Defendant and appellant Ricardo Lara, the Insurance Commissioner of the State of California (Commissioner),
Commissioner and intervener and appellant, Consumer Watchdog (CWD), appeal on several grounds. They assert the trial court did not use the proper standard of review, failed to give the Commissioner's findings a strong presumption of correctness and failed to put the burden of proof on Mercury to show the findings were against the weight of the evidence. They also argue the trial court's finding the fees were charged for separate services was precluded by collateral estoppel. In addition, they maintain Mercury received proper notice of the potential imposition of a penalty, and laches did not bar the action.
We agree with Commissioner and CWD the writ was issued in error and reverse the judgment. Because the substantial weight of the evidence supports the Commissioner's decision, remand for a new hearing would be an idle act and we therefore remand with directions for the court to deny the writ.
As a separate ground to affirm the judgment, Mercury argues its due process rights were violated by improper ex parte communications by the CDI, and the proceedings against it should be dismissed. We disagree. We also deny Mercury's motion to strike portions of CWD's brief on this issue.
Finally, we grant intervener's unopposed motion for judicial notice of CDI's responses to initial public comments about proposed rules concerning the interpretation of the term premium.
BACKGROUND
In the insurance industry, business is generated by producers, either agents or brokers. ( Krumme v. Mercury Ins. Co . (2004)
A broker may charge a fee as long as the "broker is not an appointed agent of the insurer with which the coverage is or will be placed." ( Cal. Code Regs., tit. 10, § 2189.3, subd. (c).) There is no authority allowing an insurance agent to charge such a fee.
The Insurance Code has prohibited the charging of unfair premiums since 1947. (See former §§ 1852, 1861.05.) In 1980 the Commissioner promulgated Bulletin 80-6 to the insurance industry stating, "The California courts have held that all payments by the insured which are a part of the cost of insurance are premium, including any and all sums paid to an insurance agent," citing Groves v. City of Los Angeles (1953)
In November 1988 California voters enacted Proposition 103 " ' "to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace, to provide for an accountable Insurance Commissioner, and to ensure that insurance is fair, available, and affordable for all Californians." ' " ( Donabedian v. Mercury Ins. Co. (2004)
In 1995 CDI adopted a regulation defining "premium" as "the final amount charged to an insured for insurance after applying all applicable rates, factors, modifiers, credits, debits, discounts, surcharges, fees charged by the insurer and all other items which change the amount the insurer charges to the insured." ( Cal. Code Regs., tit. 10, § 2360.0, subd. (c) ( 10 CCR § 2360.0(c) ).) In adopting this regulation, in response to public comments the Commissioner stated: " 'For purposes [of Proposition 103], a rate is the price or premium that an insurer charges its insureds for insurance,' " quoting 20th Century, supra ,
"[I]nsurance premium includes not only the 'net premium' ... but also the direct and indirect costs associated with providing that insurance coverage and any profit or additional assessment charged." ( Troyk v. Farmers Group, Inc. (2009)
FACTS AND PROCEDURAL HISTORY
Since its founding in 1962 up to 1989 Mercury sold insurance only through agents. After Proposition 103 passed in 1988, Mercury "converted" approximately 700 of its agents to "brokers" and notified the CDI their agency status was terminated.
Mercury's "brokers" began charging "broker fees" on automobile insurance policies. Mercury's agents who provided the same service and coverage did not charge an extra fee.
In 1998 CDI conducted an examination of Mercury. In July 1999 CDI provided to Mercury a report (1998 Exam Report), which stated Mercury's "brokers" were actually de facto agents under section 1621. The 1998 Exam Report also stated the purported conversion to "brokers" violated at least three Insurance Code sections because 1) the "brokers" were charging fees for providing the same services as Mercury's agents ( § 1861.05, subd. (a) ); 2) Mercury's advertising misrepresented that consumers were dealing with agents and failed to advise the "brokers" were charging fees (§ 790.03, subd. (b)); and 3) Mercury had not filed notices of appointment, required for agents, for the "brokers" (§ 1704, subd. (a)). The 1998 Exam Report stated the violations would be reported to CDI's legal division.
CDI met with Mercury in August 1999 and January 2000 to discuss the 1998 Exam Report. Prior to the 2000 meeting CDI sent Mercury a draft Notice of Noncompliance (Draft NNC). It stated Mercury was violating sections 1861.01 and 1861.05 by virtue of its agents charging "unapproved 'broker fees.' " It also stated Mercury was subject to civil penalties.
At the 2000 meeting, Mercury agreed to provide a response to the Draft NNC. CDI agreed once it received the response it would notify Mercury if "other action needs to be taken." Mercury never submitted a response to the Draft NNC.
Mercury then proposed legislation (Assem. Bill No. 2639 (2000 Reg. Sess.) (AB 2639)) to amend the definition of a broker under section 1623 to provide a licensed broker submitting an insurance application to an insurance company is "conclusive[ly] presume[d]" to be a broker and to allow "an insurer to authorize a broker to bind coverage" on the insurer's behalf. CDI opposed AB 2639 because it would " 'blur' the long-established legal distinctions between 'agents' and 'brokers' and would
The Legislature amended section 1623, but not as proposed by Mercury. Rather, it created a rebuttable presumption, for licensing purposes only, that the person is acting as an insurance broker."
A few weeks after amended section 1623 was enacted, in October 2000 CDI issued an addendum to the 1998 Exam Report (2000 Addendum). Among other things the 2000 Addendum explained CDI had contacted Mercury inquiring as to the whereabouts of Mercury's promised response to the Draft NNC. It also stated "Mercury will contact CDI's Legal Division to discuss this matter further."
The next month Mercury sent a letter to CDI stating it believed passage of AB 2639 had resolved the improper broker fee issue (Mercury Letter).
In December 2000 CDI filed the final version of the 1998 Exam Report, which repeated CDI's conclusion Mercury's "broker fees" were illegal.
In the meantime in June 2000 Robert Krumme, a consumer, filed suit against Mercury
Following the Krumme trial in May 2003 the court issued lengthy findings of fact and conclusions of law ( Krumme Findings), ruling Mercury's "brokers" were de facto agents. It found Mercury's relationship with its "brokers" was "functionally indistinguishable" from Mercury's relationship with its agents. It further ruled the de facto agents were charging illegal "broker fees," for which Mercury was vicariously liable. The court issued a permanent injunction barring Mercury from selling insurance through "brokers" who
In February 2004 CDI filed a Notice of Noncompliance (NNC), incorporating a substantial portion of the Krumme Findings. Mercury obtained a stay while it appealed the Krumme judgment. In the appeal it did not challenge the Krumme Findings. ( Krumme, supra , 123 Cal.App.4th at pp. 932-933,
After the judgment became final and the stay expired, Mercury filed three motions to vacate the judgment, all of which were denied. After Krumme became final in October 2004, the relationships Mercury had with its "brokers" and its agents continued to be "indistinguishable." By about November 2005 most of Mercury's "brokers" had converted to agents.
This did not include AIS, which for the years 2002 through 2004 had collected approximately $ 6 million in "broker fees" and generated more than $ 300 million in premium annually. As the Commissioner found, "Mercury's relationship with AIS its largest 'broker,' remained unchanged after the Krumme findings." In August 2005 Mercury advised Wall Street, "We don't see our relationship with AIS changing. We are working very closely with them. They are our largest broker as you know." As of November 2005 Mercury had not made any changes required by Krumme as to its relationship with its "brokers." The business model with AIS acting as a Mercury "broker" continued until Mercury bought AIS in 2009.
Following the Krumme judgment, CDI commenced an administrative action against Mercury by filing and serving a notice of noncompliance, an accusation, and an order to show cause.
The administrative hearing was conducted over 15 days with more than a dozen witnesses testifying and almost 4,000 pages of exhibits admitted. The parties also filed multiple briefs on every disputed issue.
ALJ Scarlett issued a 62-page proposed decision subsequently adopted by the Commissioner (Commissioner's Decision). He found that after passage of Proposition 103, from 1989 through 2003 Mercury converted almost its entire force of insurance agents to "brokers," such that about 90 percent of its producers were "brokers." Mercury used the same contract for the "brokers," changing only the word "agent" to "producer," defined in the contract as "broker." After 1989 all new producers were "brokers." Mercury's "brokers" were "indistinguishable" from Mercury's agents
The Commissioner's Decision found that once the producers became brokers they began charging "broker fees" ranging from $ 50 to $ 150. "On rare occasions" a customer did not pay a "broker fee." Actual agents who provided the same services and coverage did not charge any extra fees. As a result a person obtaining a Mercury policy through a "broker" paid more than someone purchasing the same policy from an agent.
The Commissioner found Mercury's top agent, AIS, also became a "broker" and engaged in the same conduct. AIS collected "broker fees" on more than 99 percent of the policies it obtained for Mercury. In a five-year period between 1999 and 2004, AIS "brokers" charged almost $ 27.6 million in unapproved "broker fees" on behalf of Mercury in California. "AIS continued transacting insurance on behalf of Mercury in its 'broker' status until January 1, 2009, when Mercury purchased AIS." AIS charged "broker fees" on insurance policies on behalf of Mercury until that purchase, at which time Mercury filed a notice of appointment showing AIS as a Mercury agent.
According to the Commissioner's Decision, when filing its rate applications for approval with CDI, Mercury did not include the "broker fees" charged by its "brokers." CDI did not approve the "broker fees" for at least the period 1989 through 2006. Based on Krumme , Mercury was "collaterally estopped from contesting that the 'broker fees' were not approved by the CDI." Further, based on the Collateral Estoppel Ruling, Mercury was estopped from
The Commissioner found AB 2639 "as enacted, did not provide support for Mercury's position that its 'brokers' were traditional brokers, and not de facto insurance agents acting on behalf of Mercury."
Based on the language of the rate statutes and regulations, the purpose of Proposition 103, and Bulletin 80-6, the Commissioner's Decision held the "broker fees" were premium that were required to be approved after reported on a rate application. Therefore, "from at least July 1, 1996 through 2006, Mercury violated sections 1861.01, subdivision (c), and 1861.05, subdivision (a), when it allowed its designated 'brokers' to charge and collect unapproved and unfairly discriminatory 'broker fees' to Mercury's policyholders."
The Commissioner found Mercury knew of Bulletin 80-6, which provided all fees an agent collects on behalf of an insurer are premium and must be reported. Mercury had notice since 1999 that CDI considered Mercury's conduct violated the Insurance Code and could lead to CDI filing a notice of noncompliance. Although Mercury had actual notice of the violation, it willfully continued to charge the improper "broker fees" through the end of 2008.
The Commissioner's Decision found CDI's delay in filing the Final NNC while waiting for the conclusion of Krumme was a proper exercise of judicial economy and conservation of state resources and did not result in an unreasonable delay in filing the Final NNC.
The Commissioner found Mercury was subject to a penalty for each unlawful fee it charged. It imposed a penalty of $ 150 for each violation from September 1999 to August 2004 for a total sum of $ 27,593,550 for 183,957 acts.
Subsequently, Mercury filed the action seeking a writ of administrative mandate under Code of Civil Procedure section 1094.5 challenging the Commissioner's Decision. Consumer Watchdog intervened in opposition to the petition. Thereafter, the court granted the petition.
In the minute order setting out the decision (Minute Order), the court did not dispute the findings in the Commissioner's Decision as to collateral
The court also ruled the penalty violated due process because Mercury did not have "fair notice that it could be subjected to penalties." Further, the court found CDI had "unduly delayed in issuing the NNC," giving rise to the bar of laches.
Additional facts are set out in the discussion.
DISCUSSION
1. Standard of Review
Review of a decision of the Commissioner must comply with the provisions of the Code of Civil Procedure, requiring the superior court to use an independent judgment standard of review. (§ 1858.6.) Under that standard, although the court may reweigh the evidence and substitute its own findings, before doing so it must "accord a strong presumption of correctness to the Commissioner's findings." ( State Farm Mutual Automobile Ins. Co. v. Quackenbush (1999)
A party challenging an agency's decision may argue there was a "prejudicial abuse of discretion" ( Code Civ. Proc., § 1094.5, subd. (b) ), as Mercury did here. Abuse of discretion is shown if the agency "has not proceeded in the manner required by law, the order or decision is not supported by the findings, or the findings are not supported by the evidence." (Ibid .) "Where it is claimed that the findings are not supported by the evidence [as Mercury argued], in cases in which the court is authorized by law to exercise its independent judgment on the evidence, abuse of discretion is established if the court determines that the findings are not supported by the weight of the evidence." ( Code Civ. Proc., § 1094.5, subd. (c).)
"[A]buse of discretion is established not when the administrative agency's action is not supported by the weight of the evidence but rather when such agency's findings are not supported by the weight of the evidence
" ' "[R]arely, if ever, will a board determination be disturbed unless the petitioner is able to show a jurisdictional excess, a serious error of law, or an abuse of discretion on the facts." ' " ( Sager v. County of Yuba (2007)
Where a court exercises independent judgment, the general rule requires us to review the trial court's decision for substantial evidence. ( Fukuda, supra ,
In the Minute Order, the court stated it was required to use the independent judgment standard, "accord[ing] a strong presumption of correctness to the Commissioner's findings," but that it was "free to reweigh the evidence and substitute its own findings." This was correct as far as it went.
However, the court made no mention of plaintiffs' burden to show the findings in the Commissioner's Decision were not supported by the evidence. This was error. ( Sager, supra ,
Further, the court paid scant if any attention to the findings in the Commissioner's Decision or whether they were supported by the weight of the evidence, in violation of its standard of review. ( San Diego Unified School Dist. v. Commission on Professional Competence (2013)
The Minute Order does not contain an analysis by the trial court of whether the findings in the Commissioner's Decision were contrary to the weight of the evidence or whether Mercury had rebutted the presumption of correctness. It did not reject specific evidence on which the Commissioner's Decision relied or determine the Commissioner's Decision was not supported by the weight of the evidence. Instead, it ignored the findings in the Commissioner's Decision and made its own findings in violation of the proper standard of review. This tainted the entire Minute Order and mandates reversal. ( City of Pleasanton v. Board of Administration (2012)
Mercury maintains there is no law requiring the trial court to specifically state what it did to comply with the standard of review. We are not holding it was required to do so. But the sense of the ruling must reflect the analysis was done. Here the Minute Order did not do so, as we discussed.
" '[W]hether the trial court applied the correct standard of review ... is a question of law,' " which we review de novo. ( Coastal Environmental Rights Foundation v. California Regional Water Quality Control Bd . (2017)
2. "Broker Fees " as Premium
The Commissioner's Decision held Mercury's "broker fees" were premium that were required to be approved after reported on a rate application. The trial court ruled to the contrary, finding the "broker fees" were not premium because they were charged for separate services. As discussed below, this ruling is precluded by the Krumme Findings, which bind Mercury pursuant to the Collateral Estoppel Ruling.
Whether "broker fees" were premium is mixed question of fact and law which we review de novo. ( 20th Century, supra ,
As set out above, according to well-established law and regulations, premium includes all payments made by an insured that are part of the cost of insurance, including "all sums paid to an insurance agent." (Bulletin 80-6.) This includes "all ... fees ... and all other items which change the amount the insurer charges to the insured." ( 10 CCR § 2360.0(c).) Put another way, premium is comprised of the net premium and "the direct and indirect costs associated with providing" the insurance and "any profit or additional assessment charged." ( Troyk, supra ,
We disagree with Mercury's limited interpretation of premium as including only the cost of risk and administrative expenses as inconsistent with established definitions of premium. Likewise, Mercury's claim broker fees are not premium is irrelevant. As Krumme held Mercury's "brokers" were not actually brokers but were de facto agents. Thus, the "broker fees" they charged were in fact premium that had to be reported and approved.
The Krumme Findings found Mercury's "brokers" were its de facto agents, who, while acting in the course and scope of their agency on behalf of Mercury, were charging illegal "broker fees" for which Mercury was vicariously liable. Mercury did not obtain prior approval from the Commissioner to charge or collect these "broker fees." ALJ Scarlett ruled the Krumme Findings bound Mercury under the collateral estoppel doctrine. The Commissioner's Decision held that pursuant to the Collateral Estoppel Ruling Mercury was estopped from arguing its "brokers" were not de facto agents.
In the writ proceeding, Mercury did not challenge those findings nor did the court overturn them. In fact the Minute Order specifically found Mercury did not dispute AIS brokers were its de facto agents. Thus, Mercury cannot challenge these findings on appeal. ( K.C. Multimedia, Inc. v. Bank of America Technology & Operations, Inc . (2009)
When the court ruled the "broker fees" were "charged for a separate service provided by AIS, in giving customers comparative pricing, for multiple potential insurers," it erred because it did not give collateral estoppel effect to the Krumme Findings that, when charging the "broker fees," Mercury's "brokers were acting and act in the course and scope of their agency in transacting insurance as 'insurance agents' on behalf of Mercury." The court's finding directly contradicts the Krumme Findings that in charging the "broker fees" Mercury's "brokers" were acting on behalf of Mercury, not providing a service to customers.
In ruling the "broker fees" were not premium the court stated collateral estoppel did not apply because Krumme did not decide whether "broker fees" were premium; rather Krumme stated "ratemaking was not at issue in the case." But this misses the point. The Commissioner never found Krumme had decided "broker fees" were premium. The Commissioner's finding Mercury's de facto agents charged "broker fees" while acting as Mercury's agent forecloses the court's finding. And a determination about ratemaking is not necessary for a decision in this case.
In Krumme , the court also found Mercury was violating the Business and Professions Code in its advertising of rate comparisons without disclosing broker fees might be added to the disclosed premium amount. ( Krumme, supra ,
b. Fees for Separate Services
The trial court found the "broker fees" were not premium because they were paid for separate services, i.e., comparative rate shopping. This was error.
First, the Krumme Findings, which Mercury did not challenge, determined Mercury's "brokers," i.e., its de facto agents, charged "broker fees" "in the course and scope of transacting insurance on behalf of Mercury, and therefore in the capacity of insurance agents within the meaning of section 1621 on behalf of Mercury."
Second, as noted, the trial court here failed to accord the required strong presumption of correctness to the findings in the Commissioner's Decision. The Commissioner found the "broker fees" were premium, not payment for separate services. The Commissioner cited to evidence that "broker fees" were charged by Mercury's "brokers," i.e., de facto agents, in the course of their agency on behalf of Mercury. The "broker fees" were not fees charged for services on behalf of the insured. Rather, the Commissioner found, the "broker fees" are actually agent fees, which are part of premium and must be included in a rate application for prior approval.
The court's finding that "broker fees" were proper is based on an erroneous assumption the "brokers" were acting in that capacity, not as agents, as found by Krumme . Further, the finding that "broker fees" were for a separate service cannot be reconciled under the circumstances of the case. If the "brokers" were in fact agents acting within their agency on behalf of Mercury, they could not also have been acting as brokers and providing separate services on behalf of customers.
Acknowledging 10 CCR section 2189.3 prohibits an agent from charging a broker fee, the court opined "that does not make such a fee into a 'premium' under the rate statutes." There is no legal basis
Further, contrary to Mercury's argument and the trial court's finding, CDI never argued all fees charged by an insurance agent are premium. Rather, the claim is fees charged by Mercury's "brokers," i.e., de facto agents billed while the agents were acting within the scope of their agency, were premium.
Moreover, the difference between an insurance broker and an insurance agent is not based on the services they render, as the court's Minute Order assumes. And contrary to Mercury's argument, it does matter who was providing the alleged separate services. As set out above, the distinction is based on the principal served and to whom a duty is owed. An agent acts on behalf of and owes a duty to an insurance company (§§ 31, 1621; Douglas, supra ,
The court made several factual findings about the fees charged for separate services, including that the comparative rate shopping benefitted consumers; the "broker fees" was negotiable or not always charged; and after AIS was converted to a "broker" it sometimes sold a policy for another insurer. But these findings are wholly inconsistent with the Commissioner's Decision, based on Krumme , that fees were charged as Mercury's agents while acting on behalf of Mercury. Again, the Collateral Estoppel Ruling bars relitigation of the findings, and the court erred in relying on this evidence to support its Minute Order.
c. Interpretation of Rate Statutes
In reviewing whether an agency has properly interpreted a statute, although we make the final determination of its construction, we give " ' "great weight and respect to the administrative construction." ' " ( Association of California Ins. Companies v. Jones (2017)
The statutes, regulations and case law all support the Commissioner's Decision the "broker fees" charged by Mercury's "brokers" were premium. Bulletin 80-6, adopted in 1980 and about which the Commissioner's Decision found Mercury was aware, advised insurers fees charged by agents were premium and had to be nondiscriminatory and reported to CDI.
The trial court rejected Bulletin 80-6, noting CDI's purported concession it was not "controlling authority." Although not specifically cited, the court presumably was relying on a statement in a 1997 letter from Jon Tomashoff (Tomashoff Letter) that stated Bulletin 80-6 "was never intended as, and has never been used by [CDI] as ... the equivalent of a law or regulation." This analysis was flawed.
For one thing, the Tomashoff Letter was not addressed to Mercury but to a third party producer. Additionally, Bulletin 80-6 need not be "controlling authority" to give notice to insurers of CDI's position that fees charged by agents were premium. Moreover, as the Commissioner's Decision found, "Bulletin 80-6 has been generally accepted in the industry as prohibiting insurance agents from charging 'broker fees.' "
The court also relied on the Tomashoff Letter for the proposition that fees charged by agents for services "outside the scope of the agency" (italics added) were not considered premium. But this does not assist Mercury. The statement is consistent with Bulletin 80-6 and CDI's well-established position that fees charged by agents acting within the scope of their agency, including Mercury's "brokers," are premium. ( Krumme, supra ,
Proposition 103 requires the Commissioner's prior approval of insurance rates. ( § 1861.01, subd. (c).) And section 1861.05, subdivision (a) prohibits "unfairly discriminatory" rates. Further, under 10 CCR section 2360.0(c), premium includes "fees" and "all other items which change the amount the insurer charges to the insured."
The trial court found 10 CCR section 2360.0(c) was not applicable based on its conclusion "broker fees" charged here were for separate services. However, as discussed above, this was error.
While acknowledging California Code of Regulations, title 10, section 2189.3 bars an appointed agent from charging a broker fee, without analysis the court makes the unsupported conclusion it "does not make such a fee into 'premium' under the rate statutes." This does not withstand scrutiny in light of the law that all sums paid to an insurance agent in transacting insurance are premium.
The court's interpretation of applicable law defeats rather than promotes the purposes of Proposition 103, and thus contravenes rules of statutory construction. ( Catholic Mutual Relief Society v. Superior Court (2007)
construction should not "lead to unreasonable, impractical or arbitrary results"].) The court's interpretation would lead to the absurd result of eviscerating the rate statutes' requirements by allowing insurance company agents to charge "broker fees" without any CDI oversight or approval. That would mean insurance agents could charge unapproved and unfairly discriminatory fees for alleged separate services that would increase consumers' cost of insurance. This is contrary to the voters' intent as expressed in Proposition 103.
In addition, the court failed to give the longstanding interpretations of statutes and regulations the deference to which they are entitled. ( Yamaha, supra , 19 Cal.4th at pp. 12, 14,
While courts are not bound by the Commissioner's interpretation of rate statutes ( Automotive Funding Group, Inc. v. Garamendi (2003)
Finally, the court did not comply with Proposition 103 itself, which requires liberal construction " 'to fully promote its underlying purposes,' " " 'to protect consumers from arbitrary insurance rates and practices ... , and to ensure that insurance is fair, available, and affordable for all Californians.' " ( Donabedian, supra ,
d. Installment Payments Cases
In ruling the "broker fees" were not premium the trial court relied on In re Ins. Installment Fee Cases (2012)
In Auto Club , the court considered as a question of first impression whether "premium" as used in section 381, subdivision (f)
In Installment Fee Cases , policyholders who paid premiums in monthly installments were charged interest. The court held this was not premium under section 381 because it was "consideration for a benefit separate from the insurance and is paid under an agreement separate from the policy." ( Installment Fee Cases, supra ,
These two cases differ from the instant case for several reasons. First, the fees were optional based on the policyholders' choice to pay in a lump sum or over time. In our case, there is no evidence any customer had an opportunity to avoid the fee. Second, in the cited cases only those who paid the fee received the benefit of installment payments. In the current case, however, customers paid $ 50, $ 100, or $ 150 for the same policies as those sold by agents who did not charge a fee.
The trial court here attempted to distinguish Troyk , noting Mercury did not require its "brokers" to charge a broker fee and did not collect them. But Troyk emphasized premium had to be examined "from the insureds' perspective." ( Troyk, supra ,
Further, the trial court's ruling conflicts with Krumme , which held Mercury was " 'deemed by operation of law to have constructively received the "broker fees." ' " ( Krumme , supra ,
3. Penalties
The Commissioner has broad discretion to impose penalties for an insurer's violation of rate statutes. ( Szmaciarz v. State Personnel Board (1978)
Under section 1858.07, subdivision (a), the Commissioner may impose a penalty up to $ 5,000 for each act violating Proposition 103 and up to $ 10,000 if the act was willful. The Commissioner found Mercury's failure to obtain prior approval for the "broker fees" was a willful violation of rate statutes for
The Minute Order did not find the Commissioner abused his discretion defining collection of broker fees as an illegal act or calculation of the penalty. Rather, it held imposition of the fees violated due process because "Mercury was not given fair notice that it could be subjected to penalties for not treating AIS' broker fees as premium" before CDI issued the Final NNC in 2004. The Minute Order also ruled CDI "unduly delayed in issuing the [Final] NNC," thereby allowing penalties to accrue. These rulings were error.
a. Fair Notice
In support of its ruling Mercury was not given fair notice of the penalties, the court relied on FCC v. Fox Television Stations, Inc. (2012)
In Fox the Federal Communications Commission (FCC) changed its enforcement policy of 18 U.S.C. section 1464, which prohibits the broadcast of " 'any obscene, indecent, or profane language.' " ( Fox,
Likewise, in Christopher v. SmithKline Beecham Corp . (2012)
In our case there was no policy change. Rather, at all applicable times section 1861.01, subdivision (c) specifically barred charging unapproved rates and section 1861.05, subdivision (a) likewise prohibited unfairly discriminatory rates. The Commissioner's Decision found Mercury did not dispute that. Further, as stated above, at all relevant times section 1858.07, subdivision (a) expressly authorized the Commissioner to impose penalties.
In addition in 1980 CDI promulgated Bulletin 80-6, which stated all payments made by an insured, including fees, are premium, which must be reported to CDI as such and are governed by antidiscrimination statutes. The Commissioner's Decision found Mercury knew of Bulletin 80-6. This finding is uncontroverted, and it was uncontested by the trial court.
Additional notice was given during "frequent communications" between CDI and Mercury about the Exam Report and the Draft NNC between August 1999 and October 2000; from the filing of the 1998 Exam Report in December 2000; and from the filing of Krumme , and rendering of the Krumme opinion. In addition, Mercury points to no evidence CDI ever approved "broker fees" charged by Mercury's agents or indicated they complied with Proposition 103. None of these findings were contested in the Minute Order.
Instead, the court found the law "generally [was] unclear" before the Draft NNC was issued. It based this on statements in the 1997 Tomashoff Letter that "fees could be charged by agents that would not be deemed premium if provided for services outside the scope of the agency." This does not contradict CDI's position because the "broker fees" at issue were not actually broker fees but were charged by Mercury's de facto agents acting within the scope of their agency for Mercury, and thus were premium.
Further, the Commissioner found the Tomashoff Letter was not sent to Mercury nor was it addressing Mercury's practices. Moreover, even if Mercury initially could have relied on the Tomashoff Letter, it could not continue to do so after CDI sent the 1998 Exam Report in February 1999. The court failed to address this finding.
The court also apparently relied on a statement made by Tomashoff in a 1999 public hearing that the distinction between a broker and an agent was sometimes ambiguous. But as the Commissioner found, this was a general statement, not made to or about Mercury. In fact, there is no evidence Mercury attended the meeting or knew of the comments. Further, although there might sometimes be ambiguity, there was no ambiguity under the specific facts of this case. And in any event Mercury cannot claim to rely on statements made in 1997 and 1999 after receiving notice at least three times in 2000 that its conduct was violating the statute and subjecting it to penalties.
Mercury relies on the trial court's factual findings to support its argument it did not have fair notice. But as discussed above, in making the findings, the court did not give the proper weight to the findings in the Commissioner's Decision. Consequently, the trial court's findings do not withstand scrutiny.
First, the trial court pointed out that CDI did not respond to the Mercury Letter sent in November 2000 in which Mercury stated it believed AB 2639 had resolved the improper "broker fees" issue. But the Commissioner's Decision specifically rejected this claim, stating, "Given CDI's opposition to A.B. 2639, and the language in the final version of the bill that was enacted, Mercury cannot reasonably assert that it believed A.B. 2639 resolved the issues in CDI's 1998 Exam Report and Draft Notice." Further, the trial court did not explain how AB 2639 as adopted, and different than what Mercury proposed, in fact did resolve the matter.
Additionally, only a few weeks after the Mercury Letter was sent, CDI issued the final version of the 1998 Exam Report reiterating that Mercury's practices were unlawful. The Commissioner found this "further placed Mercury on notice that CDI did not consider" the issue was resolved and Mercury's assertion it believed AB 2639 had resolved the issue was "disingenuous." Although the trial court may "substitute its own credibility determinations," "it cannot ignore its statutory obligation to defer to the Commission's considered credibility findings in doing so. In our view, the superior court's decision-which is silent as to the Commission's thoughtful reasoning and analysis as to the witnesses'
credibility-did not afford the respect due those findings." ( San Diego Unified School Dist. v. Commission on Professional Competence, supra ,
Further, CDI filed briefs in 2003 and 2004 in Krumme , opposing Mercury's position.
The Minute Order also found a 2002 exam report did not mention the "broker fees" issue. It failed to note or dispute, however, the Commissioner's finding the issue had already been referred to the legal division for enforcement. In addition, the 2002 exam report stated, "Failure to identify, comment
Finally, the Minute Order relied on CDI's approval of Mercury's rate applications, which did not include "broker fees." But the Commissioner found the applications were incomplete and "Mercury cannot assert that it relied on CDI's approval of its rate applications to conclude that its designated 'broker's' 'broker fees' were not unlawful when the 'broker fees' were actually omitted and never approved by CDI."
Mercury argues section 1858.07, subdivision (b), a safe harbor statute, should apply. It prohibits imposition of a penalty where the Commissioner has approved a rate. The trial court correctly ruled this statute did not apply because Mercury did not provide complete information. We are not persuaded by Mercury's claim CDI did not charge it with providing false information. The weight of the evidence controverts Mercury's claim it should be afforded safe harbor protection because it "had no idea" it should have included "broker fees" in its rate applications.
Neither MacKay v. Superior Court (2010)
Thus, the substantial weight of the evidence and the Commissioner's unchallenged findings show Mercury had fair notice it could be subject to penalties.
b. No Undue Delay
Relying on Walsh v. Kirby (1974)
In Walsh , the defendant agency collected evidence of multiple statutory violations by a regulated business without ever giving notice to the business of the violations. It then filed an action seeking cumulative penalties. The court ruled the agency had acted arbitrarily and violated the business's due process, and set aside the penalty. ( Walsh, supra ,
The Commissioner's Decision distinguished Walsh , finding "CDI does not have a practice of delaying the filing of an NNC to accumulate penalties. In fact, the delay in this noncompliance proceeding was due to discussions in an attempt to resolve the issues in the Draft Notice, which placed Mercury on notice of its violations, and CDI's decision to issue the [Final] NNC after conclusion of the Krumme litigation, neither of which involved a concerted effort or practice by the CDI to intentionally allow the accumulation of penalties without notice."
The Commissioner also found "CDI's decision to delay filing the [Final] NNC until after the Krumme case involved considerations of judicial economy and conserving State resources by avoiding the necessity to fully litigate issues in the [Final] NNC, that were currently being adjudicated against Mercury in the Krumme case." Thus, it found, the delay in filing the Final NNC was not a prejudicial delay allowing penalties to accumulate.
Further, as shown by the Commissioner's Decision, CDI gave Mercury notice of its violation on numerous occasions and Mercury showed no inclination to change its conduct to comply with the statute. Thus, Walsh does not apply. ( Coe v. City of San Diego (2016)
This case is comparable to City and County of San Francisco v. Sainez (2000)
There was no undue delay by CDI.
The trial court noted specific intent, required to prove willfulness (§ 1858.5), had not been proven. This is irrelevant. Under section 1858.07, subdivision (a), a penalty may be imposed for nonwillful violations.
Likewise, the court's finding that assessing a penalty of $ 5,000 to $ 10,000 per act, as allowed by section 1858.07, subdivision (a), would be an abuse of discretion is incorrect. First, as the court acknowledged and as supported by case law, CDI has discretion to determine that each time Mercury "brokers" charged a "broker fee" could constitute an "act" subject to penalty. The fact potential penalties could be high, as the court seemed to imply, does not show abuse of discretion. Given the per act penalties, the statute plainly anticipates a large penalty could be imposed. In addition, this finding has no bearing on the facts at hand. CDI imposed a penalty of only $ 150 per act.
Imposition of the penalty did not violate due process.
4. Laches
A party claiming laches must prove both unreasonable delay and prejudice.
( Clary v. City of Crescent City (2017)
First, the Commissioner found there was no unreasonable delay in filing the Final NNC because CDI consistently maintained and repeatedly advised Mercury the "broker fees" violated the rate statutes. Further, the Commissioner acknowledged CDI's delay was to conserve judicial resources and avoid the possibility of conflicting decisions. " '[D]elay in reliance on legal advice, awaiting determination of a legal issue in another pending case, may be excusable.' " ( Hill v. Hattrem (1981)
The Commissioner also found there was insufficient evidence to show CDI unreasonably delayed in filing the Final NNC. The court failed to consider or
Cases cited by Mercury do not change the analysis. In Vernon Fire Fighters Assn. v. City of Vernon (1986)
Second, there is no evidence of prejudice. Prejudice is not presumed. ( Green v. Board of Dental Examiners (1996)
Further, as discussed above, Mercury had notice for years of its potential for imposition of penalties and deliberately chose not to modify its conduct. (See Cedars-Sinai Medical Center v. Shewry (2006)
Moreover, the element of prejudice requires a change of position that would not have occurred absent the delay. ( Magic Kitchen, supra ,
As Mercury acknowledged in the administrative hearing, there is no statute of limitations for noncompliance proceedings. "By focusing solely on the passage of time, and not on the issue of disadvantage and prejudice, a court risks imposing a de facto-and impermissible-statute of limitations in a situation where the Legislature chose not to create a limitation on actions." ( Fahmy v. Medical Bd. of California (1995)
Third, even assuming Mercury showed both unreasonable delay and prejudice, the court did not acknowledge or apply the higher laches standard that applies to governmental entities.
Here, Proposition 103 embodies a strong public policy to " ' "protect consumers from arbitrary insurance rates and practices ... to ensure that insurance is fair, available, and affordable for all Californians." ' " ( Donabedian, supra ,
5. Due Process - First Administrative Hearing
Mercury seeks affirmance of the judgment on a wholly separate argument rejected by the trial court. During the administrative proceedings a dispute arose as to the requirements of California Code of Regulations, title 10, former section 2614.13 ( 10 CCR § 2614.13 ) dealing with "prepared direct testimony" (PDT) of witnesses,
Subsequently the Commissioner (at the time Steve Poizner) issued a notice of a proposed change to 10 CCR section 2614.13 making it applicable to only party-affiliated witnesses or their experts. ( Mercury 1 , at p.
ALJ Owyang then issued a proposed decision to dismiss the administrative proceeding for several reasons, including that the ex parte communications between the CDI and the Commissioner's office violated due process. The Commissioner rejected the recommendation ( Mercury 1 , at p. 2 ) and ordered a hearing on the merits. Mercury filed a writ petition to require the Commissioner to adopt the proposed decision. ( Mercury 1 , at p. 1.) When Mercury appealed the trial court's order sustaining a demurrer without leave to amend, the court of appeal affirmed. ( Mercury 1 , at p. 8.)
The administrative proceeding was then assigned to ALJ Scarlett. He ruled former 10 CCR section 2614.13 would apply but if PDT's for adverse witnesses could not be obtained, after unsigned PDT's for those witnesses were served on the opposing party, those witnesses could be subpoenaed to testify.
The issue was litigated at the administrative hearing and ALJ Scarlett found the ex parte communications did not violate due process and Commissioner Poizner was no longer in office, thereby effectively disqualifying the decisions maker. Further, Mercury had a full hearing.
When Mercury raised this issue in the writ proceeding, the trial court rejected Mercury's claim the proceeding should be dismissed, finding Mercury had received a fair hearing. It further found no evidence Commissioner Jones was a party to any improper communications.
Mercury again argues in this appeal that the only remedy for the due process violations is dismissal.
Cases on which Mercury relies are distinguishable. In Department of Alcoholic Beverage Control v. Alcoholic Beverage Control Appeals Bd . (2006)
Likewise, in Utica Packing Company v. Block (6th Cir. 1986)
We also reject Mercury's argument the hearing in front of ALJ Scarlett was tainted. Mercury complains ALJ Scarlett deviated from ALJ Owyang's ruling because he allowed adverse witnesses to testify pursuant to subpoena. But ALJ Owyang never ruled out the possibility of allowing noncooperating witnesses to testify. Further, Mercury cites no authority that ALJ Scarlett was required to follow ALJ Owyang's procedural decision.
The fact the Commissioner rejected ALJ's Owyang's proposed order and adopted the proposed decision of ALJ Scarlett does not show the hearing was unfair. The trial court did not agree with Mercury's contention that Commissioner Jones was "infected" because he retained Commissioner Poizner's prosecutors and senior advisors, noting there was no evidence. Mercury does not cite to any evidence in the respondent's brief either. There is no basis to dismiss the proceedings against Mercury.
Mercury filed a motion to strike a portion of CWD's reply brief addressing this issue, claiming CWD did not properly explain the decision in Mercury 1 and failed to disclose the findings of the trial court here, which, Mercury claims, rejected CWD's argument. We deny the motion.
We do not decide the substance of Mercury's motion but note we did not rely on any improper or incomplete argument in CWD's reply brief. Our summary of the facts was taken from Mercury 1 , and our analysis of the trial court's ruling was based on our independent review of the Minute Order.
6. Remand
Based on the trial court's failure to apply the proper standard of review one option would be for us to reverse and remand for the trial court to properly exercise its independent judgment. (E.g., Fukuda, supra ,
DISPOSITION
The judgment is reversed and the writ of mandate is vacated. The trial court is directed to deny the writ and enter judgment in favor of appellants. The motion for judicial notice is granted; the motion to strike is denied. Appellants are entitled to costs on appeal.
WE CONCUR:
IKOLA, ACTING P. J.
GOETHALS, J.
Notes
When this action was originally filed, Dave Jones was the California Insurance Commissioner and the named defendant. Commissioner shall also refer to any previous insurance department commissioners when applicable.
We are not persuaded by the trial court's attempt to distinguish these cases on the grounds they were interpreting "gross premium for taxation purposes" only.
As discussed below in section 1, the proper standard of review requires trial court review of the Commissioner's findings, not merely the underlying evidence. Therefore our statement of facts is based primarily on the evidence set out on the Commissioner's findings. Mercury's recital of the facts generally did not cite to the Commissioner's findings and we disregard it to the extent it failed to correspond with the proper standard of review. Likewise, we reject Mercury's claim CDI and CWD failed to set out all material facts and thereby waived their arguments.
The 2000 version of section 1623 provided: "Every application for insurance submitted by an insurance broker ... shall show that the person is acting as an insurance broker. If the application shows that the person is acting as an insurance broker and is licensed as an insurance broker ... it shall be presumed, for licensing purposes only, that the person is acting as an insurance broker." Section 1623 has since been amended by Statutes 2008, chapter, 304 (A.B.2956), section 2 and Statutes 2010, chapter, 4000 (A.B. 2782), section 7.
The named defendants were Mercury Insurance Company, Mercury Casualty Company, California Automobile Insurance Company, California General Underwriters Insurance Company and American Mercury Insurance Company.
The court also found Mercury engaged in deceptive comparative rate advertising to compete with other insurers who did not charge broker fees.
The order to show cause alleged Mercury engaged in false advertising. Pursuant to Mercury's motion the order to show cause and the accusation were bifurcated from the hearing on the issue in this appeal regarding the unapproved and discriminatory rates.
The maximum penalty for a willful violation is $ 10,000 per act. (§ 1858.07, subd. (a).) The findings noted that under that same section, the penalty for a nonwillful violation is $ 5,000 per violation. (Ibid .)
We reject Mercury's assertion Krumme held its "brokers" were agents only once an insurance contract was in place. We found nothing in Krumme to support this contention.
Section 381, subdivision (f) states: "A policy shall specify: [¶] ... [¶] Either: [¶] (1) A statement of the premium, or [¶] (2) If the insurance is of a character where the exact premium is only determinable upon the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined and paid."
Nor did the court mention Mercury and CDI stipulated to stay Final NNC proceedings pending Mercury's appeal of Krumme .
We reject Mercury's speculative argument the trial court would not have found "manifest injustice" unless it was weighing such injustice against the public interest.
These facts are taken from Mercury Insurance Co. v. Jones (Apr. 26, 2013, B244204)
Although Mercury did not file a cross-appeal raising this issue we may consider it. Pursuant to Code of Civil Procedure section 906, a respondent may "assert[ ] an alternate legal theory upon which the judgment may be affirmed, notwithstanding the court's resolution of the appellant's contentions in the appellant's favor." (Preserve Poway v. City of Poway (2016)