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Alert: Court of Appeals Invalidates California Regulation on Homeowner Insurance Replacement Cost Estimates

In 2010, the California Department of Insurance adopted regulations dictating specific procedures that must be employed by all homeowners’ insurance companies when estimating replacement cost. Last week, the California Court of Appeals ruled in ACIC v. Jones that the Department exceeded its legal authority in promulgating these rules, which are found in California Code of Regulations, title 10, section 2695.183 (the “Regulation”). The Department argued that the Regulation was valid under the authority of the Unfair Insurance Practices Act (“UIPA”) (Cal. Ins. Code 790.03 et seq). The Court of Appeals rejected this argument.    

The Regulation established that failure to conform to the prescribed content and format requirements constituted a misleading business practice. The UIPA prohibits insurers from providing misleading information. The Regulation said, in effect, that any estimate other than one prepared as it dictated was “misleading” and therefore illegal. The Court disagreed, holding that the Department could not take a prohibition against providing misleading information and convert it into an affirmative duty to estimate replacement cost only by a single defined method.  

The Court noted that the UIPA contains procedures that the Department can employ to determine whether certain conduct should be declared “unfair and deceptive,” but that the Department did not use these procedures. The Department cannot adopt regulations in order to avoid using these other procedures.The Court said that the Department has only the authority specifically conferred by the Legislature, and the language of the UIPA reveals the Legislature’s clear intent to define unfair or deceptive trade practices specifically, rather than delegate that function to the Department, except through its use of allowed procedures. The Court stated that the Department can use administrative and court processes provided for in section 790.06 or its authority under section 790.05 to bring an enforcement action against a licensee who has given an otherwise incomplete replacement cost estimate, but it cannot adopt regulations creating mandatory procedures based upon the argument that anything else is “misleading.”  

In recent years, the Department of Insurance has often based regulations that impose specific requirements on insurers upon the UIPA, but has frequently lost when its authority was challenged in court. This case is the first time that the Commissioner has appealed a trial court loss on this issue. Therefore, this opinion is the first binding precedent restraining the Commissioner’s use of this regulatory approach in the future.  

The scope of the Department’s regulatory power under the UIPA is also being challenged in two other important cases, one involving PacifiCare and the other involving the Globe Life companies. It is likely that lawyers on both sides of these cases are looking carefully at ACIC v. Jones to determine if it will impact them.  

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.