As passed by the California voters in 2004, Proposition 64 requires a plaintiff bringing a claim under California's Unfair Competition Law ("UCL") (Cal. Bus. & Prof. Code 17200, 17500) to have suffered an "injury in fact" and have "lost money or property" as a result of the unfair/unlawful/fraudulent practice.  In addition, any UCL action brought in a representative capacity must meet California's procedural requirements for a class action.  Proposition 64's new standing and class action requirements were eagerly received by defendants.

In recent years, the California Supreme Court has watered down Proposition 64's standing requirements.  For example, in In re Tobacco II, 46 Cal. 4th 298 (2009), the Court held that only the named plaintiff bringing the UCL claim need show an injury in fact.  In other words, Proposition 64's standing requirement did not apply to absent class members.  In Kwikset Corp. v. Superior Court, 51 Cal. 4th 310 (2011), the Court held that any economic injury, even a trifling one, may be adequate to meet the "lost money or property" requirement of the UCL, which in turn, meets the “injury in fact” requirement.  These two decisions make it much more difficult to dispose of UCL actions at the pleading and class certification stages.
 
At least one California federal court is not persuaded by the state high court's pronouncements. Most recently, on February 3, 2011, in Webb v. Carter's, Inc., ___ F.R.D. __ 2011 WL 343961, 2011 U.S. Dist. LEXIS 12597 (C.D. Cal. 2011), a California federal district court rejected the broadened standing requirement of In re Tobacco II, and denied a motion for class certification because each of the putative class members could not meet the UCL's standing requirements. “Tobacco II does not persuade the Court that a class action can proceed even where class members lack Article III standing.”  

The federal court also took a "no-nonsense" approach in applying the "injury in fact" requirement to the UCL claim.  Plaintiffs' claim of injury rests on their theory that purchasers lost the benefit of their bargain because they parted with money for a defective product.  That argument fails in the present context.  The court noted that the majority of children who wore the allegedly defective garments suffered no adverse effects and that plaintiffs had failed to show that the levels of chemicals in the clothes exceeded standards set by law.
 
It remains to be seen whether the Webb decision will become precedent for UCL standing in California federal courts. 

Marina Karvelas is an insurance litigation and regulatory law partner in Barger & Wolen’s Los Angeles office. She is a frequent contributor to the firm’s Insurance Litigation and Regulatory Law Blog and can be reached at mkarvelas@bargerwolen.com or (213) 614-7345.

The federal Patient Protection and Affordable Care Act (“PPACA”) requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage.  Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase.  The federal act does not define "unreasonable" increase.  However, an interim federal regulation effective January 1, 2011, titled “Health Insurance Issuers Implementing Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act,” 45 C.F.R. §§ 158.101-158.232 attempts to do so.  The interim federal regulation requires health insurers to spend a certain percentage of consumers’ premiums on direct care for patients and efforts to improve health care quality.  For individual and small group market insurers this is 80% of the consumers’ premium and for large group market insurers, it is 85% of the consumers’ premium.  If insurers fail to meet the ratio requirements, beginning in 2012, they will be required to provide a rebate to their customers by August 1 of each year.  The federal rule allows for a State to require a higher medical loss ratio than that required under the interim regulation.  The interim federal regulation (pdf), published December 1, 2010, is subject to a 60 day public comment period.  California and the District of Columbia have each incorporated the federal medical loss ratio in their respective efforts to respond to the PPACA.  New Jersey current law is consistent with the federal medical loss ratio.
 
Effective January 1, 2011, California (SB 1163), requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary.  On February 4, 2011, the California Insurance Commissioner  issued draft guidelines for implementing SB 1163 (“Guidance 1163:2”).  The California draft guidelines expressly incorporate, by reference, the federal medical loss ratio which is the first factor the Department will review to determine if a rate increase is "unreasonable."  Other factors include whether the filed rates result in premium differences between insureds within similar risk categories that either are not permissible under California law or do not reasonably correspond to differences in expected costs, the insurer's rate of return, as well as the insurer’s employee and executive compensation.  (Guidance 1163:2, § A, pp. 1-2.)  An actuary's certification that must accompany the rate filing must include his or her opinion that the proposed premium rates are “actuarially sound in the aggregate,” a complete description of data, assumptions, rating factors and methods with rate calculations for each contract or policy form, a statement of opinion whether the rate increase is reasonable or unreasonable, and if the latter, the justification for the increase, and a description of the testing performed by the actuary.  (Guidance 1163:2, § C, pp. 3-4.)  Notwithstanding these requirements, the California Insurance Commissioner currently does not have the authority to reject health insurance rate increases.  A legislative effort, however, is underway to provide such authority.

On January 20, 2011, the Council of the District of Columbia enacted the "Reasonable Health Insurance Ratemaking and Health Care Reform Act of 2010". (DC ACT 18-710).  The DC Act authorizes the Commissioner of Insurance to approve health care premium rates.  Section 102 sets forth standards in ratemaking and Section 103 incorporates the interim federal regulation and federal medical loss ratio, including a rebate requirement in the event an insurer fails to substantially comply with the medical loss ratio.  If an  insurer fails to comply with the rebate requirements, it "shall constitute an unfair or deceptive act or practices and shall be subject to the penalties in the Insurance Trade and Economic Development Act."   Under Section 106, the Commissioner also has authority to rescind previously approved rates.  Any previously approved but subsequently disapproved rate will be on a prospective basis only from the date of the notice of disapproval.  Not unexpected, the DC Act reflects an aggressive response to the federal mandate.

On January 18, 2011, the New Jersey Office of Administrative Law issued Rule Proposals for Individual Health Coverage (pdf), (43 N.J.R. 143(a)).  New Jersey currently has a detailed regulatory framework for individual health coverage including rate filing requirements, loss ratio and refund reporting requirements.  N.J.S.A. 17B:27A-2 (the "Individual Health Coverage Act").  Certain regulatory provisions of the Individual Health Coverage Act are scheduled to expire on June 5, 2011, including N.J.A.C 11:20-6 governing informational rate filings and 11:20-7 relating to loss ratio and refund reporting requirements.  The Rule Proposals seek readoption of these regulations.  The Rule Proposals contain a specific statement regarding compliance with the federal standards.  "The Federal law includes provisions regarding medical loss ratios in the individual market, including requirements for the payment of rebates to consumers.  It is the Department's current understanding that the calculation of medical loss ratios and payment of rebates in accordance with existing New Jersey law does not prevent the application of the Federal law, and no changes to the current rules at N.J.A.C. 11:20-6 or 7 are being proposed at this time."  (43 N.J.R. 143(a)).  Public comment to the Rule Proposals will be entertained up until March 19, 2011.
 
Marina Karvelas is an insurance litigation and regulatory law partner in Barger & Wolen’s Los Angeles office. She is a frequent contributor to the firm’s Insurance Litigation and Regulatory Law Blog and can be reached at mkarvelas@bargerwolen.com or (213) 614-7345.

California’s Office of Administrative Law recently approved new regulations promulgated by the California Insurance Commissioner for homeowners insurance.  The regulations create new duties, impose additional standards and establish a new "unfair trade practice" violation on insurance companies and insurance producers selling homeowners insurance policies in California.  Months in the making, the new regulations profess to respond to underinsurance problems experienced by California homeowners who in the wake of wildfire disasters throughout the state in the past decade discovered they did not have enough insurance to rebuild their homes.  The new regulations, as well as a newly revised California Residential Property Disclosure Form and California Residential Property Insurance Bill of Rights, mark a key shift in California’s public policy.  The new California homeowner insurance regulations and disclosure requirements take effect on June 27, 2011, and July 1, 2011, respectively.

Under the new regulations, California resident fire and casualty broker-agents and personal lines broker-agents must complete a training course on homeowners’ insurance valuation prior to estimating the replacement value of structures or explaining the various levels of coverage under a homeowners’ insurance policy.  Specifically, insurance producers are expected to “be able to estimate the value of an insured's property by having basic knowledge of its value”; “know the valuation principles and methods”; “know the value of the components of a dwelling to assess its replacement cost or value”; “have the ability to recognize other factors influencing the replacement cost”; and “understand the process used in determining the value of an insured's property”, among others, California Department of Insurance Property & Casualty Broker-Agent and Personal Lines Broker-Agent Homeowners Insurance Valuation Course Curriculum.

In addition, under the new regulations, replacement cost estimates provided to applicants must be documented and the sources or methods used to create the replacement cost estimate identified.  Critically, insurers and producers must ensure that the estimates are complete and based upon the specifically enumerated standards set forth in the regulations.

California’s new regulations cut deeply against California case law as well as homeowner insurance policy provisions that expressly place the duty to insure one’s home to value on the policyholder.  “It is up to the insured to determine whether he or she has sufficient coverage for his or her needs,” Everett v. State Farm Gen. Ins. Co., 162 Cal. App. 4th 649, 660 (2008).  Absent a specific assurance of adequacy, insurers do not have a general duty to investigate and inform the insured of adequacy of coverage, Jones v. Grewe, 189 Cal. App. 3d 950, 954 (1987).  Contrary to California precedence, the new regulations appear to impose a duty on insurers and producers to accurately diagnose their insureds’ needs.   

Insurance industry opponents have also criticized the new standards which lock in an estimating formula that may or may not provide consumers with the better estimates. The Association of California Insurance Companies (“ACIC”) has characterized the government’s mandatory standards as “unwise public policy.”  It “cement[s] into law one formula for presenting replacement cost estimates.  Today the department thinks this is a good idea.  However, if experience shows the formula is not helping consumers, it will take months of rulemaking to change the mandates in [the regulation].  During that process, insurers will be prevented from offering their customers better estimates and improved service.”  Statement of the Association of California Insurance Companies on the October 27, 2010, Amended Text of Proposed Regulations on Homeowners Insurance Estimating Replacement Cost Value (November 12, 2010).

California’s new regulations have numerous ramifications for the sale, underwriting and renewal of homeowners’ insurance policies.  Time will tell whether or not these regulations have helped alleviate underinsurance problems.  No doubt, they will spawn litigation on many fronts.

Marina Karvelas is an insurance litigation and regulatory law partner in Barger & Wolen’s Los Angeles office. She is a frequent contributor to the firm’s Insurance Litigation and Regulatory Law Blog and can be reached at mkarvelas@bargerwolen.com or (213) 614-7345.