| The California Court of Appeal for the Second Appellate District held that an attorney-in fact for subscribers of reciprocal insurance exchanges may be sued by the subscribers to recover alleged excessive fees collected by the attorney-in-fact in breach of their a fiduciary duty owed to the subscribers, as the attorney-in-fact is an entity separate and distinct from the exchanges. In so holding, the Court held that neither Insurance Code section 1860.1 nor the holding in Walker v. Allstate Indemnity Co. (2000) 77 Cal.App.4th 750, preclude the claim.
A reciprocal insurance exchange (also called an interinsurance exchange) “‘is an unincorporated business organization of a special character in which the participants, called subscribers ... are both insurers and insured; for their mutual protection, they exchange insurance contracts through the medium of an attorney-in-fact.’ ” (Cal. Ins. Code §§ 1300, 1301, 1305.) The interinsurance exchange is managed by the attorney-in-fact, which may be a corporation, and which is appointed by the subscribers through powers-of-attorney. For its services, the attorney-in-fact typically receives a percentage of the premiums the subscribers pay to the interinsurance exchange
In November 1988, California voters approved an initiative that was designated Proposition 103. Among other things, Proposition 103 enacted a statutory scheme governing the rate approval process for insurers, which provides for hearings before an administrative law judge in certain circumstances and allows for consumer participation. The key provision is found in subdivision (a) of Insurance Code section 1861.05. That provision states that rates cannot be approved or remain in effect if they are “excessive, inadequate, unfairly discriminatory or otherwise in violation of” chapter 9 of division 1, part 2 of the Insurance Code, governing rates and rating organizations (hereafter “Chapter 9”). Under the “prior approval” system now in operation, the insurer is free to choose any rate that is neither “excessive” nor “inadequate” and submit an application for approval. Based upon the information provided by the insurer, the Insurance Commissioner determines the maximum and minimum permitted earned premium, and must approve the rate if it falls between them.
Even though Proposition 103 repealed several sections of Chapter 9 that were inconsistent with the new statutory scheme, it left intact a provision of the former law-Insurance Code section 1860.1. Section 1860.1 provides: “No act done, action taken or agreement made pursuant to the authority conferred by this chapter shall constitute a violation of or grounds for prosecution or civil proceedings under any other law of this State heretofore or hereafter enacted which does not specifically refer to insurance.” This statute was enacted as part of the McBride-Grunsky Insurance Regulatory Act of 1947, to exempt insurers from federal regulatory legislation, including antitrust laws, and to authorize cooperation between insurers in rate making and other related matters.
Plaintiff Benjamin Fogel (“Fogel”) held automobile, homeowners and umbrella insurance policies issued through Farmers Insurance Exchange, Fire Insurance Exchange, and Truck Insurance Exchange (collectively the “Exchanges”). The Exchanges are reciprocal insurance exchanges. In August 2003, Fogel, on behalf of all policyholders of the Exchanges, filed a class action lawsuit against Farmers Group, Inc. (“FGI”) and the attorneys-in-fact for the Exchanges. Fogel’s first amended complaint alleged that although the attorneys-in-fact had a form subscription agreement containing a power of attorney, they did not actually require policyholders to sign the agreement. The amended complaint also alleged that the attorneys-in-fact had earned excessive attorney-in-fact fees (“AIF Fees”). The amended complaint asserted two causes of action on behalf of all policyholders in the Exchanges. First, it alleged that each of the attorneys-in-fact breached its fiduciary duty owed to the policyholders by collecting excessive AIF Fees. Second, it alleged that the attorneys-in-fact's practices of collecting AIF Fees without a signed power of attorney and collecting excessive fees were unlawful and/or unfair within the meaning of Business and Professions Code section 17200 et seq.
The trial court granted defendants' motion for summary judgment, holding that the lawsuit was precluded under Walker v. Allstate Indemnity Co. (2000) 77 Cal.App.4th 750 (“Walker”). In Walker, plaintiffs filed a lawsuit against more than 70 insurers and the Insurance Commissioner, “seeking damages or disgorgement of allegedly excessive premiums that the insurers [had been] authorized to collect.” Plaintiffs alleged the Commissioner failed to make the generic determinations and adopt the factors needed to apply the ratemaking formulas to determine whether rates were within the range allowed by section 1861.05. The Walker Court held that section 1860.1 barred plaintiffs' claims, stating: “If section 1860.1 has any meaning whatsoever ..., the section must bar claims based upon an insurer's charging a rate that has been approved by the commissioner.” Thus, the court concluded that plaintiffs' civil action challenging the approved rates was barred by section 1860.1. In addition, the trial court held that Fogel had authorized the defendants to collect the AIF Fees because the subscription agreements were incorporated into Fogel’s policies and Fogel waived or was estopped from complaining he did not authorize the collection of the AIF Fees.
On appeal, the Court held that Walker did not directly address the issues at bar. Moreover, the Court held that Fogel's claims did not come within the plain language of section 1860.1. Fogel alleged that defendants breached their fiduciary duty as attorneys-in-fact and committed unfair business practices by collecting excessive AIF Fees and/or collecting AIF Fees without a signed subscription agreement. Section 1860.1 states that only those civil proceedings based upon an “act done, action taken or agreement made pursuant to the authority conferred by [Chapter 9]” are precluded. Thus, Fogel's claims would be precluded only if defendants' collection of AIF Fees is an act done or action taken under the authority conferred by Chapter 9. However, while an insurer’s rates are examined by Chapter 9, nothing in that Chapter regulates an attorney-in-fact’s expected profit or rate of return. Thus, section 1860.1 did not preclude Fogel’s claim.
In addition, defendants argued that Fogel’s lawsuit was barred by the federal filed rate doctrine. The filed rate doctrine derives from the tariff-filing requirements of the Federal Communications Act of 1934. Under this doctrine, once a carrier’s tariff is approved by the FCC it is considered to be the law and no action may be brought against the carrier which would invalidate the tariff. Defendants argued that California’s “prior approval” system was analogous to the federal filed rate doctrine and any actions seeking to invalidate premiums and/or AIF Fees should be barred. The Court disagreed, holding that federal filed rate doctrine was inapplicable because under the federal system the carrier must charge the tariff and cannot offer rebates to its customer. In contrast, under California law, insurers are allowed to rebate excess premiums to the customer.
Fogel also argued that: (1) a subscription agreement was not incorporated by reference into his policies; and (2) waiver and estoppel did not apply. The Court of Appeal reviewed the language of his policies and held that although the policies state that the attorney-in-fact was authorized to execute the policies it did not specifically refer to the subscription agreement. Therefore, the subscription agreement was not incorporated by reference into the policies. The Court of Appeal also stated that waiver and estoppel may apply. However, those doctrines would only require Fogel to pay the reasonable value of the services provided by the attorney-in-fact. Since Fogel was seeking to recover excessive AIF Fees these doctrines would not apply.
Finally, Fogel filed his own motion for summary adjudication with the trial court seeking an order that the exhaustion of administrative remedies rule did not bar his claim. The trial court did not address this issue, having granted summary judgment to the defendants. On appeal, Fogel asked the Court of Appeal to rule that the trial court should have granted his motion for summary adjudication on this issue. The Court of Appeal agreed. The Court of Appeal again noted that the collection of AIF Fees was not regulated by Chapter 9. Therefore, Fogel was not required to submit to an administrative proceeding under Chapter 9. Thus, the Court of Appeal reversed the trial court’s grant of summary judgment and remanded the case to the trial court with an order to grant Fogel’s motion to summarily adjudicate the issue of exhaustion of administrative remedies.
This opinion is not final. It may be depublished, modified on rehearing, or review could be granted. This events would render this decision unavailable for use as legal authority.
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