By virtue of the COVID-19 outbreak and resulting stay-at-home orders in effect throughout California, a substantial number of businesses have closed (at least temporarily) and the roads are virtually free of traffic.
Consequently, premiums paid for certain business-facing policies as well as private passenger automobile insurance may not reflect the present-day risk of loss associated with operating a company or driving a car. In fact, diminished payroll and receipts due to closure orders have, according to some, dramatically reduced the risk of liability loss for businesses, and reduced driving has resulted in fewer accidents, injuries, and fatalities on public highways and roads.
The good news for certain businesses and consumers is that this reality will likely result in some money going back into their pockets, in the form of insurance premium credits, rebates, rate reductions, and the like.
Indeed, California Insurance Commissioner Ricardo Lara has ordered insurance companies to return premiums to businesses and consumers in an effort to provide financial relief during the coronavirus crisis. In this alert, Michelman & Robinson answers the questions you may have about Commissioner Lara’s directive.
Q. What exactly does the order issued by Commissioner Lara cover?
A. Commissioner Lara’s mandate applies to insurance premiums paid for the months of March and April, and likely through May, assuming stay-at-home restrictions continue through that month. In terms of the types of policies subject to the order, they include:
- Workers’ compensation
- Commercial multi-peril
- Commercial liability
- Medical malpractice
- Commercial automobile
- Private passenger automobile
- Any other insurance line where the risk of loss has fallen substantially as a result of the COVID-19 pandemic
Q. What are insurance companies being ordered to do by the California Department of Insurance?
A. Insurers are being told to provide a premium credit, reduction, return of premium, or other appropriate premium adjustment as soon as possible, and no later than August 2020. This relief is in addition to that already requested by Commissioner Lara—for instance, a 60-day grace period for policyholders to pay their premiums so that policies are not cancelled for nonpayment of premium in the midst of the disruption caused by the pandemic.
Of note, several auto insurance companies have already announced voluntary premium refunds to drivers. By way of his order, Commissioner Lara looks to bring all other carriers into the fold, adds commercial lines to the mix, and sees to it that insurers comply with California’s consumer protection laws so that refunds are not discriminatory or inadequate.
Q. Do carriers need to obtain any approvals from the CDI to facilitate premium refunds?
A. No, CDI approval is not required, so long as insurance companies follow the methods outlined in Commissioner Lara’s bulletin to calculate the relief to be provided, including using an average percentage based on estimated change in risk or exposure.
Q. Beyond providing premium relief is there anything else carriers are being told to do in relation to Commissioner Lara’s order?
A. Yes, within 60 days, insurers are to report back to the CDI all premium refunds they have issued or expect to issue.
Q. How should insurance companies respond to the commissioner’s directive and, most importantly, is it legal?
A. As stated above, some insurers have already indicated they will be refunding automobile premiums to their auto insurers. Others are considering the approach contained in Commissioner Lara’s bulletin and undertaking some internal evaluation and data crunching to determine the financial impact of his order. And then there is another group of carriers, especially smaller ones, hit hard by the coronavirus outbreak and unsure if they can afford to refund any premiums at this time.
Those in the latter category—as well as some insurers in the position to abide by the CDI directive, but concerned about the precedent of such an action—are asking the following question: what is the commissioner’s authority to demand this uniform action? The answer involves a look into the California Insurance Code, which requires carriers to file rates for approval before implementing them. Toward that end, insurers cannot charge rates that are “excessive, inadequate, or unfairly discriminatory.” More chilling from an insurance company’s perspective is language in the statute saying, “No rate shall be approved or remain in effect . . .” which is excessive.
The CDI has relied on this “remain in effect” language to periodically review individual insurer’s quarterly and annual statements, and have thereafter notified those whose rates they believe are excessive to make adjustments in their rate filings. It seems that Commissioner Lara is attempting to do that very same thing now, but on a grand scale.
However, there is no specific authority in the California Insurance Code upon which he can rely to demand that carriers make uniform reductions to premium rates in the wake of the COVID-19 disaster. For this reason, any insurer that questions or otherwise hopes to contest the commissioner’s action would have (at the very least) a right to a hearing. At the same time, insurance companies could argue that the COVID-19-related premium relief has been improperly imposed by way of Commissioner Lara’s bulletin, and that such a uniform action requires him to promulgate a regulation in accordance with the California Government Code.
Bottom line: for insurers uneasy about the insurance premium credits, rebates, and rate reductions commanded by way of Commissioner Lara’s order, there is room for challenge.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.