Citizen Suits & Proposition 103
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Citizen Suits & Proposition 103

Unwilling to rely solely upon the insurance commissioner for proper enforcement of the law, the voters created an additional, independent check upon the conduct of the insurance companies: the right to enforce the insurance code themselves in two fora: the CDI and the judicial branch. 1861.10(a) and 1861.03(a). Understanding the reasons for the voters' (and drafter's) policy choices is a worthwhile preface to examining the statutory changes.

Why Voters Created A Private Right of Legal Action Under Proposition 103

- Experience under McBride-Grunsky's Exclusive Jurisdiction. Under the pre-Proposition 103 law -- known as the McBride-Grunsky Insurance Regulatory Act -- consumers had very limited protection against insurance company abuses, no voice in insurance matters, and no effective remedies at law. The McBride-Grunsky rules -- applied by the courts in cases like Karlin -- justified the voters' distrust of a regulatory scheme in which a hostile administrative agency could ignore, or even affirmatively undermine, the law, thereby precluding any relief. Having enacted a far more rigorous regulatory scheme to replace McBride-Grunsky, permitting the CDI to retain "exclusive jurisdiction" over insurance matters would have irresponsibly placed all of 103's precious eggs in one basket.

- Dangers of the elected commissioner. Making the insurance commissioner an elective post was intended to increase the pressure on the commissioner to properly implement and enforce the new laws, but even that measure could not assuage the public's concern. The voters were cognizant of the dangers inherent in establishing an elected office in which a powerful industry would be vitally interested. The record of the administration of Insurance Commissioner Chuck Quackenbush -- in which the commissioner's malfeasance and nonfeasance were grave -- demonstrates that the voters were right to provide parallel enforcement avenues.

- Benefits of the judicial branch. The expansive private right of action granted by 103 evinces a practical appreciation of the court system. Consumers wanted the ability to bring matters before an independent tribunal where the integrity of the process is of the utmost concern and is carefully safeguarded -- where the political power and resources of the insurance industry would be of no import. Another advantage of the judicial branch is that the process is conducted pursuant to long-established and tightly-followed rules, and, importantly, the outcome is on the record.

- Differences between the judicial branch and the administrative agency. Like any administrative agency, the CDI is a far different forum than a court. The commissioner is intended to be a neutral decision-maker, but he ultimately determines the agency's regulatory policy and activity. The commissioner decides which cases to bring, and the form of regulations to promulgate. He can be influenced: there is an ex parte rule, but it only applies once a proceeding is underway. (1) In adjudicatory proceedings, the commissioner's staff are prosecutors, but they ultimately serve the commissioner. To be sure, Proposition 103 requires the commissioner to operate under specific rules it mandates, and the Administrative Procedures Act generally governs. (2) But administrative agencies are simply not courts, by design.

Moreover, in insurance regulatory matters, a further distinction must be made. There are two kinds of CDI proceedings: rulemaking and adjudicatory proceedings.

The insurance rulemaking process can be exhaustive, with full-blown hearings and the opportunity for public participation. As anticipated by Proposition 103, high-profile matters such as the drafting of regulations governing the initiative's rate rollbacks (3) or the weight accorded "territory" for auto insurance premium setting purposes (4) draw public interest intervenors and allow a thorough record to be developed. (In most rulemaking proceedings, however, insurers are present in force while there are few or no outside intervenors). The right to judicial review of the final decision of the commissioner under Proposition 103 offers an independent check on the outcome. (5)

However, in adjudicatory matters under pre-Prop. 103 Insurance Code 1858, such as complaints brought by individual members of the public (or the CDI) against an insurer, the administrative process is far more limited and susceptible of abuse. Such disputes can be highly personal. The complainant is unlikely to be represented by counsel. No public notice is given of a complaint made by a member of the public. Disputes can be mediated or settled without any formal resolution or written decision.

Yet another highly relevant distinction between the CDI and the judiciary is that administrative agencies cannot order damages; nor can they act quickly to enjoin ongoing misconduct.

In according themselves a private right of action to enforce the new law, the voters obtained the right to opt for the judicial forum when, in their own discretion, it was preferable to the administrative process.

- Insufficient administrative resources and expertise. The voters understood that the many new requirements of the insurance code would make it impossible for the insurance commissioner to effectively police the entire marketplace. While 103 mandated that insurers pay fees necessary to cover the substantially greater costs of implementing and enforcing provisions of the initiative, (6) practical limits on the size, resources and staff expertise of the CDI meant that it would be necessary to encourage private enforcement, a well-understood concept. And budgetary limitations might not be entirely benign: notwithstanding the fee mechanism to cover 103-related expenses, the industry's legendary prowess in the Legislature could result in cuts in the CDI's overall enforcement budget, which would invariably reduce the CDI's effectiveness.

Public Participation And The Private Right of Action Under Proposition 103

Section 1861.10, as enacted by Proposition 103, reflects these considerations within the context of ensuring the maximum possible public participation in insurance matters:

Consumer Participation
1861.10. (a) Any person may initiate or intervene in any proceeding permitted or established pursuant to this chapter, challenge any action of the commissioner under this article, and enforce any provision of this article.

(b) The commissioner or a court shall award reasonable advocacy and witness fees and expenses to any person who demonstrates that (1) the person represents the interests of consumers, and, (2) that he or she has made a substantial contribution to the adoption of any order, regulation or decision by the commissioner or a court. Where such advocacy occurs in response to a rate application, the award shall be paid by the applicant.

(c) (1) The commissioner shall require every insurer to enclose notices in every policy or renewal premium bill informing policyholders of the opportunity to join an independent, non-profit corporation which shall advocate the interests of insurance consumers in any forum. This organization shall be established by an interim board of public members designated by the commissioner and operated by individuals who are democratically elected from its membership. The corporation shall proportionately reimburse insurers for any additional costs incurred by insertion of the enclosure, except no postage shall be charged for any enclosure weighing less than 1/3 of an ounce. (2) The commissioner shall by regulation determine the content of the enclosures and other procedures necessary for implementation of this provision. The legislature shall make no appropriation for this subdivision. (7)

Despite its determinative importance in any discussion about "primary" or "exclusive" jurisdiction, 1861.10(a) has never been parsed by any court. (8) As revealed by a careful analysis, 1861.10(a) is as broad a grant of jurisdiction and standing as could be drafted. The section contains three clauses:

* Clause 1 of 1861.10(a) specifies that "any person" may "initiate or intervene in any proceeding permitted or established pursuant to this chapter [Chapter 9]." (9) (Emphasis added).

Use of the term "initiate" in addition to "intervene" makes clear that private parties can independently commence a proceeding which is either underway (established) or which may be brought (permitted). Chapter 9 includes both Proposition 103 and what remains of the McBride-Grunsky Act; therefore, "proceeding" includes:

- any proceeding under the provisions of Proposition 103.
- any proceeding under the provisions of McBride-Grunsky not repealed by 103, i.e., the 1858 administrative complaint process.
- any legal action brought under state laws pursuant to 1861.03 as discussed below.
- any proceeding brought pursuant to Clause 3 below.

* Clause 2 of subsection (a) specifies that "any person" may "challenge any action of the commissioner under this article [Proposition 103]."

Note that "challenge" does not mean filing an administrative complaint. This was already an available option under 1858 of McBride-Grunsky (which has its own provision for judicial review); in any case, 1858 is not a part of Article 10. Nor does "challenge" refer only to the administrative process under 1861.02 and 1861.05, which is governed by Clause 1 of 1861.10(a), as noted infra, and contains its own provision for judicial review (1861.09). To give this clause non-duplicative meaning, "challenge" means to object de novo by initiating a lawsuit in California courts. Thus there is no requirement that a person first exhaust the available administrative remedies.

Actions of the commissioner include:

- All regulatory activities required, authorized, or sanctioned by Proposition 103.
- Any conduct in violation of state laws applicable pursuant to 1861.03 as discussed below.

* Clause 3 of subsection (a) specifies that "any person" may "enforce any provision of this article [Proposition 103]."

This is the broadest grant of authority in the subsection. In contrast to Clause 2, which authorizes challenges to actions of the commissioner, Clause 3 authorizes enforcement actions against both the commissioner and insurance companies. Most importantly, Clause 3 accords the right to go to court to enforce the insurance code directly. In other words, the voters granted themselves the authority to act in the insurance commissioner's stead.

Thus, 1861.10(a) offers a far broader alternative to the limited avenue provided by the simple administrative complaint process set forth in 1858, et seq. Proposition 103 did not repeal 1858, leaving it as an alternative, voluntary avenue of redress.

Finally, 1861.10(b) provides additional confirmation that Proposition 103 authorizes private parties to go into civil courts to seek relief from statutory violations by insurance companies. It gives "the commissioner or a court" the authority to award advocacy and witness fees, and it authorizes those fees in connection with "any order, regulation or decision by the commissioner or a court."

(1) CAL. INS. CODE 1861.08.

(2) Many of Proposition 103's reforms explicitly or implicitly require the promulgation of regulations. See Calfarm, 48 Cal.3d 805 at 824, et seq.; 20th Century v. Garamendi, 8 Cal.4th 216, passim.

(3) CAL. INS. CODE 1861.01.

(4) CAL. INS. CODE 1861.02(a).

(5) CAL. INS. CODE 1861.09 and 1861.10.

(6) CAL. INS. CODE 12979.

(7) CAL. INS. CODE 1861.10(c) was invalidated by the California Supreme Court in Calfarm, 48 Cal.3d at 815.

(8) The closest we could find is Maler v. Superior Court (Federal Insurance Co.) 220 Cal.App.3d 1592 (1990). Builders sued insurers for failing to provide a defense in the underlying action. They pled violations of the Unfair Practices Act (CAL BUS. AND PROF. CODE 790 et seq.) as a predicate to liability under the Unfair Competition Law on the authority of 1861.03(a) and 1861.10. The court of appeal distinguished the UPA from other state laws, noting that the Supreme Court in Moradi-Shalal v. Fireman's Fund Ins. Co., 46 Cal.3d 287 (1988), had ruled the Unfair Practices Act could only be invoked by the insurance commissioner. Therefore, neither 1861.03(a) or 1861.10 could create a private right of action out of a statute that the Legislature entrusted solely to the commissioner's use.

(9) Note that Clause 1 thus accords any person intervention as of right.
Last updated: 8/16/02

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