Court Upholds Insurance Commissioner’s Penalties for Broker’s Fees, Which Constituted Premiums in Excess of Approved Rates

In Mercury Insurance Co. v. Lara (No. G054496, filed 5/7/19), a California appeals court ruled that the California Insurance Commissioner had the authority to impose penalties of $27,593,550 against Mercury Insurance Company for fees charged by brokers issuing its policies, because the brokers were de facto agents of the insurer, and the fees constituted premium in excess of the insurer’s approved rate.

Under insurance regulations, an insurance broker can charge a fee for services, but an agent cannot. (10 Cal. Code Regs., § 2189.3(c).) After Proposition 103 passed in 1988, and following adoption of regulations pursuant to the law, insurers were required to obtain approval of rates, meaning the premium charged. (Ins. Code, §§ 1861.01, et seq.) That was later defined as both direct and indirect costs associated with providing insurance coverage and any profit or additional assessment charged. (Troyk v. Farmers Group, Inc. (2009) 171 Cal.App.4th 1305.)

After Prop. 103, Mercury purported to convert its agents to brokers. However, they continued to provide the same services and coverages. The Insurance Commissioner conducted an examination of Mercury and issued a report stating that Mercury’s brokers were actually de facto agents under Insurance Code section 1621, which defines “agent.” In addition, a consumer filed an unfair competition action against Mercury that ultimately resulted in a published decision also finding that Mercury brokers were de facto agents. (Krumme v. Mercury Ins. Co. (2004) 123 Cal.App.4th 924.)

After Krumme, the Commissioner filed a notice of noncompliance alleging that Mercury charged unapproved rates in the form of broker fees charged by Mercury agents, which should have been disclosed as premium. After prevailing at an administrative hearing, the Commissioner imposed civil penalties against Mercury in the sum of $27,593,550 for almost 184,000 unlawful acts.

Mercury filed a petition for writ of mandate, which the trial court granted, reversing the Commissioner’s decision. The trial court found the “broker fees” were not premium because they were charged for separate services. The court also rejected the Commissioner’s interpretation of the term “premium” under the Insurance Code and regulations. In addition, the court ruled Mercury did not have proper notice it was subject to penalties, in violation of due process, and the action was barred by laches because the Department of Insurance had unduly delayed in bringing the action.

The appeals court reversed. The appeals court faulted the trial court for applying the wrong standard of proof and failing to give appropriate deference to an administrative agency. The court found that Mercury was estopped to deny that its “brokers” were de facto agents by the ruling in Krumme. Further, because the brokers were agents, the fees they charged were necessarily considered premiums, because agents are barred from charging fees under the Insurance Regulations. The appeals court also rejected claims of lack of notice and undue delay on the part of the Commissioner, as well as laches and lack of due process.

Concluding that remand for a further trial would be an “idle act,” the appeals court ordered the trial court to deny the writ and enter judgment for the Commissioner, upholding the imposition of the $27,593,550 in penalties against Mercury.

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May 10, 2019