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August 2010

Schwartz v. Poisner ? Insurance Commissioner Does Not Have A Ministerial Duty To Enforce Rescission Or Insurers' Compliance With Insurance Code Provisions

California Insurance Commissioner Was Not Required To Seek Relief On Behalf Of Policyholders Who Allegedly Suffered Economic Harm As A Result Of Insurers' Improper Claims Handling Practices.

(July, 2010) ___ Cal.App.4th ___; 10 C.D.O.S. 10511

The California Court of Appeal, First Appellate District, affirmed the trial court's dismissal of a petition for a writ of mandate seeking to compel the Insurance Commissioner to pursue additional remedies against insurers.  The Court of Appeal found  the Commissioner lacked a mandatory, ministerial duty to enforce plaintiff's rights under the Insurance Code.  To the extent the Commissioner is vested with authority to enforce these rights, his refusal to do so was a proper exercise of discretion that was neither arbitrary nor capricious.

In October 2005, following an extensive investigation, the California Insurance Commissioner settled with a number of insurers to resolve allegations their claims-handling procedures violated Insurance Code provisions.  The agreement established a claims reassessment process under which previously denied claims for disability income benefits could be resubmitted for re-evaluation.  The agreement also imposed a penalty and required the insurers to change claims-handling procedures and certain provisions of their insurance policies. 

As a result of the reassessment process, approximately $230.2 million in additional benefits will be paid to policyholders who made claims.  The settlement agreement provided no express benefits for policyholders who had not submitted claims, however.

Plaintiff, Rick Schwartz, purports to represent classes of California residents holding disability income policies who, like him, submitted no claims under their policies, and thus, received no express benefits under the Insurance Commissioner's settlement with the insurers.  Schwartz contended the insurers' "systematic scheme to deny and terminate claims ? effectuated a reduction in coverage across the entire policy holder class."  This reduction in coverage functioned as a de facto increase in premiums because while coverage was eliminated, the premiums remained the same.

Schwartz contended the Commissioner's failure to incorporate any relief into the settlement agreement to redress the "substantial premium overcharges" paid by members of his class was "arbitrary, capricious and an abuse of discretion."  Schwartz further contended the Commissioner's failure to revoke, rescind and/or withdraw approval of the subject policies constituted a failure to follow legal mandates under the California Insurance Code and, likewise, was arbitrary, capricious, and an abuse of discretion.
Schwartz, among other things, sought a writ of mandate to compel the Commissioner "to perform the duties imposed upon him by law ? and to reopen the investigation ? or otherwise take appropriate action ? in order to accord relief to plaintiffs and the classes for the economic injury that has gone completely unredressed by the [settlement agreement]."

The Commissioner moved to dismiss the mandamus cause of action against him.  The trial court granted the motion, concluding the Commissioner lacks a mandatory, ministerial duty to afford Schwartz his requested relief.  To the extent the Commissioner is vested with the authority to do what Schwartz demanded, the Commissioner's refusal to do so constituted a proper exercise of his discretion and was neither arbitrary nor capricious.  Schwartz appealed.

The California Court of Appeal affirmed.  The Court noted mandamus actions permit judicial review of ministerial duties and quasi-legislative acts of public agencies. (CCP § 1085.)  Mandamus lies to compel the performance of a clear, present, and ministerial duty where the petitioner has a beneficial right to performance of that duty. 

Here however, the Court held the Commissioner has no ministerial duty to enforce the right of rescission under Insurance Code sections 330, 331, 481.5 or 483.  Nothing in these statutes requires the Commissioner to enforce and obtain a refund of premium or enforce policyholder rights in any particular manner.  Moreover, Insurance Code sections authorizing the Commissioner to enforce insurers' compliance with its provisions (such as sections 12921.1(a), 12921.4(a), and 12926) demonstrate the decision to pursue particular remedies, or any remedy at all, falls within the Commissioner's discretion. 

The trial court applied the appropriate standard in reviewing the Commissioner's discretion.  Namely, the court "does not inquire whether, if it had power to act in the first instance, it would have taken the action taken by the administrative agency."  Rather, the authority of the court is "limited to determining whether the decision of the agency was arbitrary, capricious, entirely lacking in evidentiary support, or unlawfully or procedurally unfair."  Courts exercise such limited review "out of deference to the separation of the powers between the legislature and the judiciary, to the legislative delegation of administrative authority to the agency, and to the presumed expertise of the agency within its scope of authority."

Applying this standard, the Court of Appeal could not say the Commissioner's decision to resolve issues concerning the insurers' claims procedures without obtaining the additional relief Schwartz sought was an abuse of discretion.  Schwartz submitted no facts that suggested the Commissioner's investigation was inadequate.  The settlement provided for a $8 million penalty and additional benefits to policyholders.  The Court of Appeal found it reasonable for the Commissioner to conclude that it was unnecessary to pursue additional relief for policyholders who had not yet submitted claims and whose future claims, if any, would be properly evaluated under corrected procedures adopted as a result of the settlement.

This opinion is not final. Though it has been certified for publication, it may be modified on rehearing, or granted review by the Supreme Court of the State of California. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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