The California Appellate Court’s recent ruling in Mercury Casualty Company v. Jones, 214 Cal. Rptr. 3d 313 (Cal. Ct. App. 2017) interpreted sections 2644.10(f) and 2644.27(f)(9) of title 10 of the California Code of Regulations as urged by the California Insurance Commissioner. That decision became final on February 20, 2018 following the United States Supreme Court’s rejection of the insurer’s petition for writ of certiorari. The decision limits insurers’ ability to pass advertising costs on to their policyholders through insurance premiums, and also limits insurers’ ability to increase the maximum permitted earned premium under their rating plans.
The Mercury decision continues to build on California’s consumer protection-focused laws regulating insurance rates. This trend began 30 years ago with the passage of Proposition 103, which instituted a “prior approval” system requiring insurers to obtain the Insurance Commissioner’s prior approval for rates used in most property and casualty lines of insurance (both personal and commercial). This case involved Mercury’s 2009 application to increase rates on its California homeowner’s multi-peril line of insurance. The Commissioner denied Mercury’s requested rate increase, deciding that: (1) under section 2644.10(f), “Mercury’s entire advertising budget must be excluded from the rate application” and (2) Mercury did not qualify for adjustment of maximum permitted earned premium under section 2644.27(f)(9) because “Mercury failed to demonstrate the rate decrease results in deep financial hardship.” Mercury sought a writ of mandate and declaratory relief with the superior court. After the superior court entered judgment affirming the Commissioner’s findings, Mercury appealed to the Court of Appeal.
Section 2644.10(f) disallows “institutional advertising expenses” for the purposes of ratemaking. The Commissioner deemed Mercury’s entire advertising budget an excluded “institutional advertising expense” because the advertising was aimed at promoting the Mercury Insurance Group as a whole rather than the individual insurer whose rates were before the Commissioner for approval. Following this decision, insurers may opt to focus on advertising that is aimed at obtaining business for a specific insurer and provides consumers with information pertinent to the decision whether to buy the insurer’s product, as the Mercury decision leaves intact the ability to account for such advertising costs in rate filings.
California regulations prohibit rates that are above the maximum earned premium (a term that is defined by regulation). Section 2644.27(f)(9) allows for insurers to apply for adjustment of the maximum earned premium, known as a “variance request,” in cases where the maximum would be “confiscatory.” The Court rejected Mercury’s argument that the “confiscatory” standard allows insurers to have the opportunity to earn a “fair return.” Instead, the Court adopted the Commissioner’s higher standard that a rate is not confiscatory unless it results in “deep financial hardship.” Under these principles, insurers have a much higher burden when seeking a variance request based on section 2644.27(f)(9).