The California Office of Administrative Law has published a decision outlining the mostly minor issues that prevented its legal experts from signing off last month on a proposal to cap title insurance rates and escrow fees.
Former Insurance Commissioner John Garamendi submitted the proposed rate cap, which would use a cost-based formula to limit the profits of title insurance and escrow companies, to the OAL on Jan. 5. The OAL, which is charged with reviewing regulatory changes proposed by state agencies to ensure they comply with the law, issued a notice of disapproval on Feb. 21.
The next day Garamendi’s successor, Steve Poizner, said the OAL had raised only minor issues of clarification, while validating the Department of Insurance’s authority to institute a rate cap — an issue raised by the industry during hearings last summer. Poizner said he agreed with Garamendi’s assessment that there was a lack of competition in the industry, and that he would “aggressively enforce” a rate cap after winning approval from the OAL.
The OAL’s seven-page decision, published Wednesday, supports Poizner’s view that the issues it raises can be addressed.
Although the Insurance Code prohibits the commissioner from fixing rates for title insurance and escrow services, insurers have been required to submit their rates for approval since 1989 under the provisions of a voter-approved initiative.
Garamendi’s proposed title insurance rate cap relied on a 1994 California Supreme Court interpretation of the initiative to argue that the state can set upper limits on rates without fixing them. Title companies and escrow companies would still prepare their own rate plans under the new regulations, Garamendi maintained, submitting information on their actual costs that would be used to set upper limits on rates.
“OAL agrees with the commissioner that the rationale articulated in (the state Supreme Court decision) is pertinent to the decision on these regulations, and it persuades us that he may set the upper limit on rates that are not excessive,” OAL Senior Staff Counsel David Potter wrote in the decision.
Potter also dismissed industry objections that Garamendi had failed to demonstrate a lack of competition among title insurance and escrow companies and that rates were excessive, saying that, “for the purposes of (OAL’s) review, substantial evidence is sufficient to support such a finding.”
The Department of Insurance, however, having determined that a rate cap will have adverse effects on some businesses, must issue a finding that the proposed regulations are “necessary for the health, safety or welfare of the people of the state,” Potter wrote.
The remaining issues raised in the decision were minor. If the state’s intention is to require companies to maintain and submit records of their actual costs in order to set rates, OAL questioned the use of the word “should” rather than “shall” in the proposed regulations. The OAL also complained that formulas that include fractions were printed in illegible type fonts, and that the proposed regulations should cite the specific sections of the Insurance Code that support the department’s rule-making authority, rather than broad “strings” that include sections that are not relevant.
The Department of Insurance has 120 days to respond to the issues raised by the OAL, but will probably not need that long, the department’s general counsel, Gary Cohen, said Feb. 22.
If the proposed rate cap is approved, the Department of Insurance plans to begin collecting data that would be used to set maximum rates in 2008, although industry groups have warned they could challenge the regulations in court.