Looking Back on ’04: The Most Talked-About Stories in the Western Region

GARAMENDI GRILLS INSURERS ON HOMEOWNERS UNDERINSURANCE CRISIS:
California

Insurance Commissioner John Garamendi held a statewide investigative hearing in San Diego late October to discuss an alleged “crisis in coverage” stemming from the California wildfires of Oct. 2003, which burned thousands of homes in three counties: San Diego, Riverside and San Bernardino. Replacement cost, policy limits, and non-renewal of policies were the source of a heated debate of the day-long hearing investigating underinsured homeowners affected by last year’s wildfires. The hearing featured testimony from representatives of industry trade associations, insurance companies, consumer advocates, wildfire victims and property valuation solution provider Marshall & Swift/Boeckh, whose Quick Quote software program was a strong point of contention as homeowners and agents alike agreed the program underestimated a home’s replacement cost by hundreds of thousands of dollars at times. Following the hearing, Garamendi released a report showing that survivors of the Southern California wildfires who suffered total losses have filed formal complaints with the Department of Insurance at a rate 22 times higher than the normal rate of complaints. The report was disputed by industry trade associations Personal Insurance Federation of California (PIFC)

and ACIC.

STATE FARM LOSES APPEAL IN STATE FARM V. CAMPBELL: The U.S. Supreme Court declined to hear the appeal of one of Utah’s highest-profile court cases, perhaps ending a decades-long legal battle over a claim brought by a couple against their insurance agency. The court’s decision meant a lower court ruling that State Farm Mutual Automobile Insurance Co. must pay Inez Campbell, of Lewiston, $9 million will stand. Campbell and her late husband, Curtis Campbell, sued State Farm after it refused to settle claims arising from a 1981 car accident that killed one driver and left another disabled. A jury in 1983 found Curtis Campbell at fault in the accident and ordered him to pay the victims about $136,000 in excess of his $50,000 insurance policy limit. State Farm eventually paid all the damages, but Campbell and his wife still sued for punitive damages, alleging bad-faith failure to settle, fraud and emotional distress. A Utah jury awarded the Campbells $1 million in compensatory damages and $145 million in punitive damages, which was later reduced to $25 million on appeal.

In 2001, the Utah Supreme Court reinstated the initial $145 million in punitive damages, taking into account State Farm’s net worth and its business behavior in other states. In 2003, the U.S. Supreme Court held that the $145 million award was unconstitutionally large, and remanded the case to the Utah Supreme Court to adjust the amount. In April, the state high court lowered the award amount to just over $9 million The 83-year-old Campbell died of Parkinson’s Disease soon after the 2001 ruling, but his wife remained a party to the lawsuit.

GARAMENDI SUES STATE FUND, AND VICE VERSA:
Garamendi and the CDI sued State Compensation Insurance Fund for access to the workers’ comp insurers’ documents, books and employees in April. The lawsuit said that State Fund refused to allow Garamendi’s representatives to conduct a financial examination and refused to pay for that examination. The legislative mandate (SB 228) requires that the Insurance Commissioner report on SCIF’s financial condition, underwriting practices, and rate structure and report to the Legislature and the Governor on the potential of reducing rates by July 1, 2004.

On May 18, the CDI dismissed its lawsuit against State Fund. The CDI designated three examiners with special expertise that made them uniquely qualified to assist the CDI in conducting an operational review of SCIF, but said SCIF refused to allow them in to conduct the necessary exam. Due to SCIF’s refusal to permit the examiners to conduct the exam and the delay that resulted, the CDI said it was too late for them to perform their examination properly and prior to the July 1 deadline.

State Fund stirred the pot once again on May 28, when they filed suit against Garamendi and the CDI, alleging the Commissioner had attempted to illegally usurp control over the Fund. State Fund rejected Garamendi’s claim that the organization is subject to jurisdiction under Insurance Code §§ 739 et seq. (Risk-Based Capital for Insurers) due to its status as a “public enterprise fund.” In the complaint, State Fund sought for judicial declaration that “the RBC Statutes do not apply to State Fund; that the Insurance Commissioner and the [CDI] do not control the operations and/or assets of the State Fund; that the Insurance Commissioner has exceeded his authority and restated the law by directing the State Fund to dismiss its legislative advocate; and the Insurance Commissioner has exceeded his authority and violated law by directing the State Fund not to write insurance for qualified employers within the State of California.” On Dec. 13, 2004, Judge Paul Alvarado issued a tentative ruling affirming that the State Fund is subject to the CDI’s authority under the state’s Risk Based Capital statute. The ruling allowed the CDI to continue to oversee and regulate State Fund’s financial condition and operations.

OREGON’S SAIF AVOIDS ABOLISHMENT:
In November, a measure to abolish Oregon’s State Accident Insurance Fund (SAIF) appeared on a statewide ballot, and voters overwhelmingly said yes to keeping the state-run workers’ comp carrier from being abolished by rival Liberty Northwest. Supporters of the abolishment said that the measure would have decreased insurance rates if the market is left to private insurers, an argument rejected by opponents. The $8 million dollar initiative measure broke a state record for spending. Liberty Mutual reportedly spent $5.3 million in its campaign to abolish SAIF, with another $2.5 million being spent by The Committee for SAIF-Keeping, a group of small businesses in support of the state-run carrier. Earlier in May, SAIF released a self-evaluation in response to Governor Ted Kulongoski’s concerns about the publicly-owned workers’ comp company. SAIF had been criticized for months for its spending on lobbyists and consultants.

CALIF. COMMISSIONER, AG PROBE BROKER PRACTICES:
October saw the investigation into broker fee practices by California Insurance Commissioner John Garamendi, and later, by California Attorney General Bill Lockyer, who announced he has launched a formal investigation into possible antitrust violations and fraud by insurance companies and brokers, saying the probe’s initial focus would be on bid-rigging and other anti-competitive conduct in the industry. California’s antitrust law, known as the Cartwright Act, prohibits such alleged anti-competitive behavior. Lockyer said he would continue to work with Garamendi on his investigation into the contingency payments to brokers. Later, Lockyer subpoenaed both Safeco and The Hartford in connection with his investigation.

In November, San Diego-based Universal Life Resources (ULR) was accused of pocketing millions of dollars in hidden payments from insurance companies in a lawsuit filed by New York Attorney General Eliot Spitzer. Garamendi filed his own lawsuit shortly thereafter. Spitzer’s suit alleged that ULR awarded contracts to provide group coverage to insurance companies that had made “override” payments to ULR. The suit also alleged that ULR collected “communications fees” from insurers that resulted in higher premiums for consumers, who were reportedly unaware of the fees. ULR reportedly received $11.5 million in “override” payments and $5.6 million in “communications fees” last year. Its total revenues for the year were about $25 million.

O’KANE RETIRES:
Jerry O’Kane, CEO of IBA West, a regional trade association that represents independent insurance brokers and agents in California, Washington, Oregon and Alaska, announced his retirement, which became effective Sept. 1, 2004. O’Kane was replaced by Clark Payne. After 22 years of service to the organization, O’Kane said he would continue to assist the IBA West with advocacy as a consultant. O’Kane was best known for opening up the State Compensation Insurance Fund to agents and brokers in 1984, just after the advent of open rating. O’Kane also worked to assist agents in dealing with the repercussions of 1988’s Proposition 103.

MERCURY LOSES APPEAL IN BROKER FEES CASE:
In November, the California Court of Appeals ruled that Mercury Insurance Company producers acting as brokers are considered agents and not brokers, and thus are not entitled to collect any broker fees in the case of Krumme v. Mercury Insurance Company. The appellate court said that Mercury brokers are considered agents because they have binding authority for Mercury. The court also stated that both brokers and appointed agents used the same application form and rating and underwriting guidelines supplied by Mercury, and that both brokers and appointed agents advertise that they represent Mercury.

“Brokers and appointed agents were functionally indistinguishable in their relationship to Mercury,” read the court’s opinion. “In view of the substance of their dealings with Mercury, because these ‘brokers’ have transacted, and do transact, insurance on behalf of Mercury, they cannot be considered ‘insurance brokers’ for licensing purposes… and are instead ‘insurance agents.'” Mercury argued that the Insurance Code does not specify between a broker and an agent but uses the term “broker-agent.”

ANTHEM/WELLPOINT MERGER AP-PROVED BY CDI:
In November, Insurance Commissioner John Garamendi gave his approval of a pending merger to Anthem Inc. and WellPoint Health Networks Inc. after both organizations agreed to several concessions. Anthem and WellPoint agreed to allocate an additional $100 million of high-quality portfolio investments through the Investment in a Healthy California Program. The investments are targeted at health care facilities and services in underserved communities over the 20-year life of the program. Anthem will also contribute $50 million to support community clinics and the training of nurses through California community colleges to address the state’s nursing shortage.

The merger agreement follows a lawsuit filed by Anthem Inc. in late August against Garamendi after he disapproved Anthem’s application to acquire control of BC Life & Health Insurance Company in connection with the proposed merger of WellPoint Health Networks Inc. with Anthem. The suit was dropped when Garamendi later approved the merger.

MED-MAL BALLOT INITIATIVES HIT THE POLLS:
An unprecedented number of states voted on medical malpractice insurance initiatives in the November election, including Nevada, Oregon and Wyoming. Doctors triumphed over lawyers in Nevada when citizens passed a ballot initiative that limits noneconomic damage awards in med-mal cases to $350,000 with no exceptions and limits fees for attorneys.
Other initiatives to place caps on noneconomic damage awards in Oregon and Wyoming were narrowly defeated. Oregon’s Measure 35 would have enacted a cap of $500,000. In Wyoming, Amendment D would have changed Wyoming’s constitution to allow for a cap on noneconomic damages. Wyoming’s Amend-ment C, which allows the Legislature to set up a medical panel to review malpractice cases before they enter the court system, narrowly passed. According to the American Medical Association (AMA), 20 states are currently facing a med-mal crisis, with doctors retiring early, relocating to other states or reducing services due to skyrocketing medical liability rates.

Topics Lawsuits California Carriers Fraud Agencies Legislation Workers' Compensation Wildfire Homeowners Oregon Professional Liability