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INSURERS CHALLENGE CALIFORNIA DEPARTMENT OF INSURANCE OVER REGULATION OF
IRAN-RELATED INVESTMENTS

             Michelman & Robinson, LLP has filed a petition with the California Office of Administrative Law (OAL), challenging the attempt by the California Department of Insurance (CDOI) to regulate insurer investments in companies doing business with Iran.  CDOI issued rules on February 10, 2010, restricting insurer investments in companies that CDOI has determined to have undesirable connections with Iran.   M&R filed this petition on behalf of the American Council of Life Insurers, the American Insurance Association, the Association of California Insurance Companies, the Association of California Life and Health Insurance Companies, and the Personal Insurance Federation of California.
 
            The CDOI action on February 10 identified 50 different companies as "doing business with the Iranian oil and natural gas, nuclear, and defense sectors."  It declared that any investments in these companies must be reported by insurers as non-admitted assets on their quarterly and annual statements.  Finally, it asked each insurer licensed in California to establish a moratorium on future investments in the listed companies and it mandated that each insurer file a statement with CDOI stating whether or not it would establish such a moratorium.  The insurance trade associations have been talking to CDOI staff since February to resolve their differences.  Last week these discussions ended and the associations decided to challenge the CDOI effort.  
 
            The petition filed with OAL contends that the CDOI effort imposes illegal underground regulations and asks OAL to issue a determination to this effect.  Under California administrative law an underground regulation is a rule that should have been, but was not, adopted according to formal rulemaking procedures.  California courts have consistently held that an underground regulation is void and unenforceable; Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4th 557, 571 (Cal. 1996).  The California Administrative Procedure Act permits OAL to review alleged underground regulations to determine whether or not they should be subjected to formal rulemaking. 
 
            An OAL determination that the challenged rules are underground regulations would not be directly enforceable against CDOI.  CDOI could ignore it.  A favorable determination by OAL, however, would make it very difficult for the Department to prevail in any enforcement action against an insurer that did not comply with the February 10 mandates.  Also, OAL determinations are given "due consideration" by courts when these issues are litigated.  Perhaps most importantly, the petition itself makes it clear that the CDOI actions in this matter are of very questionable legality.

             A copy of the Petition for Determination may be downloaded from the Michelman & Robinson web site at: http://www.mrllp.com/images/presscoverages/PetitionforDetermination.pdf