NATIONAL ASSOCIATION OF INDEPENDENT INSURERS v. State Farm Mutual Automobile Insurance Company, Intervenor, Respondent and Cross-Appellant.

Reset A A Font size: Print

Court of Appeal, Third District, California.

NATIONAL ASSOCIATION OF INDEPENDENT INSURERS, et al., Plaintiffs, Respondents and Cross-Appellants, v. John GARAMENDI, as California Commissioner of Insurance for the State of California, Defendant, Appellant and Cross-Respondent, State Farm Mutual Automobile Insurance Company, Intervenor, Respondent and Cross-Appellant.

No. 3 CIV. C016989.

Decided: July 19, 1995

Law Office of Knapp, Petersen & Clarke, Cynthia A. Trangsrud, Glendale, CA, for Ass'n of Calif. Ins. Law Office of Lord, Bissell & Brook, David F. Hauge, Los Angeles, CA, California Cas. Group, James M. Sevey, San Mateo, CA, for Nat. Ass'n. State Atty. Gen., Robert D. Milam, Deputy, Sacramento, CA, for John Garamendi. Law Office of Heller, Ehrman, White & McAuliffe, Paul Alexander, Palo Alto, CA, for State Farm Mut. Auto. Ins. Agency. Law Office of Leboeuf, Lamb, Greene & Macrae, Sanford Kingsley, San Francisco, CA, Law Office of Leboeuf, Lamb, Greene & Macrae, Rita M. Theisen, Washington, DC, amicus curiae for Health Ins. Ass'n.

In this appeal we must determine whether the Insurance Commissioner has statutory authority to charge insurers for the cost of investigating individual consumer complaints.   While the broad language of Insurance Code sections 730 and 736 1 authorizing the commissioner to conduct “examinations” and charge therefor suggests a statutory basis for the charges, we will conclude the term “examination” as used throughout the Insurance Code, encompasses a comprehensive review of an insurer's business or conduct and not the narrow investigation of a single consumer complaint.   Finding no other statutory basis for the charges we will reverse the judgment insofar as it declares the commissioner has authority to charge insurers for the cost of investigating individual consumer complaints.

PROCEDURAL BACKGROUND

Prior to 1991 the commissioner investigated consumer complaints but did not charge insurers for the related costs.   In July 1991 insurers were notified they would be charged a flat fee of either $198 or $285 for every complaint lodged and investigated.   The National Association of Independent Insurers (NAII) filed a complaint seeking declaratory relief and petitioned the court for a writ of mandate ordering the commissioner to cease and desist from imposing the charges and to disgorge all the moneys received.   The complaint set forth three causes of action for declaratory relief, seeking judicial declarations that 1) the Commissioner lacked authority to impose the assessment;  2) the assessment constitutes a regulation subject to the Administrative Procedures Act, and 3) the assessment violated the insurers' due process rights.   State Farm Insurance Company intervened, filing a complaint substantially identical to NAII's complaint.

The parties filed cross motions for summary judgment or summary adjudication of the issues.   In ruling on these motions in June 1993, the trial court disposed of two of the three causes of action for declaratory relief.   The court found “authority for conducting investigation of consumer complaints exists in § 730 and therefore the commissioner may charge a fee for conducting such examinations under § 736.”   The court also ruled that the imposition and calculation of the fees constituted a regulation under the Administrative Procedures Act.  (APA § 11340, et seq.)   At this point, the court did not rule on the third cause of action alleging a deprivation of due process.

Following a series of hearings, the procedural nature of which are irrelevant to this appeal, the trial court entered judgment and issued a peremptory writ of mandate.   Based on its finding the commissioner had statutory authority to impose the charges, judgment was entered for the commissioner on the first cause of action.   However, the insurers were held entitled to judgment on the second cause of action because both the calculation and the implementation of the fee are regulations as defined in the APA and the commissioner failed to follow the APA.   As to the third cause of action seeking a judicial declaration that the assessment violates the due process guarantees of the state and federal constitution, the judgment declared the commissioner's failure to comply with the APA constituted a deprivation of due process.   The court held there was insufficient evidence to either grant or deny declaratory relief as to whether the assessment itself deprived the insurers of due process.   The court issued a peremptory writ of mandate ordering the commissioner to cease and desist from imposing the charge on insurers for the investigation of consumer complaints and to disgorge the fees collected.

The court's disposition pleased no one.   The commissioner appeals, challenging the court's ruling the assessment violated the Administrative Procedures Act.   NAII and State Farm appeal the court's determination the Commissioner has authority under sections 730 and 736 to impose the assessment.   The Health Insurance Association and the American Council of Life Insurance have filed briefs in the appeal as amici curiae.

DISCUSSION

Inasmuch as the issues raised in this appeal revolve around the meaning of statutory language, a brief discussion of certain cogent principles of statutory construction is appropriate.   We acknowledge but do not here restate at length well established rules requiring us to ascertain the “intent of the Legislature” and apply the “plain meaning” of language chosen to effectuate legislative intent.2  “As a rule, there can be no intent in a statute not expressed in its words;  the intention of the Legislature must be determined from the language of the statute.”  (Woodland Joint Unified School Dist. v. Commission on Professional Competence (1992) 2 Cal.App.4th 1429, 1451.)   We note that language, however, does not have intrinsic meaning devoid of its context.   Although we must begin with the words to ascertain their apparent meaning, we cannot confine our analysis to words in isolation.   (Housing Authority v. Van de Kamp (1990) 223 Cal.App.3d 109, 114.)   Both context and statutory purpose are essential to interpreting statutory language.  (Natural Resources Defense Council v. Fish and Game Com., supra, 28 Cal.App.4th at p. 1123;  James v. St. Elizabeth Community Hospital, supra, 30 Cal.App.4th at p. 80;  Viking Ins. Co. v. State Farm Mut. Auto. Ins. Co., supra, 17 Cal.App.4th at p. 548;  Squaw Valley Ski Corp. v. Superior Court (1992) 2 Cal.App.4th, 1499, 1511.)

“ ‘The meaning of a statute may not be determined from a single word or sentence;  the words must be construed in context, and provisions relating to the same subject matter must be harmonized to the extent possible.   [Citation.]  Literal construction should not prevail if it is contrary to the legislative intent apparent in the statute.’ ”  (Housing Authority v. Van de Kamp, supra, 223 Cal.App.3d, at p. 114.)

We thus construe the meaning of the statutes from the language used in the context of the Insurance Code.   We resort to such extrinsic aids as committee reports and other indicia of legislative intent only when our review of the apparent meaning of the language of the statute in its broad textual context is inconclusive.   Here we are satisfied the meaning of sections 730 and 736 are ascertainable from the text of the code.   We need not consider the standards and practices within the insurance industry, either now or in the past, or legislative intent as expressed through legislative history and as evidenced by the historical application of the statutes.3

I

Given its pivotal nature, we first consider the issues raised in the insurer's appeal, viz., whether the Commissioner is empowered by statute to impose the charges here at issue.   All parties have correctly discerned that our critical task is one of ascertaining legislative intent as expressed in sections 730 and 736.   No party has suggested the authority to impose the charges can be found elsewhere.   Since “we must assume the Legislature knew what it was saying and meant what it said” (Rideout Hospital Foundation, Inc. v. County of Yuba (1992) 8 Cal.App.4th 214, 221), we begin, as we must, with the language of the two sections of the statute at issue.  (Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist., supra, 8 Cal.App.4th at p. 1562.)   We initially view the words of the statutes in isolation.

Section 730 provides in relevant part:  “(a) The commissioner, whenever he or she deems necessary or whenever he or she is requested by verified petition, signed by 25 persons interested as shareholders, policyholders, or creditors of any admitted insurer showing that the insurer is insolvent under this code, or upon information that any insurer has violated any provision of Article 7 (commencing with Section 800), shall examine the business and affairs of the insurer.   The commissioner shall so examine every domestic insurer before issuing to it a certificate of authority other than a renewal.”

Section 736 states:  “All examinations shall be at the expense of the insurer, organization or person examined, except that special examinations which are in addition to regular examinations may be at the expense of the state in the discretion of the commissioner.   The costs and expenses of all such examinations shall be paid from the support appropriation for the Department of Insurance current at the time of the examination but shall be charged to and collected from the insurer, organization or person examined․”

The Commissioner asserts, and the trial court agreed, the investigation of an individual consumer's complaint constitutes an “examination” within the meaning of section 730.   It follows therefore, the cost of such an examination “shall be at the expense of the insurer, organization or person examined.”   We first examine the conditions imposed on the Commissioner's authority to conduct an examination under section 730.

The text of section 730 describes three events triggering the commissioner's authority to examine the business and affairs of an insurer.   They are:  (1) “whenever he or she deems necessary,” (2) “whenever he or she is requested by verified petition, signed by 25 persons interested as shareholders, policyholders, or creditors of any admitted insurer showing that the insurer is insolvent under this code,” or (3) “upon information that any insurer has violated any provision of Article 7․”

The commissioner argues the statute confers upon him broad discretion to “examine” the “business and affairs of the insurer.”   He points to the unlimited phrase “whenever he or she deems necessary” to support a broad interpretation of the discretionary authority to conduct examinations under section 730(a).   The insurers contend, however, the words “he or she deems necessary” are modified by the words “showing that the insurer is insolvent under this code.”   A prerequisite of insolvency, in other words, substantially limits the discretion of the commissioner to conduct examinations.   We disagree.

The use of the disjunctive leads us to conclude each of the three triggering events are separate and distinct;  an insurer will be examined if the commissioner exercises his or her unqualified discretion or a verified petition is submitted or a violation of Article 7 occurs.   The language “showing that the insurer is insolvent” does not, as the insurers insist, limit the commissioner's discretion.   Rather, it simply limits the scope of the right to petition for an examination of insolvent insurers.   Neither the language nor the grammatical construction of the text of section 730 limits or restricts the broad discretion afforded the commissioner to examine an insurer.

We next address a more fundamental question, viz., what is an examination under section 730?   The trial court concluded the term encompassed the investigation of consumer complaints.  Section 730 itself directs the commissioner to “examine the business and affairs of the insurer.”   Although none of the pertinent terms is defined within the statute, “business and affairs” appears to reference a very comprehensive review.   Section 733 4 outlines the commissioner's powers and duties in making a section 730 examination.   The language is more emphatic than the language used in section 730.   The commissioner must:  have free access to “all ” the books and papers, (§ 733, subd. (a)) thoroughly inspect and examine “all ” its affairs, (§ 733, subd. (b)) and must determine if it has complied with “all ” laws applicable to its insurance transactions.  (§ 733, subd. (d).)  Consequently, although the commissioner has the discretion to determine when an examination should be conducted, he or she is compelled to perform a comprehensive review of all of its affairs and to ascertain, as a part of that review, whether there has been compliance with all applicable laws.

The investigation of an isolated consumer complaint does not necessitate such a thorough review.   Rather, as the commissioner concedes, an average investigation takes less than three hours to complete.   This is hardly enough time to inspect and examine all of the insurer's affairs or to determine whether it has violated any insurance laws.

Section 733 thus confirms that which is suggested in the language of section 730.   An examination of “business and affairs” is a broad, comprehensive review of an insurer's activities.   While a narrow reading of section 730 might allow investigations as within the examination authority of the commissioner, the section, when read in the broader context, suggests otherwise.

Section 736 distinguishes, without defining the difference, between “special examinations” and “regular examinations.”   Regular examinations are charged to the insurers whereas special examinations may be conducted at state expense.   But the application of the word “examination” is ambiguous.   Subdivision (b) of section 730 compels the commissioner to conduct an examination at least once every five years and confers upon the commissioner the authority to determine the nature, scope, and frequency of examinations conducted within the five year framework.   Hence, it appears the commissioner does have the discretion to narrow the nature and scope of an examination to meet a more restrictive purpose.   The issue thus presented is whether a special examination can be as limited in scope and purpose as the investigation of an individual consumer complaint.

Faced with lingering ambiguity of the meaning of examination within section 730, et seq., of the Insurance Code, we must expand our search to other relevant provisions of the Code.  “To this end, every statute should be construed with reference to the whole system of law of which it is a part, so that all may be harmonized and have effect.”  (County of Yolo v. Los Rios Community College Dist. (1992) 5 Cal.App.4th 1242, 1249;  Estate of Newman (1994) 25 Cal.App.4th 472, 484-485;  Romak Iron Works v. Prudential Ins. Co. (1980) 104 Cal.App.3d 767, 776.)   We construe the language in the context of the whole statutory framework so as to discern the policies and purposes of the statute and thereby enable us to read the language to conform to the spirit of the law.  (Viking Ins. Co. v. State Farm Mut. Auto. Ins. Co., supra, 17 Cal.App.4th at p. 546.)

The insurers point to the legislation specifically targeting the investigation of consumer complaints appearing at sections 12921.1, et seq.   Section 12921.1 describes a detailed program whereby the commissioner is directed to institute a mechanism to encourage consumer complaints and a procedure for responding to the consumer with the results of the investigation.   Section 12921.3, enacted many years before section 12921.1, instructs the commissioner to receive and to investigate complaints.   The trial court agreed with the commissioner's argument that in spite of the more specific, but later-enacted legislation, he retained the preexisting and broad authority to investigate consumer complaints under the auspices of the much broader delegation of authority in section 730.   We disagree and find this interpretation at odds with a basic canon of statutory construction that “[a]s a rule, a later, more specific, statute will prevail over an earlier, more general one.”  (Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525, 556;  Schmidt v. Southern Cal. Rapid Transit Dist. (1993) 14 Cal.App.4th 23, 27;  San Francisco Tax Payers Assn. v. Board of Supervisors (1992) 2 Cal.4th 571, 577.)

We agree with insurers that the statutory scheme dealing with consumer complaints precisely covers the type of “investigations” the commissioner has renamed “examinations.”   There is no confusion in the language or purpose of these statutes which are designed to afford consumers administrative recourse for alleged wrongdoing by insurers.   The insurance commissioner not only must receive and evaluate complaints, but must establish and publicize an extensive program accessible to consumers of insurance.   Conspicuously absent from this comprehensive program is any provision authorizing the commissioner to charge insurers.

The commissioner in essence asks us to engraft section 736 charging authority for examinations onto the legislation on consumer investigations.   To accept the commissioner's argument, we would have to ignore the specific consumer legislation of Division 3 and apply the more generic provisions of a Division 1 examination.   We would also have to assume the Legislature, aware of the existing discretionary authority of the commissioner to investigate consumer complaints as examinations (§ 730) and thereafter charge for the service (§ 736), nevertheless enacted an elaborate program dealing exclusively with consumer investigations in an entirely separate division of the code in Division 3 (§ 12921.1, et seq.) but continued to rely on the Division 1 charging authority.   We will not presume the Legislature constructed such a tortuous linguistic route to give the commissioner the authority to charge for investigation of consumer complaints.   Nor can we assume the Legislature created the elaborate consumer investigation procedures as mere surplusage.

Hence, we conclude the meaning of section 730 when viewed in isolation is belied by its contextual meaning.   An examination connotes a much broader review of the “business and affairs” of an insurer than the investigation of a single consumer complaint.   The investigation of consumer complaints is expressly mandated in section 12921.1, et seq., but the authority to charge insurers for the investigation is not.   Consequently, the commissioner does not have the authority to impose a section 736 assessment on insurers because such an investigation is not an examination of an insurer's business and affairs.

Our interpretation is buttressed by the use of the term “examination” in two unrelated chapters of the code.   Chapter 9, governing Rates and Rating, discusses examinations in some detail.   Section 1857.1 gives the commissioner authority to conduct examinations.   It states in relevant part:  “The commissioner shall, at least once every five years, and may as often as may be reasonable and necessary, make or cause to be made an examination of each licensed rating organization, and he may, as often as may be reasonable and necessary, make or cause to be made an examination of any advisory organization or group, association or other organization of insurers which engages in joint underwriting or joint reinsurance․  [¶] In examining any organization, group or association pursuant to this section the commissioner shall ascertain whether such organization, group or association, and, in the case of a rating organization, any rate or rating system made or used by it, complies with the requirements and standards of this chapter applicable to it.”

In a manner parallel to the description of examinations in sections 730, et seq., section 1857.3 describes the persons and things subject to examination.   They are:  “The officers, managers, agents and employees of any such organization, group, association or insurer may be examined at any time under oath and shall exhibit all books, records, accounts, documents or agreements governing its method of operation, together with all data, statistics and information of every kind and character collected or considered by such organization, group, association or insurer in the conduct of the operations to which such examination relates.”   Similar to the provisions of section 733, section 1857.3 refers to all books, records, etc., together with all data, statistics, etc.   Again, the examination connotes a comprehensive review.

Interestingly, the commissioner is subject to examination when acting as a conservator in insolvency proceedings.  (§ 1061) The Department of Finance must examine the commissioner's books and accounts at least every two years.   The language used in section 1061 provides an additional glimpse into the meaning of examination.   If the examination is to be restricted to a financial review, the Legislature has chosen to limit the scope of the review to “books and accounts” rather than the more comprehensive terminology “business and affairs.”   It is not that examination has an intrinsic meaning defining scope;  rather the scope is determined by the language used to describe that which is to be examined.

II

Although we conclude the commissioner lacks authority to charge insurers for the cost of the investigation of individual consumer complaints, he or she is compelled by statute to ascertain patterns of complaints.   Section 12921.4(b) states:  “The commissioner shall ascertain patterns of complaints by insurer, geographic area, insurance line, type of violation, and any other valid basis the commissioner may deem appropriate for further investigation, and periodically evaluate the complaint patterns to determine additional audit, investigative, or enforcement actions which may be taken by the commissioner, and report on all actions taken with respect to those patterns of complaints in his or her annual report to the Governor pursuant to Section 12922, and to the public.   For the purposes of this subdivision, complaints mean those written complaints received by the commissioner under subdivision (a), and written complaints received by the commissioner from any other sources, alleging misconduct or unlawful acts by insurers or production agencies.”

If, following the investigations of individual consumer complaints, the commissioner ascertains a pattern of complaints against an insurer, he or she may then exercise discretion to conduct an examination of the business and affairs of the insurer pursuant to section 730.   A pattern of alleged misconduct or unlawful acts would necessitate the comprehensive review encompassed by a section 730 examination.   An insurer can be charged for the examination necessitated by the pattern uncovered by cumulative investigations of consumer complaints pursuant to section 736.

DISPOSITION

The judgment is reversed insofar as it declares the commissioner has authority pursuant to sections 730 and 736 to charge insurers for the cost of investigating individual consumer complaints.   The judgment issuing a writ of mandate compelling the commissioner to cease and desist from imposing the charge on insurers for the investigation of individual consumer complaints and to disgorge the fees collected is affirmed, not because the imposition of the fees constitute a regulation pursuant to the APA, but because the commissioner lacked statutory authority as explained above.   The commissioner's cross-appeal contesting the trial court's determination he had violated the APA and violated insurers' rights to due process is dismissed as moot.   Cross-appellants shall each recover costs on appeal.

FOOTNOTES

1.   Further statutory references are to the Insurance Code unless noted otherwise.

2.   For a reiteration of common litanies on statutory construction, see James v. St. Elizabeth Community Hospital (1994) 30 Cal.App.4th 73, 77-78;  Natural Resources Defense Council v. Fish & Game Com. (1994) 28 Cal.App.4th 1104, 1123-1124;  Viking Ins. Co. v. State Farm Mut. Auto Ins. Co. (1993) 17 Cal.App.4th 540, 546;  State Bd. of Education v. Honig (1993) 13 Cal.App.4th 720, 752-753;  Department of Fish & Game v. Anderson-Cottonwood Irrigation Dist. (1992) 8 Cal.App.4th 1554, 1562-1563;  County of Yolo v. Los Rios Community College Dist. (1992) 5 Cal.App.4th 1242, 1248-1249.

3.   Accordingly, all requests for judicial notice are denied.

4.   Section 733 states:“In making such examination the commissioner:“(a) Shall have free access to all the books and papers of the company.“(b) Shall thoroughly inspect and examine all its affairs.“(c) Shall ascertain its condition and ability to fulfill its obligations.“(d) Shall ascertain if it has complied with all laws applicable to its insurance transactions.“(e) May appraise or cause to be appraised by competent appraisers appointed by him or her all property in which the insurer has or claims an interest, or which is security, in any form, for the payment of any debt or obligation to the insurer.   All such appraisals of real property shall be in writing.“(f) Shall, in conducting the examination, observe those guidelines and procedures set forth in the Examiner's Handbook adopted by the National Association of Insurance Commissioners.   The commissioner may also employ other guidelines or procedures which the commissioner may deem appropriate.“(g) May retain attorneys, appraisers, independent actuaries, independent certified public accountants, or other professionals and specialists as examiners, or any of the employees of the department assigned by the commissioner to carry out the purposes of this article, the cost of which shall be borne by the company subject to examination.”

RAYE, Associate Justice.

SIMS, Acting P.J., and DAVIS, J., concur.