Proposed Regulations list 20 standards to determine if insurer is operating in hazardous financial conditions

by Hinshaw & Culbertson LLP
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On June 21, 2013, the California Department of Insurance (“CDI”) submitted its Proposed Action and Notice of Public Hearing to adopt regulations listing conditions that the Commissioner may consider in determining whether an insurer is operating in a hazardous condition. If a hazardous condition is found, the Proposed Regulations permit the Commissioner to issue an Order requiring that the insurer take specific steps to correct, eliminate, or remedy the condition.

The Proposed Regulations list 20 conditions which the Commissioner may consider in making a determination whether an insurer is operating in a hazardous condition. Most are directly related to adverse findings relating to the insurer’s financial condition discovered upon review of the insurer’s filed financial statements and holding company filings. However, one of the conditions the Commissioner may consider is “adverse findings reported in market conduct exam reports.” This would include both rating and claims examinations. This suggests that the CDI is attempting to bring market conduct examinations within the framework of “hazardous financial condition.”

The Proposed Regulations permit the Commissioner to issue an Order following his determination that the continued operations may be hazardous based on any part or all of the 20 conditions. The most controversial aspect of the Proposed Regulations permits the Commissioner to order the insured to comply with any of the corrective measures in the Proposed Regulations. The corrective measures include, among others, increasing capital and surplus, suspending dividends, documenting adequacy of premium rates, and adopting and utilizing governance practices acceptable to the Commissioner. 

One of the corrective actions is the ability of the Commissioner to “increase the insurer’s liability to an amount equal to any contingent liability if there is a substantial risk that the insurer will be called upon to meet the obligation undertaken within the next 12 month-period.” 

There is no administrative hearing process to resolve disputes involving the Commissioner’s corrective action Orders. Rather, once the Order is issued, the insurer has the opportunity to be heard by requesting a meeting with the Commissioner. Thereafter, the only redress for the insurer is to seek a judicial challenge. 

Based on the fact that these Proposed Regulations provide increased powers to the Commissioner to order corrective actions based on his finding of hazardous conditions without a hearing, we believe that their legal authority will be closely scrutinized. Among the concerns we highlight the inconsistency with accounting rules and express statutory provisions which establish and limit the Commissioner’s authority.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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