The following are the last five cases resolved in October 2002.
These show the case against me, alleging that there was something
illegal or improper done to resolve the Northrigde Earthquake claims.
These claims were beyond the statute of limitations of one year when
I took office, and my attempts to get the Legislature to extend this
time period were not successful through then Chair of the Assembly
Insurance Committee, Jack Scott. The Senate Insurance Committee Chair,
Jackie Speier, "tabled" it until it was politically expedient, after I
had resigned. She staged widely publicized and expensive "hearings"
which resulted in fewer than 200 total "inquiries" from policyholders.
If the Department sued the insurers, years of expensive ligtigation
would follow, adding costs to taxpayers and policyholders. If some
fines resulted (not at all certain), those fines would go to the
"general fund", not the victims. The foundations forced the insurers
to reopen the claims as well as provide additional funds for some who
were underinsured or not insured.
Though I had fined insurance companies $56 million, more than all
previous commissioners combined, this was not the best path to get
restitution for the policyholders in this case.
The Judge decided the allegations against me were utterly groundless.
Comments by the Judge show that the same methods were used, and even
bragged about, by other regulators such as the Attorney General of
California who brought this suit.
The cross complaint filed by the Insurers who were also sued, were
granted, and the agreements developed by the Quackenbush Administration
that forced insurers to reexamine claims, and provided over a hundred
million dollars more to victims, still stand today.
The following chart shows the claims information before the suit:
Supplied by the Personal Insurance Federation of California
Northridge Earthquake Claims Reports as of December 1999
company total claims paid out pending Quake Premium Collected
State Farm 117,000 $3.5 Bil .1 of 1% $1.2Billion
SAFCO 8,293 $265 mil 10 claims $127.5 mil
Farmers 36,700 $2.0 Bil .1 of 1% $500 mil
21st Century 46,400 $1.04 Bil 46 claims $48.7mil
Progressive 75 $75,000 0
TOTALS 208,468 $7.2 Billion $1.8 Bil
BILL LOCKYER
Attorney General
RICHARD M. FRANK, Chief
Assistant Attorney General
JAMES M. CORDI, Supervising
Deputy Attorney General
SONJA K. BERNDT
Deputy Attorney General
State BarNo. 131358
300 South Spring Street, Room 5212
Los Angeles, California 90013
Telephone: (213) 897-2179
Fax: (213) 897-7605
Attorneys for Respondent Harry Low,
Insurance Commissioner
IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
DOROTHY A. MARTINEZ, ET AL.
Plaintiffs,
V.
CHUCK QUACKENBUSH, ET AL.
Defendants,
and
HARRY LOW, INSURANCE COMMISSIONER
Respondent.
Case No. BC272899
[coordinated with BC240146, BC246808, BC246809, BC246810, BC247592, BC272902]
NOTICE OF RULING IN
COORDINATED CASES
Next Status Conference:
Date: November 12, 2002
Time: 1:30p.m.
Courtroom: Department 324
(The Honorable Victoria G. Chaney)
TO ALL PARTIES, TO ALL INTERESTED PERSONS, AND) TO THEIR COUNSEL OF
RECORD:
PLEASE TAKE NOTICE THAT the Court has issued a ruling on the
cross-motions for summary judgment filed in the following cases, which
have been coordinated with this case: 21st Century Ins. Co. v. The
People, et al. (case number BC240 146); The People, et al. v. State
Farm General Ins. Co., et al. (case number BC246808); The People, et
al v. Allstate Insurance Co., et al. (case number BC246809); The
People, et al. v. Farmers Ins, Exchange, et al. (case number BC2468
10); and The People, et al. v. Fireman's Fund Ins. Co., et al.
(case number BC247592).
attached to this notice.
DATED: October 16, 2002
Respectfully submitted,
BILL LOCKYER, Attorney General
of the State of California
RICHARD M. FRANK
Assistant Attorney General
JAMES M. CORDI
Supervising Deputy Attorney General
SONJA K. BERNDT
Deputy Attorney General
By
SONJA K.BERNDT
Deputy Attorney General
Attorney for Respondent
ORIGINAL FILED
SUPERIOR COURT OF CALIFORNIA OCT 1 0 2002
COUNTY OF LOS ANGELES LOS ANGELES SUPERIOR COURT
21st CENTURY INSURANCE COMPANY, Plaintiff,
Vs.
PEOPLE OF THE STATE OF CALIFORNIA ex rel. BILL LOCKYER, ATTORNEY GENERAL,
et al.,
Defendants.
Case No: BC 240146
RULING ON:
(1) DEFENDANTS' MOTlON FOR SUMMARY JUDGMENT OR
ALTERNATIVELY, FOR SUMMARY ADJUDICATION;
(2)21 ST CENTURY'S CROSS-MOTION FOR SUMMARY JUDGMENT
Hearing date: 9/18/02 Ruling date: 10/10/02
After considering the moving, opposing and reply papers and the
arguments of counsel at the hearing, the court now rules as follows:
The State Parties' motions for summary judgment, or in the alternative,
for summary adjudication against State Farm, 21st Century, Allstate,
Fireman's Fund and Farmers are denied. The cross-motions for summary
judgment brought against the State Parties by State Farm, 21st Century,
Allstate, Fireman's Fund and Farmers are granted.
Plaintiffs The People of the State of California ex rel. Bill Lockyer,
Attorney General, California Department of Insurance, and Insurance
Commissioner Harry Low (the State Parties) move the Court for summary
judgment in each of the actions against State Farm General Insurance
Company (State Farm), 21St Century Insurance Company (21st Century),
Allstate Insurance Company (Allstate), Fireman's Fund Insurance Company
(Fireman's Fund) and Farmers Insurance Exchange (Farmers)
with respect to the First Cause of Action for Declaratory Relief; and
alternatively for summary adjudication of the following issues:
Issue No. 1: That the Settlement Agreements, in order to be legally
binding on the State, may not allow the contributions to the nonprofit
organization to be used for non-earthquake insurance-related purposes.
Issue No. 2: The Settlement Agreements are void and unenforceable on
their face because they do not require the payment of funds to a
non-profit organization to support only earthquake insurance-related purposes.
State Farm, 21st Century, Allstate, Fireman's Fund and Farmers each
bring a Cross-Motion for Summary Judgment against the State Parties on
the ground that there is no triable issue of fact and that the insurers
are entitled to summary judgment because the State Parties cannot
establish that the settlement agreements at issue between the
California Department of Insurance (CDOI) and the insurance entities
violated any law or public policy, and that as a result of such
violation, the settlement agreements should be declared void and
unenforceable.
I. The Settlement Agreements
The basic facts set forth below are undisputed by the parties.
A. State Farm
On April 21, 1999, State Farm and the California Department of
Insurance (CDOI) entered into a Settlement Agreement (Complaint, Exh.
1; Lew DecI., Exh. A) as well as a related Stipulation, Waiver and
Consent Order (Complaint, Exh. 1). These documents were intended
to conclude all regulatory action with respect to State Farm's handling
of policyholder claims arising from the 1994 Northridge earthquake. In
the agreement,State Farm agreed to make a $2 million contribution to a
California nonprofit public benefit corporation'named the California
Research and Assistance Fund (CRAF).
The agreement stated that: "The objectives of the Fund shall be
determined by the Corporation, which may receive advice and counsel
from [California seismic engineering organizations]. The objectives may
address specific topics expected to be of material assistance to all
Californians, including such topics as:
· "Recommended procedures for adjustment of residential
earthquake claims..."
· "An update of ATC-13 ... to ensure that earthquake damage
models incorporate the post-Nortbridge insights..."
· "A study of how [building materials] perform in earthquakes...
· "Similar matters addressing needed seismic studies, including
improved seismic education."
(Settlement Agreement, p. 1.)
These facts, as set out in the State Parties' moving papers, are not in
dispute. (See State Farm's Cross-Motion, pp. 2-3.) The State Parties
and State Farm do, however, have differing interpretations of the
Settlement Agreement and the law applicable to the power of an
administrative agency to settle disputes.
As a preliminaiy matter, the court finds that the Stipulation and the
Letter Agreement constitute two separate and independent agreements.
The Stipulation was intended to "conclude all regulatory action."
The Letter Agreement deals with the contribution to CRAF.
B. 21st Century
On April 21, 1999, 21st Century and the CDOI, at the direction of
former Insurance Commissioner Chuck Quackenbush, entered into a
settlement agreement. (Complaint, Exh. A; Lew Decl., Exh. A.) The
parties also entered into a related stipulation, waiver and consent
order on the same date.(Complaint, Exh. A.) These documents were
intended to resolve all disputes between 21st Century and the CDOI with
respect to 21st Century's handling of claims made as a result of the
Northridge earthquake. (Stipulation and Order, paragraph 1; Complaint,
Paragraph 9.)
Pursuant to the settlement agreement 21st Century agreed to make
$6,550,000 in contributions to a California nonprofit public
corporation named the California Research and Assistance Fund (CRAF).
In consideration for this contribution, the CDOI "agreed to release all
claims against plaintiffs" and "further agreed that it would (1)
rescind the orders Prohibiting plaintiffs from paying dividends or
writing new business and (2) not issue an order to show cause and
statement of charges or accusation or take action against plaintiffs."
(Complaint, paragraph 17.)
The Stipulation and Order states that 21st Century "shall participate
in the hardship and humanitarian fund to be established by [CRAF]...."
(Stipulation and Order, par 7.) The settlement agreement provides that:
1. 20th Century Insurance Company ... will establish and
contribute the sum of six million dollars ($6,000,000) to a fund...
which will be a part of the California Research and Assistance Fund, a
California nonprofit public benefit corporation ... to provide limited
financial assistance to homeowners with earthquake insurance and
uninsured or underinsured non-profit entities who suffered damage in
the Northridge earthquake.
(a) Purpose of the fund. To provide limited financial assistance to
1) homeowners with earthquake insurance who suffered property damage
in the Nortbridge earthquake and who, due to special circumstances or
hardships, uninsured earthquake losses beyond applicable deductible
amounts, and 2) to provide grants to uninsured non-profit entities with
Northridge earthquake property damage which has not been remedied. Any
amounts remaining in the Fund after all payments of financial
assistance and expenses shall be used for the general purposes of the
Corporation.
2. 20th" Century shall also contribute $550,000 to the Corporation
to be used for the general purposes of the Corporation.
(Settlement Agreement, 1, 2.)
C. Allstate
On July 8, 1999, Allstate and the CDOI, acting at the direction of then
California Insurance Commissioner Chuck Quackenbush, entered into the
settlement agreement. (Complaint, Exh. I; Lew Decl., Exh. 1.) Allstate
and the CDOI also entered into a related Stipulation, Waiver and
Consent Order dated July 8, 1999. These documents were intended to
"conclude the Commissioner's investigation of [Allstate's] handling of
Northridge Earthquake claims and fully and finally resolve any and all
regulatory actions relating thereto." (Stipulation and Order, 10.) In
the settlement agreement, Allstate agreed to make a contribution to a
California nonprofit public benefit corporation named the California
Research and Assistance Fund (CRAF) in the amount of $2 million. The
settlement agreement provided:
[Allstate] agrees[s] to participate in a humanitarian public earthquake
study and education fund... that will be established by a California
nonprofit public benefit corporation.... [Allstate's] participation in
the Fund will be in the form of a monetary contribution in the amount
of two million dollars. Such monetary contribution will be [Allstate's]
sole responsibility and obligation with respect to the Fund.
The objectives of the Fund shall be determined by the Corporation,
which may receive advice and counsel for such professional California
seismic engineering organizations as the Applied Technology Council
(ATC), the California Universities for Research in Earthquake
Engineering (CUREe), and similar bona fide academic and professional
engineering organizations. The objectives may address specific topics
expected to be of material assistance to all Californians, including
such topics as:
· "Recommended procedures for adjustment of residential
earthquake claims..."
· "An update of ATC- 13... to ensure that earthquake damage
models incorporate the post-Northridge insights..."
· "A study of how [building materials] perform in earthquakes...
· "Similar matters addressing needed seismic studies, including
improved seismic education"
(Settlement Agreement pp.1-2)
The Stipulation and Order provide:
[Allstate] voluntarily agree[s] to participate in a
humanitarian public earthquake study and education find.., that will be
established by a California nonprofit public benefit corporation....
The Corporation shall establish the specific benefits of the Fund,
which may include: education and research activities relating to: (a)
earthquake preparedness; (b) earthquake damage mitigation; (c)
earthquake damage prevention; (d) earthquake damage assessment, and/or
(e) earthquake damage repair. [Allstate's] participation in the Fund
shall be in such a manner as [Allstate] and the Commissioner shall
mutually agree. Such participation shall be [Allstate's] sole
responsibility and obligation with respect to the fund. (Stipulation
and Order, 3.)
D. Fireman's Fund
On March 13, 1999, Fireman's Fund and the CDOI, acting at the direction
of former Insurance Commissioner Chuck Quackenbush, entered into a
settlement agreement. (Complaint, Exh. 1; Lew Decl., Exh. I.) In the
agreement, Fireman's Fund agreed to make a contribution of $550,000 to
a "Not for Profit, Education Project that the [GDOI] oversees for the
benefit of the public." (Settlement Agreement, § 2.C.)
The contribution was made to a California nonprofit public benefit
corporation named the California Research and Assistance Fund (CRAF).
(See Fireman's Fund's Verified Amended Answer, 16.)
In consideration for this contribution, the CDOI agreed "not to conduct
a market conduct examination of Fireman's Fund's Northridge earthquake
claims files" and "not to undertake other regulatory actions
including fines or other sanctions relative to Fireman's Fund's
Northridge earthquake claims." (Settlement Agreement, § 1 .D.)
The Settlement Agreement provides:
C. Education Project
Within ninety (90) days of execution of this Agreement, Fireman's Fund
agrees to contribute $550,000 to the Not for Profit, Education Project
that the [CDOI] oversees for the benefit of the public. The Education
Project administrators shall use their discretion concerning the use of
these funds, with due consideration of Fireman's Fund's request that
the earthquake insurance and seismic event preparedness education
receive the majority of these funds.
(Settlement Agreement, § 2.C.)
D. Farmers
On June 22, 1999, Farmers and the CDOI, acting at the direction of then
California Insurance Commissioner Chuck Quackenbush, entered into two
settlement letters, a seven page Long Settlement Letter and a single
page Short Settlement Letter. (Complaint, Exh. 1; Lew Decl., Exh. 1.)
The two letters were intended to:
(1) resolve policyholder concerns arising out of [sic] Northridge
earthquake; (2) resolve and conclude the pending market examination
concerning earthquake claims; and (3) promote charitable causes as they
relate to earthquake relief efforts.
(Long Settlement Letter, p. 2.)
In the two letters, Farmers agreed to make a $1 million contribution to
a nonprofit charitable foundation to be established by the
Commissioner. (Long Settlement Letter, pp.4,7; Short Settlement
Letter.) The contribution was made to a California nonprofit public
benefit corporation named the California Insurance and Education
Project (CIEP). (Farmers' Verified Answer, 10.)
II. Summary Judgment Standard
A defendant is entitled to summary judgment as to each cause of action
where one or more of the elements cannot be established. (Code Civ.
Proc., § 437c(a).) The party moving for summary judgment bears the
initial burden of production to make a prima facie showing of the
nonexistence of any triable issue of material fact. (Aguilar v.
Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850.) The burden shifts
to plaintiff when a summary judgment motion prima facie justifies a
judgment for the defendant. (Zuckerman v. Pacific Savings Bank (1986)
187 Gal.App.3d 1394, 1401.) in moving for summary judgment, a defendant
"has met his burden of showing that a cause of action has no merit if
he has shown that one or more elements of the cause of action... cannot
be established, or that there is a complete defense to that cause of
action. Once the defendant... has met that burden, the burden shifts to
the plaintiff. . . to show that a triable issue of one or more material
facts exists as to that cause of action or a defense thereto. The
plaintiff... may not rely upon the mere allegations or denials of his
pleadings to show that a triable issue of material fact exists but,
instead, must set forth the specific facts showing that a triable issue
of material fact exists as to that cause of action or a defense
thereto." (Aguilar, 25 Cal.4th at p. 849, internal quotations omitted.)
The defendant need not conclusively negate such an element, but need
only show that the plaintiff does not possess, and cannot reasonably
obtain, needed evidence. (Id. at pp. 853-854.) Once the defendant
carries this burden, the burden shifts to plaintiff to make a prima
facie showing of the existence of a triable issue of material fact.
(Id. at p. 849.) There is a triable issue of material fact if the
evidence would allow a reasonable trier of fact to find the underlying
fact in favor of the party opposing the motion in accordance with the
applicable standard of proof. (IA. at p. 850.)
This Court can and will only entertain competent evidence. (Biljac
Associates v. First Interstate Bank (1990) 218 Cal.App.3d 1410,1419 &
fn. 3.)
Ill. Rich Vision and Government Code Section 11415.60
In Rich Vision Centers, Inc. v. Board of Medical Examiners (1983) 144
Cal.App.3d 110, the Court of Appeal determined the scope of a licensing
agency's power to settle cases. The court concluded that agencies "only
have the power conferred upon them by statute and an act in excess of
these powers is void;" however, an "agency's powers are not limited to
those expressly granted in the legislation; rather, '[it] is well
settled in this state that [administrative] officials may exercise such
additional powers as are necessary for the due and efficient
administration of powers expressly granted by statute, or as may fairly
be implied from the statute granting the powers."' (Id. at p. 114.) The
court further held that:
Permitting the Board to settle disputes over present or
continuing fitness for a license helps to achieve the legislature's
purpose. Settlement negotiations provide the Board greater flexibility.
Importantly, settlements provide the means to condition the issuance
or renewal of licenses in order best to protect the public. Because
settlement is administratively efficient and furthers the purpose f6r
which the Board was created, we hold that the Board has the implied
power to settle licensing disputes. [Citation.] This holding is
consistent with the general policy of favoring compromises of
contested rights.(Id. at p. 115.)
Regarding the terms of the settlement, the Rich Yision court
stated "we see no limitations on the conditions that may be included in
a settlement except that such conditions must not violate public
policy." (Id. at pp. 115-116.) "There is no reason to handicap those
members of the Attorney General staff who represent licensing ageincies
in performing their duty by limiting their ability to propose and
include any settlement term beneficial to the public." (Id. at p. 116.)
The holding in Rich Vision has been codified as Government Code
section 11415.60, which provides:
(a) An agency may formulate and issue a decision by settlement,
pursuant to an agreement of the parties, without conducting an
adjudicative proceeding. Subject to subdivision (c), the settlement may
be on any terms the parties determine are appropriate.
(b) A settlement may be made before or after issuance of an
agency pleading, except that in an adjudicative proceeding to determine
whether an occupational license should be revoked, suspended, limited,
or conditioned, a settlement may not be made before issuance of the
agency pleading. A settlement may be made before, during, or after the
hearing.
(c) A settlement is subject to any necessary agency approval.
An agency head may delegate the power to approve a settlement. The
terms of a settlement may not be contrary to statute or regulation,
except that the settlement may include sanctions the agency would
otherwise lack power to impose.
The State Parties' reading of Rich Vision is that, under this factual
situation, [a]s a matter of law, the Settlement Agreement, to be valid
and enforceable, must have required the funds contributed to a
charitable organization to support only activities related to the
CDOI's enforcement powers and responsibilities in the enforcement
action giving rise to the Settlement Agreement, i.e., for
earthquake-related purposes only." (State Parties' Motion, p. 1 [Each
of the five motions brought by the State, apart from the initial
statement of facts, consist of identical language in the section
arguing the State's position regarding Rich Vision. For simplicity's
sake, the court uses "State Parties Motion" to refer to identical
language found in each of the five motions brought by the People].)
This reading is based on the language in Rich Vision stating that
"[b]ecause settlement ... furthers the'purpose for which the Board was
created, we hold that the Board has the implied power to settle
licensing disputes." (Rich Vision, supra, 144 Cal.App.3d atp. 115.)
Based on this language, the State Parties contend that the scope of an
agency's-power to settle administrative actions is limited to
"settlements that further the purposes for which the regulatory agency
was created." (State Parties' Motion, p. 5; see also Cal. Attorney
General Opinion. No. 00-51(1 (July 25,2000) [nonpub. opn.], pp. 3,4.
In other words, some settlements further the purposes for which the
agency was created and some do not; those that do not are invalid.
The language relied upon by the State Parties appears in the section of
the Rich Vision opinion dealing with whether agencies have the implied
power to settle, titled "The Board has implied power to settle
licensing disputes." (See Rich Vision, supra, 144 Cal.App.3d at pp.
114-115.) The scope of such power was delineated in the next section,
titled "Settlement terms are limited only by public policy." (Id. at
pp. 115-116.) This part of the analysis holds that the court saw "no
limitations on the conditions that may be included in a settlement
except that such conditions must not violate public policy." (Ibid.)
"There is no reason to handicap those members of the Attorney General
staff who represent licensing agencies in performing their duty by
limiting their ability to propose and include any settlement term
beneficial to the public." (Id. at p. 116.) A reasonable reading of
this language implies that a settlement term may be included which
benefits the public but might not be directly within the immediate
purview of the agency's powers. That is, Rich Vision does not prohibit
a settlement calling for a payment to a charitable organization unless
the settlement agreement expressly provides that the settlement fund be
used exclusively to support activities related to the underlying
enforcement action.
For example, the Attorney General's own website praises the public
benefits of settlement funds distributed to charitable organizations
or purposes unrelated to the underlying actions. The Attorney General
announced that $2.9 million form the antitrust settlement with the
Nine-West Group will be used to support California domestic violence
shelters, the prevention and prosecution of domestic violence against
women, and information and legal assistance to women with gynecological
or breast cancer under a court-approved plan." (State Farm RJN, Exh. I;
see also Exh. H [$2 million of proceeds from settlement of antitrust
case against Levi-Strauss given to charitable organization to "research
important issues of consumer protection, affordability and access to
health care, health care choice and the concentration, regulation and
competition in the health care sector"].) In neither the Nine-West
nor the Levi-Strauss settlements, were the settlement funds directly
related to the underlying antitrust law enforcement action. Yet the
Attorney General boasted that "[i]t is extemely gratifying and
appropriate that we put these funds to use to help consumers and
improve health care quality through enhanced research and grants.
(State Farm RJN, Exh. H.)
Morever, the Rich Vision court recognized that the act of settlement
itself furthers the purposes of an administrative agency. (Rich Vision,
144 CaI.App.3d at p. 115.) In Frankel V. Board of Dental Examiners
(1996)46 Cal.App.3d 534, 544, the court cited Rich Vision for this
proposition: "Provided that they do not include conditions that violate
public policy, settlements are administratively efficient, further the
purpose for which the [agency] was created, and are consistent with the
general policy of favoring compromises of contested rights."
Given the broad grant of authority in settling administrative actions
delegated to an agency by Rich Vision and Government Code section
11415.60, as well as the recognition of the courts in Rich Vision and
Frankel that settlement itself furthers the purposes of the agency,
these authorities, and indeed, the Attorney General's own actions in
similar cases, do not support the State's attempt to restrict an
agency's settlement authority to only those settlements that "further
the purposes" for which the agency was created. Therefore, unless the
settlement agreement violates statute or public policy, it is valid and
enforceable.
The insurers' settlement agreements are valid and enforceable unless
the terns of the agreements are "contrary to statute or regulation"
(Gov. Code, § 11415.60, subd. (c)), or do not "violate public policy"
(Rich Yision, supra, 144 Cal.App.3d at pp. 115-116). The State Parties
do not contend that the settlement agreements are contrary to any
statute or regulation. Rather, the State Parties argue that the
settlement agreements violate public policy because the terms of the
agreements were not sufficiently beneficial to the public. In support
of this public policy argument, the State Parties rely upon the
Insurance Code's penalty provisions, the Attorney General's Opinion
No.00-510, and the legislative reaction to the settlement.
The party opposing enforcement of a contract has the burden of showing
that enforcement would be in violation of the settled public policy of
this state as it existed at the time the contract was made. (Moran v.
Harris (1982) 131 Cal.App.3d 913, 919-920.) Courts "may not encroach
upon the lawmaking branch of government in the guise of public policy
unless the challenged transaction is contrary to a statute or some
well-established rule of law." (Id. at p. 921.)
First, the State Parties cite provisions of the Insurance Code
specifying how monetary penalties and sanctions imposed by the CDOI may
be used. (See State Parties' Motion, pp. 8-12, citing Insurance Code §§
707.4 and 12975.7.) The State Parties seem to argue that because the
letter agreement "sidestepped" these Insurance Code sections, it
allowed State Farm to avoid statutory penalties and sanctions in
violation of public policy. This argument ignores the broad grant of
discretion of Government Code section 11415.60, subdivision (a), which
permits an agency to settle, or "sidestep" adjudication, and
subdivision (c), which provides that "the settlement may include
sanctions the agency would otherwise lack power to impose," as long as
they are "not contrary to statute or regulation." Since the settlement
agreement was not subject to the provisions of Insurance Code sections
704.7 and 12975.7 (State Parties' Motion, p. 12), the settlement
agreement was not contrary to statute. In light of Government Code
section 11415.60, the State Parties' contention that public policy was
violated when the CDOI and State Farm "sidestepped" the penalty
provisions is unpersuasive and falls far short of a '"well-established
rule of law." (Moran, Supra, 131 Cal.App.3d at p. 921.) Further, it is
common for parties to avoid admissions of liability in settlement
agreements. The payment of monies as "penalties" implies an admission
of liability. To require settlement funds to be labeled as penalties
would hamstring the settlement process and is contrary to the policy of
encouraging settlement.
Second, the State parties argue that Attorney General Opinion No.
00-510 demonstrates that the letter agreement was in violation of
public policy. Opinion No. 00-510 addressed the question:
May the Insurance Commissioner include as a term of settlement of a
regulatory enforcement case brought against a regulated insurance
company a requirement that the insurance company pay funds directly to
a private charitable foundation?
The opinion concluded that the Commissioner may include as a term of
settlement a requirement that the insurance company pay funds directly
to a private charitable foundation "in furtherance of purposes for
which the Department of Insurance was created and related to the
enforcement responsibilities of the Commissioner in the regulatory
proceeding," but that the Commissioner may not include a settlement
term requiring payment of funds to a charitable foundation "for the
purpose of supporting activities unrelated to the regulatory
enforcement responsibilities of the Department of Insurance in the
proceeding." (Opinion No. 00-510 at p. 1.) The opinion states that such
a settlement provision "would be against public policy by exceeding the
scope of the statutory duties and regulatory powers of the
Commissioner." (Id. at p. 6.)
This informal letter opinion is dated July 25, 2000, over a year after
the April 21, 1999 settlement agreement and stipulation entered
into by State Farm and the CDOL (Complaint, Exh. 1; Lew Decl., Exh. A.)
This Court would be hard-pressed to find that this after the fact
opinion constituted a "well-established rule of law" of this state as
it existed at the time the contract was made (Moran, supra, 131
Cal.App.3d at pp. 913, 919-921.) Not only was this opinion drafted
after the Attorney General announced potential litigation against the
insurance company defendants (See State Farm's RJN, Exh. G), such
informal opinions are not entitled to the usual weight given opinions
of the Attorney General (Koire v. Metro Car Wash (1985) 40 Cal.3d 24,
30. ["While opinions of the Attorney General are not controlling
authority, they are entitled to consideration"] California Coastal
Coin. v. Quanta Investment Corp. (1980) 113 CaLApp.3d 579, 593, fh. 11
[indexed letter opinion differs from formal opinion, in that it is not
published and widely dissemimated; rather they are kept by Attorney
General and made available to the public by request] ; Rideout Hospital
Foundation, Inc. v. County of Yuba (1992)8 Cal.App.4th 214, 226, fn. 4
[letters, including unpublished and informal Attorney General letter to
Governor "not the type of extrinsic aids that courts can meaningfully
use in discerning legislative intent"]).
Moreover, the opinion advances an interpretation of Rich Vision similar
to the State Parties' arguments in this case. As the above analysis
points out, Rich Yision does not impose a restriction that the
Commissioner may not include a settlement term requiring payment of
funds to a charitable foundation "for the purpose of supporting
activities unrelated to the regulatory enforcement responsibilities of
the Departnient of Insurance in the proceeding." Rather, the only
limitation imposed by Rich Vision is that the terms "may not violate
public policy." (Rich Vision, supra, 144 ~al.App.3d at pp. 115-116.)
Finally, the State Parties are unable to establish a consistent
standard under their various interpretations of Rich Yision. The
Attorney General first states in the letter opinion that the
Commissioner may not include a settlement term requiring payment of
funds to a charitable foundation "for the purpose of supporting
activities unrelated to the regulatory enforcement responsibilities of
the Department of Insurance in the proceeding." (Opinion No. 00-510 at
p.1, emphasis added.) Next, the Attorney General argues that the
agreement must require that settlement funds be used "for
earthquake-related purposes only." (State Parties'...Motion, p. 1,
lines 19-22, emphasis added.) On the very same page, the'Attomey
General insists that the settlement agreement must require "funds
contributed to a charitable organization to support only
earthquake-insurance-related activities." (State Parties' Motion, p. 1,
lines 23-25, emphasis added.) Not one of these three positions can be
squared with the Attorney General's actions in the Nine-West and
Levi-Strauss settlements, which would also be invalid under the State
Parties' reading of Rich Vision.
Third, the State Parties rely on the reaction of the Legislature to the
CDOI settlements. Following the settlement agreements between the CDOI
and insurers handling Northridge earthquake claims, legislative
hearings critical of the settlements were held (See State Parties' RJN,
EThs. 1, 2), and the Insurance Code was amended to prohibit settlements
by the Insurance Commissioner that provide for a respondent to
contribute or deposit any money to a nonprofit entity or to pay any
fine or assessment except in accordance with Insurance Code section
12975.7 (Stats. 2000, ch. 1091).
"Where changes have been introduced to a statute by amendment it must
be assumed the changes have a purpose; by substantially amending a
statute the Legislature demonstrates an intent to change the
pre-existing law in all areas where there is a material change in the
language of the act" (Louisiana-Pacific Corp V. Humboldt Bay Mun. Water
Dist. (1982) 137 Cal.App.3d 152, 159.) "[C]ourts will not infer that
the Legislature intended only to clarify the law unless the nature of
the amendment clearly demonstrates that its intent was to be
declaratory of the existing law." (Verreos v: City and County of San
Francisco (1976) 63 Cal.App.3d 86, 99.) Under the foregoing
authorities, it must be presumed that the amendment of Insurance Code
section 12975.7 was intended to change pre-existing law and public
policy, rather than to be declaratory of existing law. When the
Legislature in essence codified the holding in Rich Vision by enacting
Government Code section 11415.60, it had the opportunity to limit the
scope of an administrative agency's settlement authority as it did when
enacting Insurance Code section 12975.7. The fact that it chose not to,
as well as the fact that it later chose only to limit the settlement
powers of the CDOI, supports a finding that Insurance Code section
12975.7 represented a change in the law, not simply a clarification of
existing law.
The legality of an agreement is determined as of the time of its
making. (Moran, supra, 131 Cal.App.3.d at p. 918.) The letter opinion
and the after the fact expressions of public policy by the legislature
are not evidence of public policy at the time the settlement agreements
were made, but rather, reflect a reaction and later change in the law
and public policy. Because the settlement agreements were within the
scope of the CDOI's implied powers under Rich Vision, and because the
settlement agreements were not contrary to statute and did not violate
public policy, the settlement agreements are valid and enforceable.
IV. Contract Law Principles
Settlement agreements with government agencies are governed by contract
principles. (Frankel, supra, 46 Cal.App.4th at p. 544.) "A contract
must receive such an interpretation as will make it lawful..,
reasonable, and capable of being carried into effect, if it can be done
without violating the intention of the parties." (Civ. Code, §1643;
Service Employees International Union Local 18 v. American Building
Maintenance Co. (1972)29 Cal.App.3d 356, 359 ["where two
interpretations are reasonably permissible, courts will adopt that
which renders a contract valid and effectual"].) The settlement
agreements requiring contributions to CRAF (all except Farmers'
settlement agreement, which provided for a contribution to CIEP) have
been interpreted by the insurers and the State Parties (in the CRAF
action) as restricting the funds to earthquake-related purposes. (State
Farm PJN, Exhs. A-D, Exh. F, pp. 5, 8,11, fn.3.) The Sacramento
Superior Court has granted injunctive relief based on theallegations
that CRAF's funds were restricted. (State Farm RJN, Exh. E, pp. 3-4.)
Because there are two reasonably permissible interpretations of the
letter agreement, this court will adopt the interpretation which
renders the contract valid, i.e., that the letter agreement restricts
the funds to earthquake-related purposes. (Service mployees
International Union Local 18 v. American Building Maintenance Co.,
supra, 29 Cal.App.3d at p. 359.)
This interpretation finds support in the accompanying language in the
letter agreement, which all deals with earthquake related matters.
(Civ. Code, § 1641 ["The whole of a contract is to be taken together,
so as to give effect to every part, if reasonably practicable, each
clause helping to interpret the other"].) Each of the settlement
agreements is replete with language that the funds are to used for
earthquake-related purposes. Any language that appears to give the
directors of CRAF or CIEP discretion to spend the settlement funds in
any manner they wished must be read in context with the
earthquake-related provisions. (See People v. Parmar (2001) 86
Cal.App.4th 781, 78 8-789 [agreement stated District Attorney would
assign a deputy who "will...seek all legal and equitable remedies
available" against individuals in violation of nuisance statute; Court
of Appeal decided "will" was sufficiently qualified by other language
that it did not divest District Attorney's office of discretion to
bring cases, therefore contract did not violate public policy].)
The inclusion of language which appears to give the directors some
discretion in how to spend settlements funds does not automatically
render the agreements void. (Redke v. Silvertrust (1971) 6 Cal.3d 94,
102 ["if a contract can be performed legally, a court will presume that
the parties intended a lawful mode of performance"]; see also
Environmental Protection Information Center, Inc. v. Maxxam Corp.
(1992)4 CaLApp.4th 1373, 1382 [presumption should be afforded extra
weight because "It must be presumed that the Department will obey and
follow the law"]; Roth v. Dept.of Veteran Affairs (1980) 110 CaLApp.3d
622, 628 [the rule that any "uncertainty in the contract must be
construed against the drafter" applies equally to "public body"].)
Further, Califomia presumes that its public officials will follow the
law--because there was no express provision in any agreement requiring
the Insurance Commissioner to act contrary to statute, it must be
presumed that he would follow the law in effect at the time the
contract was made. (Environmental Protection Info Ctr., Inc. v. Maxxam
Corp. (1992)4 Cal.App.4th 1373, 1382; Miller v. McKenna (1944)23 Cal.2d
774, 786.)
Another factor warrants against invalidating the settlement agreements.
The State Parties have left unanswered the question of what happens if
these settlement agreements are invalidated. Ordinarily, guilty parties
to an illegal contract may not recover in restitution any consideration
paid. (See 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, §
446, pp.398-399.) However, where, as here, the insurers are innocent
parties to the illegality, and the potentially illegal use of the funds
occurred subsequent to the formation and performance of the contract,
courts will allow such an innocent party to obtain restitution of the
consideration paid. (Id., §§ 447, 451, pp. 399-400, 401-402.) To return
the parties to the status quo would be difficult. Each contract has
been fully executed, and each insurer has paid in settlement an amount
ranging from $550,000 to $6,550,000. These funds have, for the most
part, been spent by the CRAF and CIEP, neither of whom are parties to
this action and not under this court's jurisdiction; the return of
these funds to the insurers is extremely doubtful, as conceded by the
State Parties at oral argument. Further, Fireman's Fund agreed to
conduct an internal audit of its claims handling; to pay any payments
that it determined were due as a result of the audit; to conduct a
telephone survey of its earthquake damage claimants; and to review and
reevaluate the files of dissatisfied customers. (Fireman's Fund
Settlement Agreement, 3,4.) Similarly, Farmers agreed to survey more
than 25,000 claimants, and negotiate or mediate any disagreement
regarding the claims. (Farmers' Settlement Agreement, pp. 4-5.) As a
result, these two carriers have paid funds, as part of the settlement
agreements, beyond their contributions to the charitable organizations.
it is clear that should a court find the agreements void, the insurance
carriers will not be returned to the status quo; on the other hand, the
CDOI would be free to resume its market conduct examinations.
The State Parties argue that the court should find that the settlement
agreements are invalid, so that the CDOI may resume its market conduct
examination of the various insurance carriers. At oral argument, the
State Parties raised the spectre of thousands of policyholders whose
mishandled claims for earthquake damages will go without a remedy
should this court grant summary judgment in favor of the insurance
carriers. However, the Legislature has already addressed this concern
by enacting Code of Civil Procedure section 340.9, which revived
insurance claims for damages arising out of the Northridge earthquake
which were barred by the statute of limitations. Today, eight years
after the Northridge earthquake, what more can be done by a market
conduct examination to help the public with claims for damages arising
from the earthquake?
V. Judicial Estoppel
Finally, the State Parties' summary judgment and summary adjudication
motions against the carriers who contributed to the CRAF fund are
properly denied under principles ofjudicial estoppel. The elements
of judicial estoppel are: "(1) the same party has taken two positions;
(2) the positions were taken in judicial ... proceedings; (3) the party
was successful in asserting the first position (i.e., the tribunal
adopted the position or accepted it as true); (4) the two positions are
totally inconsisteht and (5) the first position was not taken as a
result of ignorance, fraud or mistake." (Jackson v. County of Los
Angeles (1998) 60 Cal.App.4th 171, 183.)
The State Parties have taken two positions in these actions and the
CRAF action. In CRAF, the State Parties have interpreted the settlement
agreements as restricting the funds to earthquake-related purposes.
(State Farm RIN, Exhs. A-D, Exh. F, pp. 5, 8,11, fii.3.) In the actions
here against the insurers, the State Parties assert that the settlement
agreements are invalid because they do not restrict use of the funds to
earthquake-related purposes. These positions, both taken in judicial
proceedings, are totally inconsistent. The Sacramento Superior Court
has granted injunctive relief based on the allegations that CRAF's
funds were restricted. (State Farm RJN, Exh. E, pp. 3-4.) Thus, the
State Parties were successful in asserting the first position. Finally,
the position taken by the State Parties in CRAF was not taken as a
result of ignorance, fraud or mistake. In opposing the demurrer, the
State admitted it was pursuing both theories out of uncertainty as to
how the court would rule. (State Farm RJN, Exh. F, p. 11, fri. 3.)
Because all of the elements required to establish the defense
ofjudicial estoppel are present, the State Parties motions for summary
judgment against the carriers who contributed to the CRAF fund are
properly denied.
VI. Conclusion
For the reasons set forth above, the settlement agreements at issue
between the insurance carriers and the CDOI are valid and enforceable
under Rich Vision, the Civil Code and the common law of contracts.
Accordingly, the State Parties' motions for summary judgment, or in the
alternative, for summary adjudication against State Farm, 21st Century,
Allstate, Fireman's Fund and Farmers are denied. The cross-motions for
summary judgment brought against the State Parties by State Farm, 21st
Century, Allstate, Fireman's Fund and Farmers are granted.
By this ruling on summary adjudication, the court does not intend to
express any opinion, and has no opinion, as to the propriety of the
settlement agreements. This court has only ruled on the issue of
whether the agreements were lawful. Neither is the court judging the
propriety of the insurers' claims handling following the Northridge
earthquake.
In sum:
The State Parties' motions for summary judgment, or in the alternative,
for summary adjudication against State Farm, 21st Century, Allstate,
Fireman's Fund and Farmers are denied. The cross-motions for summary
judgment brought against the State Parties by State Farm, 21st Century,
Allstate, Fireman's Fund and Farmers are granted.
IT IS SO ORDERED.
Dated: 10/10/02
Victoria Gerrard Chaney
Judge
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