CREDIT INSURANCE GENERAL AGENTS ASSOCIATION OF CALIFORNIA INC v. PAYNE (1975)

In a complaint for declaratory relief and injunction an association of general agents selling credit life and disability insurance in California seeks a declaration by the courts that Ruling 186 of the Insurance Commissioner, insofar as it promulgates rules and regulations limiting the rates of compensation for general agents in the sale of credit life and disability insurance, is invalid and void and seeks to enjoin its enforcement.¹

Following filing of an answer by the Commissioner both parties moved for summary judgment. The motion of the general agents was granted and that of the Commissioner was denied. Judgment was entered declaring that the Commissioner ‘does not have statutory authority to regulate the amount of commissions to be paid to plaintiff and its members in the sale of credit life and credit disability insurance’ and restraining and enjoining the Commissioner from regulating the amount of commissions ‘as provided in Regulation 2248.–14 of Title 10 of the California Administrative Code.’

The Commissioner appeals succinctly stating the issue on appeal to be ‘whether the Insurance Commissioner of the State of California had the power under the Insurance Code to adopt Regulation 2248.14 limiting the maximum amount (percentage) of commissions paid to agents in the sale of credit life and credit disability insurance.’ We would further refine the issue to the Commissioner's power to regulate the commissions paid to general agents.²

Brief History of the Attempted Regulation

In sections 779.1–779.26 of the Insurance Code³ the Legislature, recognizing a need to regulate credit life and disability insurance, established a comprehensive statutory scheme for the protection of the public welfare in this respect. Among other things all policies of insurance and schedules of premium rates must be filed with the insurance commissioner (§ 779.8) who is given the power to disapprove any such whose benefits are not reasonably related to the premium charged or which are inequitable or contrary to regulations promulgated by the commissioner (§§ 779.9 and 779.21).

Recognizing the existence of serious problems and abuses in the field of mass marketed credit insurance arising primarily because the debtor who is covered by this insurance composes part of a captive market and the transaction involves an element of reverse competition, the Commissioner promulgated voluminous regulations on the subject including regulation 2248.14. The problems and abuses referred to are explained in the preamble to this document as follows:

‘(a) Credit insurance provides important stability in financing the flow of goods and services; protecting the interests of lenders and sellers by assuring payment of outstanding debts, and avoiding hardship to debtors and their families in the event of death or disability of the debtor prior to termination of the debt.

‘(b) In the marketing of credit insurance there have been occasions where the inferior bargaining position of the debtor creates a ‘captive market’ which, in the absence of appropriate regulation, places the creditor in a position to dictate the choice of coverages, the premium rate, the insurer and agent, with undesirable consequences, such as: excessive coverages both as to amounts and duration; excessive charges to debtors; failure to inform debtors of their insurance coverage; and failure to provide debtors the protection purchased by the debtor.

‘(c) In the absence of appropriate regulations, premium rates and compensation for credit insurance tend to be set at levels determined by the rate of return desired by the creditor in the form of dividends, or experience-rating refunds, or in the form of commissions either to the creditor as a licensed insurance agent or to agents or brokers controlled or owned by the creditor instead of on the basis of reasonable cost for the protection provided to the consumer, the debtor. This results in ‘reverse competition’ which, unless properly regulated by adequate and meaningful regulation of the premium rates charged to the debtor and the amount of compensation received by the creditor, agents and brokers results in inequitable insurance premium charges to debtors which are unreasonably high and not reasonable in relation to the premium charged for the insurance benefits received by debtors, and constitute provisions which are unjust, inequitable and unfair.'

Since it is conceded that regulation 2248.14 does in effect permit regulation by the Commissioner of the amount of commission that can be paid to general agents, we must determine the scope of the statutory power conferred upon the Commissioner by the Legislature in enacting article 5.9, division 1, part 2, of the Insurance Code.

Discussion

The Commissioner argues that a liberal construction of the broad legislative authorization contained in sections 779.1 and 779.21⁴ permitting him to adopt such reasonable rules and regulations as may be necessary to regulate credit life and disability insurance compels the conclusion that the placing of maximum percentage limits on general agent commissions is both necessary and reasonable to carry out the provisions of the statute. It is also argued that section 779.9⁵ contains a second and more specific statutory authorization to regulate such compensation. We do not agree.

It appears clear that the statutory authorization permits the Commissioner, among other things, to regulate the nature and extent of the coverage to be afforded the debtor as reflected by the terms and conditions of the policy as well as the dollar amount of premium to be charged him for that coverage. The statute then authorizes the promulgation of all rules and regulations reasonably necessary to the securing of adequate coverage at an appropriate charge. While the Commissioner concluded in promulgating regulation 2248.14 that ‘there is adequate evidence to show that merely establishing by regulation the basic maximum rates which may be charged to the debtor without regulatory control of the compensation does not constitute adequate and meaningful regulation of credit insurance transactions when the debtor is charged the premium for the insurance coverage, unless the Commissioner also establishes a regulatory mechanism to control excessive commissions and other forms of excessive compensation in the manner established in the attached proposed regulations' the evidence relied upon for that conclusion is not before us nor is any satisfactory explanation thereof presented in the briefs on appeal. Since presumably the commission is payable out of the premium thus by the simple process of providing adequate coverage at a reasonable premium the purpose of the statutory scheme is accomplished. We agree with the Commissioner that in order to provide adequate coverage at a reasonable premium ‘something has to give, either the amount of commission that goes to the creditor-agent or the general agent or the amount received by the insurer for expenses and profit, or the amount of payment that goes out in claims to the doctor, or portions of each of such elements.’ However, we do not agree that to protect the debtor it is necessary that the Commissioner regulate in specific detail all of the elements involved in the underwriting and rate-making processes of the insurer. The amount of compensation to be paid for the sale of these policies is a matter of private contract between the general agents and the insurer each being aware of the nature and extent of the coverage to be afforded and the ultimate premium that can be charged under the watchful eye of the Commissioner. It is an element which of necessity must ‘give’ but will do so under pressure from the law of supply and demand as it relates to the underwriting and rate-making processes found in each case and does not require capping by administrative regulation to secure the desired result. By holding that the Commissioner has no power directly to regulate the amount of commissions to be paid general agents, we do not envisage any depreciation in the extent of the statutory authority given him by the Legislature to promote the public welfare by regulating the total cost of creait life and disability insurance to the consumer.

We have examined the cases cited by both parties and find all to be accurate statements of the court's function pertaining to statutory construction but none compelling of a contrary decision herein. Nor do we deem the zeal displayed by the insurance commissioners of the several states, individually or collectively, in seeking legislation or promulgating regulations specifically capping the amount to be paid general agents persuasive of a holding that such action is authorized by statute and actually necessary to accomplish the purpose behind the law. On the contrary, while not compelling of our decision herein, the case of Calhoun Life Insurance Company v. Gambrell, 245 S.E. 406, 140 S.E.2d 774, supports the view taken herein. In holding that the Insurance Commissioner of South Carolina had no statutory authority to regulate the commissions paid on the sale of credit life and health and accident insurance that court said:

‘The order of the circuit judge, while not invalidating the entire regulation, enjoined the appellants from enforcing the regulation insofar as it regulated the commissions to be paid in connection with, and the rates to be charged for, credit life insurance and credit accident and health insurance, on the ground that the appellants had no statutory authority to regulate these matters.

‘Appellants do not contend that there is any statutory authority which expressly authorizes the regulation by the Commission of the matters here in issue, but do contend that such power is conferred ‘by reasonably necessary implication’, by virtue of Code Section 37–56, which authorizes the Commission to make certain rules and regulations, not inconsistent with law, and other statutes which will be discussed.

‘Appellants strongly rely on Code Section 8–774, a portion of the Small Loan Act, which reads as follows:

‘Sec. 8–774. Insurance to be related to risk; authorized agencies and companies.—All insurance sold or provided pursuant to this article shall bear a reasonable and bona fide relation to the existing hazard or risk of loss and shall be written by an agent or agency licensed in this State and by an insurance company authorized to conduct such business in this State. (1956 (49) 2502, 2967; 1957 (5) 339.)’

‘The State Board of Bank Cotrol is primarily charged with the interpretation, administration and enforcement of the Small Loan Act. Assuming, however, without deciding, that the Insurance Commission is charged with the responsibility of enforcing the quoted section, we see no language therein which by necessary implication confers upon the Commission the poser to regulate rates and commissions as contended by appellants. The language of the section makes no reference whatsoever to either premium rates or commissions.

‘Appellants also rely on Code Sections 37–181 et seq., governing the capital, surplus, reserve requirements and other financial matters appertaining to insurance companies, as granting such authority by reasonably necessary implication. It is argues that the payment of exorbitant commissions, allegedly being paid by plaintiffs and other companies, with respect to credit insurance will of necessity make the writing of such insurance unprofitable and as a result adversely affect the financial soundness of any company engaging in such practice. It is, accordingly, contended that the Commission has the power to regulate commissions in order to prevent such a result.

‘We shall not here attempt to refer to and review all of the Code sections relied upon by the appellants. In general, these sections, in addition to providing certain specific financial requirements with respect to all companies, give to the Commission and the Chief Commissioner full power to take appropriate action against any particular company which may be operating in violation of law, or in an unsound financial condition, even to the extent of revoking the license of the same or putting it into receivership. We see nothing in any of the statutes relied upon which by necessary implication confers upon the Commission the power to fix the commission or premium rates with respect to all credit life and credit accident and health insurance written by all companies.’

The rationale expressed therein is persuasive of the result reached herein.

The judgment is affirmed.

FOOTNOTES

1.  Credit life insurance is defined in Insurance Code section 779.2, subdivision (1), as:‘(1) ‘Credit life insurance’ means insurance on the life of a debtor pursuant to or in connection with a specific loan or other credit transaction, exclusive of any such insurance procured at no expense to the debtor. Insurance shall be deemed procured at no expense to the debtor unless the cost of the credit transaction to the debtor varies depending on whether or not the insurance is procured; . . .'Credit disability insurance is defined in subdivision (2) as:‘(2) ‘Credit disability insurance’ means insurance on a debtor to provide indemnity for payments becoming due on a specific loan or other credit transaction while the debtor is disabled as defined in the policy; . . .' Ruling 186, adopted May 9, 1973, effective July 1, 1973, promulgated and adopted regulations 2248.1–2248.25. The regulations are found in chapter 5, subchapter 2, article 6.7, of Title 10, California Administrative Code.

2.  The entire matter has been presented to us in unusually clear, concise and understandable briefs filed on behalf of both parties.

3.  All references by section only are to the Insurance Code except as otherwise noted.

4.  Section 779.1 provides:‘The purpose of this article is to promote the public welfare by regulating credit life insurance and credit disability insurance. Nothing in this article is intended to prohibit or discourage reasonable competition. The provisions of this article shall be liberally construed.’Section 779.21 provides:‘The commissioner may adopt, pursuant to the provisions of Chapter 4.5 (commencing with Section 11371) of Part 1 of Division 3 of Title 2 of the Government Code, such reasonable rules and regulations as may be necessary to carry out the provisions of this article.’

5.  Section 779.9 provides:‘The commissioner shall within 30 days after the filing of any such policies, certificates of insurance, notices of proposed insurance, applications for insurance, endorsements and riders, disapprove any such form if the benefits provided therein are not reasonable in relation to the premium charge, or if it contains provisions which are unjust, unfair, inequitable, misleading, deceptive or encourage misrepresentation of the coverage, or are contrary to any provision of the Insurance Code or of any rule or regulation promulgated thereunder.’

ALLPORT, Associate Justice.

COBEY, Acting P. J., and POTTER, J., concur.