Articles Posted in Insurance Law

Mercury Casualty Co., based in Los Angeles, is in trouble with California insurance regulators. Our San Francisco insurance lawyers noticed a news story earlier this month regarding Mercury’s proposed rate hikes on their homeowner’s insurance policies.

Mercury had asked to raise rates on these policies by 7.3 percent. A California administrative judge rejected that proposed increase. Then, after a public hearing on the issue, California Insurance Commissioner, Dave Jones, used his powers to determine that the proposed rate hike was excessive. The Commissioner has these powers due to a 1988 law requiring the Commissioner’s approval for property and casualty insurance rates, or allows for his rejection, as happened this month. Mercury complained in their legal filings that their homeowner’s insurance has the lowest rates in the state, but Commissioner Jones argues that Mercury based those statistics on old data and incorrect legal and factual conclusions. Consumer Watchdog, an insurance consumer advocacy organization, told reporters that Mercury had “ample opportunity to justify its requested rate hike”, both this one and the previous request for an 8.8 percent increase, and they have failed to convince anybody, including the Commissioner and the judge.

In fact, Commissioner Jones is ordering Mercury to implement a rate decrease of 8.2 percent, so even more than they were proposing to increase rates by. Due to this ruling, now Mercury is suing to stop the Commissioner from forcing these rate reductions for 270,000 policyholders in California. The case is in Sacramento County Superior Court and Mercury claims these reductions would total $16.5 million if allowed to go through. Commissioner Jones responded to this case by saying, “I have directed the Department of Insurance to vigorously defend against Mercury’s effort to deprive homeowners of this rate decrease.” He also asserted, “The rate reduction provided for in this decision would offer much-needed financial relief for homeowners and would no doubt help consumers keep more of their hard-earned dollars in today’s tight economy.”

In a previous post, this blog explained what “force-placed” insurance is and how insurance companies and banks use it to charge consumers high rates, usually for a car or a home. These imposed insurance policies are intended to protect the money-lender but often come with exorbitant rates much higher than standard insurance rates for the same car or property. California insurance officials are, according to a recent story, continuing to pursue reform of the force-placed system and trying to obtain more reasonable rates for customers assigned this insurance.

Officials managed to pressure QBE Insurance into cutting force-placed insurance rates by 35 percent. And Great American Assurance Company reduced force-placed rates by 28 percent as part of its mortgage protection program. California Insurance Commissioner, Dave Jones, noted that the former will save $19.4 million annually for policyholders and the latter will save $1.26 million annually. The average consumer savings under QBE’s reduction will be $626 and $505 annually for Great American Assurance customers. This is after the October success of convincing Assurant to drop rates by 30.5 percent. Some analysts, such as John Nadel at Stern Agee and Leach in New York, think that California may now push Assurant to lower their rates even further after the recent news about other insurance companies.

About the most recent rate reductions, Commissioner Jones said, “This is another victory and significant rate reduction for many California homeowners who have been subjected to these types of policies.” The new QBE rates will go into effect on March 15 and currently affect 30,940 properties in the state of California. The Great American Assurance Company rates start on March 1 and affect 2,512 California policies.

Our San Francisco insurance attorneys noticed a recent bad faith case against an insurance company making headlines in our state. The city of Tulare, California, is potentially on the hook for $1 million for hospital bills accrued by a city employee’s daughter, who suffered from and eventually died of cancer.

The 19-year-old woman received a bone marrow transplant for a form of leukemia at Stanford Hospital in Palo Alto, for which the price tag was $1,041,711.98. The city self-insures employees up to $80,000 and then buys further outside insurance to cover expenses exceeding the initial coverage. The general practice is that the city pays the medical bills upfront, and then files a claim for reimbursement. So the city initially paid the hospital $439,500 before realizing that there was a problem with the outside insurance. The insurance company used by the city, which was supposed to cover the rest of the young woman’s medical bills, refused to pay.

That company, Sun Life Assurance Company of Canada, says that non-covered experimental drugs were used in the procedure. The experimental drugs in question were given to her after her 2010 bone marrow transplant. She agreed to be part of a clinical trial to test two combinations of medications to counter a “graft versus host” disease, when the body rejects the implanted foreign material, which often affects transplant patients. The city countered Sun Life’s claims by stating that the experimental drugs were a tiny part of the procedure to try to save the young woman’s life. The experimental drugs cost $23,000 of the total cost, and city advocates state that it is unusual for an insurance company to refuse to pay outright for everything only because of a small, non-covered part of the treatment. They also noted that the drug components themselves were standard medications- it was only the different combinations that were experimental, making Sun Life’s claims even more unfair.

When insurance companies commit fraud, their customers suffer. Though the customers have done nothing wrong, but they are hurt by the company’s bad acts and often are cheated out of getting the insurance protection and coverage they diligently paid for over the years.

The news was about an insurance company, Hamilton Brewart Insurance Agency, which was part of the Upsala business community for decades. The founder, Hamilton Brewart, donated money to numerous charities and for public service projects at the local fire department. Until recently, it had seemed like a healthy company. In 2009, agents at Hamilton Brewart sold policies worth $90 million, which influenced Insurance Journal’s 2010 ranking of the insurer as the 95th best privately held property and casualty insurance company in the United States.

In a massive reversal of fortune, the company has now been sued by Universal Bank, based in West Covina, accusing the insurance company of asking for at least $6 million in phony loans. Universal Bank alleges that the son of the man who founded Hamilton Brewart, Derek Brewart, confessed to fraud personally during meetings. The founder, the elder Mr. Brewart, died earlier this year, leaving Derek in charge of the company, and his legal team claims the company was already in shambles by the time he inherited it. It seemed that the company had a darker side and there were problems below the surface, regardless.

Things are happening involving insurance regulations nationwide, and our San Francisco insurance attorneys are watching the latest developments. This week the Wall Street Journal reported that California Insurance Commissioner,Dave Jones, has told other state regulators that he will not vote for proposed changes to life insurance regulations. The changes involve the National Association of Insurance Commissioners, which is an organization of state officials that set standards for adoption by the states.

The proposed changes, pushed for by insurance companies, would get rid of the current system, which uses life insurance industry-wide formulas to decide how much money needs to be set aside for the payouts they guarantee to their customers. The insurance companies wish to use their own internal formulas instead of industry standards to decide how much money is needed, using their own particular data on the types of customers and policies they have.

Commissioner Jones points out, in his statement against this proposed change, that there is no identification or quantification of the additional resources state agencies would need, even though the new models are highly complex. He made the valid argument that, “if we should have learned anything from the last financial crisis, trusting a financial industry to monitor itself can only be effective [if] that trust can be verified.”

Our San Francisco insurance attorneys follow all the latest California legal developments in insurance law. Recently we noted that the California Supreme Court granted review in American States Insurance Company v. Ramirez. This case revolves around a “stuffer” put into the envelope with the employer’s insurance policy documents, requesting information about employees driving their own cars for company business. The questions at issue in this upcoming case are, first whether that “stuffer” form which stated that the insured was covered for any vehicle driven was part of the insurance policy, and second, if it was part of the policy, did that “stuffer” form create ambiguity in coverage that should be construed against the insurer?

The background of the case involves an employee, Hector LaBastida, of HLCD, Inc. HLCD took out the insurance policy at issue, which explicitly included insurance for two listed cars. It had a liability limit of $750,000. The insurance company, American States, sent Mr. LaBastida a copy of the policy including the “stuffer” form, which listed him as the only driver. Later, Mr. LaBastida caused a traffic accident in his own car, not one of the cars listed on the policy, but while conducting company business. That accident caused the death of one person and severely injured two others. Mr. LaBastida also had private insurance for his personal car from Wawanesa Insurance Company, with a liability limit of $300,000.

In 2005, the persons injured in the car accident and their families sued HLCD and Mr. LaBastida. In that case, American States denied coverage for the accident because it said Mr. LaBastida’s car was not covered by their policy. Two years later, the injured persons offered to settle within the liability limits, but American States refused again on the grounds the car was not covered by them.

Our San Francisco insurance attorneys noticed yet another recent news story involving a businessman using shady methods to cheat customers in a multi-million dollar insurance fraud scheme. It is sad that there seems to be no end to the various schemes unscrupulous people create to take other people’s money, and the insurance industry certainly has seen its fair share of these schemes recently.

This particular scam was allegedly perpetrated by a 43-year-old former El Dorado businessman named Gregory J. Chmielewski. He was arrested in Arizona on October 24 and arraigned this week in the United States District Court in Sacramento. He is being held without bail, according to the U.S. Attorney’s Office and is charged with both fraud and money laundering.

Mr. Chmielewski’s scam involved setting up a company called Independent Management Resources in Roseville to provide low-cost workers’ compensation insurance to high risk occupations like construction workers. He then partnered with a Native American tribe, the Fort Independence Indian Reservation in Inyo County, to create another company called Independent Staffing Solutions. The tribe owned the company but Mr. Chmielewski essentially controlled the operations. This company also purported to provide insurance at lower rates than traditional insurance companies.

Another case of a shady insurance broker has come to light in California, this time making even bigger news because it affects some well known celebrities. Some of those cheated by this particular broker are Tom Hanks and Andy Summers, the former guitarist of The Police, as well as others.

The Federal Bureau of Investigations (FBI) had been investigating this case, which came to a head this week in southern California. On Wednesday, 59-year-old insurance broker, Jerry B. Goldman, was arrested at his Thousand Oaks, California, home after being indicted by a federal grand jury on October 30 for mail fraud, alleging that he overcharged his clients by $800,000 over the 13 year scheme. The indictment includes 10 counts. Each of those counts carries a maximum penalty of 20 years in federal prison. Goldman pled not guilty when brought before a judge during his arraignment in Los Angeles and was released on $25,000 bail, posted by his wife.

The indictment of Goldman alleges that he overcharged four victims for insurance policies from 1998 until the summer of 2011. Mr. Hanks and Mr. Summers were only referred to in the indictment as “T.H.” and “A.S.”, but the prosecutor’s office confirmed their identities. The other two victims are only referred to as “M.W.H.” and “S.R.”, but it is also speculated that they are known celebrities as well. He provided these four victims with insurance coverage for numerous things, including their cars, property, and art collections, from floods, fires, earthquakes, worker’s compensation, and personal employment liability. The indictment does not break down the specific loss for each of the four victims and so far, none of the affected celebrities have issued any statements about this situation.

Unless you work in insurance law or the insurance field, you may not know what “force-placed” insurance is. Force-placed insurance, sometimes called “lender placed”, is when a lender or creditor takes out insurance on an asset that doesn’t have insurance, and the costs of the insurance are passed on to the customer, hence why it is “forced”. This method is most commonly used on vehicles and houses. So when a person buys a car or a house with a mortgage or a loan, the creditor, usually a bank, requires that the buyer carry insurance on that property. If the buyer doesn’t get his or her own insurance, the creditor obtains insurance to protect their investment.

Now, according to the Insurance Journal, California Insurance Commissioner, Dave Jones, is considering new regulations for these force-placed insurance policies, specifically whether it should be filed as a specialty line or a commodity. Mr. Jones said, “The Department is also contemplating regulations that would require all insurers that write lender placed property insurance to file the rates as a commodity rather than as a specialty line.” Traditional homeowners and automobile insurance already have to be filed as commodities. Filing as a commodity restricts the insurer’s ability to deviate from the standard rate approval process. This past March, the Commissioner contacted the ten largest forced-placed insurance providers in California and asked them to submit new rate filings. Upon closer inspection, the Department found signs of excessive rates charged by some insurers.

Armand Feliciano, vice president of the Association of California Insurance Companies and Property Casualty Insurers Association of America, is wary of the potential new regulations. He also disputes the term “force-placed” insurance. He says insurance is necessary to protect a bank’s assets, and that those concerned with the practice should be looking at banks and not the insurance companies for solutions. “When you say ‘forced,’ did they not sign a contract?” Mr. Feliciano pointed out. “If you’re going to lend someone $500,000, you’re going to want some assurances. Obviously [Commissioner Jones] can’t regulate the banks. But he should talk to the banks. The banks tell us what to cover.”

It seems every week there is a new shady situation being reported on in the California insurance law realm. While not all of these situations directly involve insurance customers, they all involve customers in an indirect manner. When shady occurrences are going on behind the scenes, it affects prices and services and shows the culture of how these insurance companies deal with unsavory situations. All of these issues end up having major impact on average consumers, who often do not know anything about the complicated behind-the-scenes activities working against them.

This week, a former insurance agent filed a class action lawsuit in the Los Angeles Superior Court against the insurance company Automobile Club of Southern California over an illegal commission scheme, according to the Insurance Journal. The commission scheme penalizes agents who sell car insurance policies to people who did not previously have an insurance policy. The lawsuit points out it is currently illegal in California, due to Proposition 103, to discriminate based on previous insurance coverage. Auto Club states that agents at its Costa Mesa call center were awarded points based on the type of customer. The lawsuit claims that this resulted in a system where if an agent sold a policy to a previously uninsured customer they received a $20 commission, while selling to someone with a good driving record and previous insurance was worth a $500 commission.

Specifically, the lawsuit alleges that Auto Club is violating Insurance Code section 1861.02(c), which prohibits insurance companies from discriminating against people who did not previously have insurance. They claim the illegal commission scheme created financial incentives that led to agents hanging up telephone calls from consumers asking for a price quote, or agents lying to certain consumers by quoting an inflated premium. The suit claims unlawful business practices and unfair business practices and seeks declaratory relief. Auto Club strongly maintains that it is, and has been, in compliance with Prop 103.