Cal.