Market Conduct Report Prompts Lawsuit Against Calif. Commissioner

The court felt that the allegations should be heard,” Cary Cheldin, president of Crusader Insurance Services in Woodland Hills, Calif., told Insurance Journal.

Cheldin was referring to a lawsuit Crusader Insurance Company filed against California Insurance Commissioner Harry Low; who responded with a demurrer that was ruled against by Los Angeles Superior Court Judge David Yaffe on Sept. 30.

The lawsuit stems from a dispute over Crusader’s Market Conduct Report, which was posted online at the California Department of Insurance’s (CDI) Web site. “We took exception with the publication of that,” said Cheldin. “We felt that the report contained false statements, and that the Department knew they were false, and that many of the allegations made in the report by the Department were based on misunderstanding of the law, and arbitrary and capricious positions taken by the Insurance Commissioner.

“We feel that government officials have a duty to be careful with what statements they’re releasing to the public, and what allegations they make, and that they should refrain from making statements that are potentially damaging to any member of the private sector if their basis is not found, and we didn’t feel it was in this case.”

The CDI conducted a Market Conduct Examination of Crusader’s claims handling practices and released a Market Conduct Report based on the results of that examination around Sept. 30, 2000.

“Part of the routine during the examination is that when they’re done looking through all the claim files, [the CDI] has a meeting with the company’s management, as they did with us, and they go over some of their areas of concern,” said Cheldin.

“We did that, and discussed virtually all of the issues raised in the market conduct report, although the report wasn’t given to us at that time; then sometime after that wrap-up meeting with management, the report, in a preliminary format, was sent to us for our comments. At that time we objected to several different things that we saw problematic, and they revised the reports slightly, and we wrote back again, and [it was] back and forth like that for several months, until finally they just adopted the report as final, and put it up on the Web site.

“We filed this lawsuit against them to stop them from enforcing underground regulations against us,” continued Cheldin. He described an ‘underground regulation’ as a rule the Department says exists, but that isn’t in writing in the Insurance Code or another regulation. “This sort of thing came up in a couple of different cases, reflected in the Market Conduct Report. They, for example, alleged that our files needed to contain documentation of an exhaustive type. In other words, they claimed that we need to have all documents pertaining to every minute detail of the claims handling process, but when we read the Insurance Code, and insurance regulations, we weren’t able to find anything that made such a requirement. Whenever something like that occurs, it’s generally referred to as an underground regulation and it’s against the law for a regulatory agency to practice underground regulations.”

Commissioner Low’s demurrer was the response to Crusader’s suit, a Petition for Writ of Mandate, which was filed on June 27, 2002. In a press release from Crusader Insurance, Low allegedly claimed that the court was without jurisdiction because “the Commissioner has broad discretionary authority to disseminate public information without court review.”

“We are currently seeking to engage in discovery,” said Cheldin, of the company’s next step. “We would like to take some depositions of some of the Insurance Department’s employees and perhaps subpoena some of their documents. That way we can properly present evidence in support of our case and present that evidence to the court.

“I have no problem with these reports going out to the public—in fact I applauded that when the Department adopted that rule, because I think the regulation of the insurance industry should be done in a way that the public can see what’s going on and that the public can get involved,” added Cheldin.

“The interesting thing is that it seems that the Commissioner takes an adversarial posture against insurance companies when conducting these examinations and issuing these reports,” said Cheldin. “Insurance companies should be concerned that the reports are accurate, and that’s what we’re trying to do here.”

The CDI was unable to comment at this time due to the ongoing litigation.

Topics Lawsuits California Legislation