This article is written following two disciplinary cases brought by the California Department of Insurance (“CDI”) in which due process challenges were made by Hinshaw & Culbertson’s Senior Regulatory Counsel Robert Hogeboom against California Insurance Code (“CIC” or “Insurance Code”) Section 1748.5(e)in the first case and CDI Regulation 2183.2(b)(6) in the second case.
Insurers, producers and criminal lawyers representing individuals employed or licensed in the insurance industry need to fully understand these two sections, which give the Commissioner extraordinary powers to i) revoke a license based on a criminal misdemeanor conviction not “denounced” by the Insurance Code; and ii) suspend a person from the business of insurance based on the filing of a felony criminal complaint.
Overview of the Disciplinary Process
The CDI regulates insurers and producers through its licensing authority which authorizes persons to transact insurance in the State of California. Long standing statutory sections set forth the basis under which an insurance producer can be denied a license when applied for or revoked, suspended or restricted after the license has been issued.
The primary disciplinary provision that applies to both applicants seeking an insurance license or those who hold licenses is CIC Section 1668. This section contains seventeen separate acts under which the license applied for can be denied or revoked after a license has been issued. Due process is afforded to applicants and licensees in the form of an administrative hearing conducted before an independent hearing judge from the California Office of Administrative Hearings (“OAH”).
In hearings involving applications for licenses, the burden of proof is on the applicant to show that none of the grounds alleged under CIC Section1668 have been violated. The burden shifts to the CDI on cases in which the CDI seeks to revoke or suspend a license.
The first five of the prohibited acts in CIC Section 1668 are considered “general” as opposed to specific acts. General acts are more difficult to prove by the CDI because they lack specificity, which increases the burden on the CDI. These acts include such terms as: “not properly qualified to perform the duties of licensee”; “against public interest to hold a license”; “does not intend to accurately and in good faith carry on insurance business”; and “lacking integrity”. Historically, these general acts are pled as a consequence of a violation of the specific acts described below.
he remaining twelve acts are “specific acts” which, if one or more are violated, provide the basis for suspension or revocation of the license. Among these acts are public offenses involving a fraudulent act or act of dishonesty in the acceptance, custody, or payment of money or property, and criminal felony and misdemeanor convictions. All felony convictions are a basis for revocation. However, misdemeanor convictions are limited only to those convictions which are “specifically denounced by the insurance code or other laws regulating insurance.”
The ultimate decision on these matters usually involves mitigation and character defenses in which the administrative law judge has much discretion in rendering a proposed decision.
- CIC Section 1748 Issuance of Suspension Orders Prior to Hearing
Understanding CIC Section 1748.5
In order to deal with licensees or other persons in the insurance business who have engaged in misconduct or been issued a criminal complaint, CIC Section 1748.5 was enacted in 1991 authorizing the Insurance Commissioner to suspend subject individuals from the insurance business. The due process hearing procedure in these cases substantially favors the CDI since the statute only requires a finding by the Commissioner that the act or acts complained of in the criminal complaint reflect that the public may be harmed in the future if the subject person is permitted to remain in the insurance business.
CIC Section 1748.5 applies to any person who has participated or may participate in any manner in the business of a production agency or any person licensed as a producer. Hence, this section applies to non-licensees as well as licensees and to insurance producer employees, officers and board members.
The legislative history of CIC Section 1748.5 reflects that the purpose of the statute, as contained in the initial bill “SB 389” in 1991, was to broaden the authority of the Insurance Commissioner to remove persons from the management of insurance companies and production agencies and provide limitations on insurance production agency activity.
Background information regarding the bill reflects that SB 389 was a response to a series of disturbing developments within the insurance industry at the time the bill was promulgated in 1991. The legislative file noted that “the failure of Mission Insurance was brought about by the fraud and gross mismanagement of its officers and directors, who after leaving Mission took their act down the road to start over again with new insurance companies. In a second example, Coastal Insurance Company’s demise, which triggered a hit on the guarantee fund of $80 million, was also caused by numerous acts of fraud, criminality, and gross mismanagement by its officers, directors and employees.”
According to the worksheet of the Assembly Committee on Judiciary, the purpose of the bill was stated as follows: “The Insurance Commissioner has limited authority to suspend or remove officers or employees of insurance companies in production agencies who have committed fraudulent or willful acts of misconduct that threaten the solvency of an insurer.”
The worksheet then poses the question “how does this bill remedy the problem?” It responds as follows: “This bill gives express power to the Insurance Commissioner to suspend or remove subject persons from the industry who have committed specific acts or omissions and prohibits their further employment within insurance industry.” At least one industry association opposed the bill as being overly broad, too restrictive and harsh.
There are three types of situations in which the Commissioner may issue an order removing a person and/or prohibiting a subject person from the business of insurance. These sections are CIC Section 1748.5(b) which permits the Commissioner to issue an Order of Suspension after hearing, CIC Section1748.5(c) which provides the basis to suspend subject persons under CIC Section 1748.5(b) prior to hearing, and CIC Section 1748.5(e) which provides for an Order of Suspension prior to hearing based upon the issuance of a criminal complaint.
- CIC Section 1748.5(b)
This situation involves the removal of a person after notice and a hearing if there is a finding that the person “has engaged in misconduct with respect to the business of insurance that has caused financial or other injury to any person, or . . . engaged in fraud, or willful acts or omissions involving dishonesty that exposed the person to financial or other injury; and [the person’s] conduct or practice demonstrates unfitness to continue [in the insurance business].”
The order of suspension is maintained on the licensee until the Commissioner dismisses the charges in the notice or a judicial court issues a stay of the order. Under this section, the person who receives a suspension order has but ten days to apply to the Superior Court for a stay of the order pending completion of a hearing.
While the Commissioner may suspend the person from the insurance business, the burden is on the Commissioner at the hearing to show each of the following: a) misconduct in the business of insurance that caused financial or other injury to any person or that the person has engaged in willful actions or omissions involving dishonesty that exposed a person to financial or other injury; and b) that the conduct demonstrates unfitness to continue in the business.
- CIC Section 1748.5(c)
This section permits the Commissioner, who has given written notice under CIC Section1748.5(b) immediately prior to the hearing, to order the person from participating in any manner in the business of insurance. The Commissioner must find that the failure to immediately issue the order threatens the financial solvency of an insurer and may reasonably be expected to cause irreparable injury to any person. The Commissioner also must find that all of the necessary factors are present which would permit the Commissioner, after notice and a hearing, to issue an order under subsection (b).
- CIC Section 1748.5(e)
This section permits the Commissioner to immediately suspend a person from the insurance business prior to a hearing if the person has been subject to an indictment by a grand jury or a criminal information involving a crime punishable by a term exceeding one year and involves a fraudulent act or act of dishonesty in the acceptance, custody or payment of money or property and that a failure to immediately issue the order threatens the financial solvency of an insurer or may cause financial or other injury to any person.
Under this section, once a criminal complaint is issued the order is immediate. The rights of the person suspended from the business is limited to a hearing “on the order” after the suspension. Most notable is the fact that the CDI maintains that the hearing does not permit the licensee to present evidence on the facts concerning the criminal complaint or the licensee’s innocence. In other words, according to the CDI’s reading of this statute, a bare accusation incorporating the criminal complaint is sufficient to permit the CDI to suspend a person from the business of insurance.
- Due Process Concerns
The due process implications of CIC Section 1748.5, as applied by the CDI, are very serious. This statute was promulgated based on the unscrupulous acts of a few in 1991. The bill was opposed as being overly broad, too restrictive and harsh. The proponents of the bill including the CDI argued that the due process safeguards, including the right of access to the Superior Court without the necessity of exhausting administrative remedies, was sufficient.
Since its passage in 1991, there have been very few cases brought under CIC Section 1748.5. Most disciplinary cases have been correctly brought as traditional accusations in which a pleading was issued and a hearing afforded the licensee prior to any action on the license. However, a recent case may suggest a change in how the CDI views cases involving allegations of theft of fiduciary funds.
In this case, a consumer complained to the local police that her insurance producer stole $1,500 in premium because he failed to procure her insurance policy and the funds were placed in the producer’s personal account. The producer denied the allegation, alleging that it was not willful but was an administrative error and that the trust account maintained a surplus of funds sufficient to cover the premium.
The case was referred to the CDI. The CDI prepared a lengthy investigation report and submitted it to the district attorney. The district attorney then issued a criminal complaint against the licensee. Following the issuance of the criminal complaint, the CDI issued an order under CIC Section 1748.5(e) immediately suspending the producer from the business of insurance on the basis that the failure to issue the suspension order based on the criminal complaint may cause financial or other injury to any person, i.e. theft due to the allegation in the criminal complaint.
Subsequent to the suspension, a hearing was held on the suspension order. The CDI placed into evidence the criminal complaint and police report, which adopted the CDI investigation report, and rested. The defense was precluded from putting on evidence relevant to the criminal matter. Although the Administrative Hearing Officer ruled against the licensee, the court expressed its view during the hearing that the statute may need to be reviewed on appeal.
We argued that, if the CDI is allowed to rely merely upon a criminal complaint that alleges theft and dishonesty, then where is the due process that the authors of the bill argued were contained in the bill? The operative language of CIC Section 1748.5(e) ̶ which states “that a failure to immediately issue the order may cause financial or other injury to any person” ̶ suggests that any criminal complaint issued would meet this burden on its face as all criminal complaints involve some element of injury to third persons.
This recent position by the CDI places further burden on criminal lawyers who may defend a licensee or any person who may participate in the business of a production agency. Here, any resolution on the criminal matter with a settlement for reduced charges, such as a felony reduced to a misdemeanor, will continue the suspension order.
The only published opinion dealing with the due process concerns of CIC Section 1748.5 is the 2006 case American Liberty Bail Bonds, Inc. v. Garamendi. Several issues were raised in that opinion:
- Whether a “subject person,” to which the section applies, includes both an individual as well as an agency.
- Whether a post-deprivation hearing meets minimum due process requirements;
- Whether the post-deprivation hearing is required when the suspension is based solely on the filing of a criminal complaint.
A summary of the Court of Appeal’s findings are as follows:
- The court held that the language in CIC Section 1748.5(e)(1) means that only a natural person can be suspended from office or employment with a production agency.The agency cannot be suspended.
- Where there has been a legislative finding that the immediate suspension of subject persons who have been charged with certain crimes is necessary to protect the insurance industry’s integrity, due process is not violated as long as a post-deprivation hearing is available.
- Due process requires the opportunity to be heard at a meaningful time and in a meaningful manner. To be meaningful, a hearing need not be a full adversarial one. A hearing that excludes the subject person’s guilt or innocence on an underlying criminal charge comports with due process.
- With respect to the requirement that there must be “substantial assurance” that the deprivation is not baseless, the court found that CIC Section1748.5 did not violate due process because an independentinvestigation found sufficient grounds for the issuance of a criminal complaint:
“Here, the Orange County District Attorney filed an information (criminal complaint) against [the licensee]. That information was filed by a body independent from the Commissioner, and it had to be based on reasonable or probable cause or it was subject to being set aside. (See Pen.Code, § 995.) Therefore,the information, like an indictment, provides ‘adequate assurances’ that the suspension is not unjustified.” Accordingly, the court’s holding that CIC Section 1748.5’s post-deprivation hearing did not violate an individual’s due process rights was directly and entirely founded on the presumption that, when a criminal complaint has been filed, it is the result of an independent determination by the district attorney.
In the recent case with the CDI described above, we found that there were strong indications that it was the CDI’s investigation that caused the district attorney to file the criminal complaint which in turn served as the basis for the suspension order. If so, the CDI was able through its own investigation to trigger its suspension powers under Section 1748.5 by spurring the district attorney to file its criminal complaint against the agent.
This is problematic because as American Liberty Bail Bonds, Inc. v. Garamendi explicitly notes that the district attorney is “a body independent from the Commissioner” that guarantees due process. If, on the other hand, the district attorney is acting at the behest of the CDI, then the agencies can “game” CIC Section 1748.5 to engineer the outcome. This would effectively allow the CDI to seize an agent’s license without a hearing on the merits based on little more than its own investigation.
Such a concern is not academic, and still less is it fanciful. The CDI’s relationship with local district attorneys was discussed in InsuranceNewsNet.com on July 19, 2014. The article noted that CDI has a program which pays county district attorneys to prosecute life insurance and annuity agents. The CDI fund, which is derived by a $1.00 fee on “every insurance policy sold in California”, pays for the district attorney personnel, such as attorneys, investigators and expenses for the prosecutor.
As in the example case above, the CDI is able to issue suspension orders avoiding the cost and time to hold hearings in which the CDI has the burden of proof to revoke the license. The effect is that the CDI is able to seize a license based on events the CDI itself sets in motion, undermining the purported “independence” discussed in American Liberty Bail Bonds.
- Criminal Misdemeanor Convictions not Denounced by the Insurance Code
Regulation CIC § 2183.2(b)(6)
In 2007, the Insurance Commissioner promulgated a controversial regulation which lists a number of crimes or acts which the CDI maintains are “substantially related” to the qualification, functions or duties of an insurance licensee. Unlike the statutory misdemeanor provision, which is limited to specific misdemeanors denounced by the Insurance Code in CIC Section 1668(m), new CDI Regulation 2183.2 lists a number of misdemeanor convictions not denounced by the Insurance Code. But, per the language of the regulation, these misdemeanor convictions “evidence present or potential unfitness to perform the functions authorized by the license in the manner consistent with the public health, safety and welfare.”
Among these misdemeanor convictions is any act in which “the person willfully causes injury to the person or property of another.” Under this regulation, the CDI alleges that its burden is met once it submits into evidence the misdemeanor conviction which incorporates one of the types of crimes listed in the regulation. Since the regulation asserts that the substantial relationship crimes apply for “purposes of denial, suspension, revocation, and/or restriction of a license or license application”, a licensee’s due process right to put on a mitigation or other type of defense is limited.
The effect of this regulation is that a licensee can now be revoked for a misdemeanor conviction not denounced by the Insurance Code under CIC Section 1668(m)(2) for a single isolated misdemeanor incident which may not be connected to the licensee’s insurance business.
In a recent case, the licensee pepper sprayed another man after an altercation in which the “victim” allegedly kicked and damaged the licensee’s car. The licensee pled nolo contendere to a misdemeanor conviction under which he paid a small fine and was placed on two years’ probation. Afterwards, at the administrative hearing which the CDI brought against the licensee’s license, the CDI placed into evidence the criminal misdemeanor conviction and police report and rested its case.
A Motion to Dismiss the Accusation was filed alleging that the regulation was inconsistent with CIC Section 1668(m)(2) as the regulation effectively created a new misdemeanor (not denounced by the Insurance Code) as a basis to revoke a license. Ultimately, the court looked at all of the evidence in the case, not just the conviction, and took into account the severity of the act and the harm inflicted. The court found against the CDI’s request for a revocation and issued a two year restricted license to mirror the licensee’s criminal probation period.
This regulation will likely be tested in the future on the basis that the Commissioner lacks the statutory authority to adopt new misdemeanor acts which enlarge the scope of CIC Section1668(m)(2), i.e. “misdemeanors denounced by the code”. Further, this regulation arguably violates the due process scheme established in CIC Section 1668(a)-(e) which places the discretion as well as the burden on the CDI to prove that a person is not fit to hold an insurance license.
 All references to CIC refer to California Insurance Code.
 In both cases, the court allowed each licensee to remain in the insurance business. An injunction was issued against the CDI in the first case.
 Under CIC Section 1738 suspension or revocation of restricted licenses are based on the criteria enumerated in CIC Section 1668.
 Hearings are governed by the California Administrative Procedure Act under Sections 1500 et seq. of the California Government Code.
 See CIC § 1668(a-e).
 See CIC § 1668 (f-q).
 See CIC § 1668(m)(2).
 CIC Section 1748.5(a)(2) defines a “subject person” as “any person who has participated or may participate in any manner in the business of a production agency, or any person licensed as a producer.”
 Legislative Intent Service: Cal. S.B. 389, Ch. 771, at 3 (1991).
 Id. at 5.
 See CIC § 1748.5(b) (emphasis added).
 See CIC § 1748.5(c).
 See CIC § 1748.5(e).
 The producer had been licensed for 20 years without any prior disciplinary action. He was an independent producer with a family business. The issuance of the suspension order resulted in a substantial loss of his business.
 141 Cal. App. 4th 1044 (2006).
 Id. at 1060 (emphasis added).
 Steven A. Morelli, California Program Pays to Prosecute Life and Annuity Agents, InsuranceNewsNet.com (June 19, 2014), available athttp://insurancenewsnet.com/innarticle/2014/06/19/California-Program-Pays-to-Prosecute-Life-and-Annuity-Agents-a-520109.html.
 See 10 Cal. Code Regs. §§ 2183 -2183.4 (Producer Licensing Background Review Guidelines).
 10 Cal. Code Regs. § 2183.2(b).
 See CIC § 2183.2(b)(6)