Katz v. Insurance Commissioner

Liss, J., delivered the opinion of the Court. This is an appeal pursuant to the Maryland Insurance Code (1957,1979 Repl. Vol.) Art. 48A, § 242B (2) of an order of the Baltimore City Court affirming an order issued by the Insurance Commissioner of Maryland dated October 5,1981. The Insurance Commissioner rejected a challenge to the Insurance Division’s prior approval of a statewide increase in premium rates for private passenger automobile insurance underwritten by one of the appellees herein, State Farm Mutual Automobile Insurance Company.

The appellants, Daniel and Judy Katz, are two State Farm policyholders who reside in Maryland and who brought this action against State Farm and the Insurance Commissioner of Maryland. On November 3,1980, State Farm sent the Commissioner, as required by Maryland Code (1957, 1979 Repl. Vol.) Art. 48 A, § 242 (d), a "rate filing” that proposed a 9.8 per cent increase in private passenger automobile insurance rates, to become effective February 15, 1981. After a hearing on December 17, 1980, at which State Farm presented additional data, the Commissioner approved the filing; the increase took effect February 10, 1981 for new business and March 10, 1981 for renewal business.

On June 2, 1981, the appellants applied through counsel to the Commissioner for a second hearing pursuant to Art. ⁴²² 48A, § 242 (f) (4), which permits any person or organization purporting to be aggrieved with respect to any rate filing to ask for a hearing and specify the grounds of grievance sought to be established. The Commissioner ordered a second hearing, which was held July 14, 1981 before two hearing officers, the Assistant Commissioner and the Acting Chief of the Forms and Rating Section of the Insurance Commissioner’s office. At the hearing, counsel for both sides presented oral expert testimony and additional documentary evidence, although the appellants themselves did not appear. On October 5, 1981, the Commissioner issued an order in which the arguments of appellants were rejected and the rate approval granted State Farm was upheld.

The appellants timely noted an appeal to the Baltimore City Court pursuant to Art. 48A, § 242B (2). After briefing and oral argument, that Court issued a memorandum opinion and order on February 26,1982, finding "that there were material facts to support” the Commissioner’s order and that the order "was not arbitrary or contrary to the law.” Accordingly, the court affirmed the Commissioner’s order, and the instant appeal followed. Two issues are presented for determination by this Court: 1. Whether State Farm’s rate filing gave due consideration to underwriting profits, contingencies and investment income, as required by Maryland Code (1957, 1979 Repl.

Vol.) Art. 48A, § 242 (c)? 2. Whether the Assistant Insurance Commissioner’s reliance on an extra-record document violated appellant’s due process rights under Maryland law and the U.S. Constitution? I. Maryland has been a leader among the States which require that auto insurance rates be established by taking into full consideration the earnings that the insurance companies generate from the investment of their policyholders’ funds. 1 ⁴²³ In its filing and at the first hearing, State Farm calculated the amount of increase it would need by estimating the claims experience and expense it anticipated would occur during the year commencing six months before November 1, 1981 and six months after that date by suggesting the amount of return it would need to earn to maintain a sound financial position. As explained by State Farm’s expert actuarial witness, the procedure involved the following steps: (a) Past and current claims cost data for each line of coverage are analyzed so that the average cost of policy claims can be projected for the period for which the rate increase is sought.

Then, past and current claims frequency data (i.e., the number of claims made per 1,000 cars insured) for each coverage are analyzed so that the average frequency of claims can be projected for the applicable period. Then, the projected cost and frequency of claims are combined to produce total projected claims of losses for the period. (b) Next, a projection is made of anticipated underwriting expenses for the period the rate will be in effect, again, using past and current expense experience as a guide. (c) Finally, the insurer’s total financial need for the period is estimated and applied against the above anticipated losses and expenses.

This involves estimating the amount of underwriting profit and contingency needed, considering the level of growth the company wishes to maintain, the likely effect of inflation, and the investment income the company may earn. ⁴²⁴ In its rate filing State Farm discussed its financial needs, i.e., the "income” side of the ratemaking equation and reported, among other things, its investment profits and losses for each year from 1968 through 1979 and expressed 6.1 per cent of earned premiums as a mean of those years. It then pointed out that during those years, the average of 6.1 per cent return on investments, combined with an average underwriting return of 2.9 per cent resulted in a total after-tax return of 7.0 per cent of earned premiums, or 11 per cent to 16 per cent of net worth. This return, State Farm explained, "produced satisfactory results during periods of inflation in the 5% to 10% range.” The exhibit went on to point out that the prevailing inflation rate was at the time in excess of 10 per cent; 2 and thus, State Farm’s actuary later testified, "We should be looking at an 18 per cent return” and an "18 per cent return” [i.e., on net worth] is what "we ought to be talking about nowadays.” 3 Insurance ratemaking is not only "a highly complex procedure accomplished by experts in the field,” Maryland Fire Underwriters Rating Bureau v. Insurance Commissioner of Maryland, 260 Md. 258 , 266, 272 A.2d 24 (1971), but also is "a judgmental field” in which rates "cannot be determined with exactitude,” Insurance Services Office v. Whaland, 378 A.2d 743, 746 (N.H. 1977). The ratemaking principles and standards for judicial review adopted by the General Assembly are set forth in the Insurance Code.

Art. 48A, § 242 (c) provides in pertinent part: (c) Making of rates. — All rates shall be made in accordance with the following principles: (1) Due consideration shall be given to (i) past and prospective loss experience within and outside this State; (ii) conflagration and catastrophe hazards, if any; (iii) past and prospective expenses both countrywide and those specifically applicable ⁴²⁵ to this State; (iv) underwriting profits; (v) contingencies; (vi) investment income from unearned premium reserve and reserve for losses; (vii) dividends, savings or unabsorbed premium deposits allowed or returned by insurers to their policyholders; (viii) and to all other relevant factors within and outside this State. (2) Rates shall not be excessive, inadequate, or unfairly discriminatory. The standard for judicial review is found in § 242B, which states in pertinent part as follows: If the Baltimore City Court finds that the Commissioner’s order or decision is not supported by the preponderance of the evidence on consideration of the record as a whole, or is not in accordance with law, the court shall reverse or modify the Commissioner’s order or decision in whole or in part. An appeal to the Court of Special Appeals may be taken from the decision of the Baltimore City Court as in other civil cases.

The Commissioner shall be made a party to every appeal of this nature. In Maryland Fire Underwriters Rating Bureau v. Insurance Commissioner of Maryland, supra, the Court of Appeals noted that "it would be well to delineate the narrow scope of judicial review of legislative functions of the [Insurance] Commissioner arising under the rating subtitle of the Act [§ 242B].” [260 Md. at 263-264], The high court further cautioned that a reviewing court "should be loath to substitute its judgment for the result reached by an administrative agency. . . .” [Id. at 266], and followed its prior decision in State Insurance Commissioner v. National Bureau of Casualty Underwriters, 248 Md. 292 , 236 A.2d 282 (1967), characterizing Chief Judge Hammond’s opinion in that case as having "carefully considered the scope of judicial review permitted by § 245 [now § 242B (2)].” [Id. at 265], In State Insurance Commissioner v. National Bureau of Casualty Underwriters, supra, the Court of Appeals had construed the statute as follows: ⁴²⁶ * * * We read the direction to the court to determine whether or not the Commissioner’s order is supported by a preponderance of the evidence to mean that the court must rule whether or not the Commissioner followed the legislative directive to reach a factual conclusion in the matter before him on the basis of a preponderance of the evidence, not to make its own independent decision whether it would have valued the evidence in the same way and reached the same result. The statutory standard imposed on the court is not to decide whether the Commissioner was right in his factual determinations and inferences but whether those determinations could reasonably have been made by a reasoning mind using the preponderance of the evidence test. The reviewing court must decide only whether the Commissioner could reasonably have decided that a preponderance of the whole evidence supported his conclusions of fact, not whether those conclusions were correct.

The permission given the court to modify the administrative order or decision refers, we think, to correction of orders or decisions "not in accordance with law” and was not intended to permit a modification on the facts. [ 248 Md. at 305 ], and concluded: We hold that a court in reviewing legislative actions or decisions of an administrative agency may apply the weight of the evidence test to the factual findings of the agency, without exercising nonjudicial functions, provided it does not itself make independent findings of fact or substitute its judgment for that of the agency. Section 245 of Art. 48A, properly construed, does no more than permissibly require the court to decide (1) the legality of the Insurance Commissioner’s actions, and (2) whether a reasoning mind reasonably could have determined that the factual conclusion reached was ⁴²⁷ proven by the weight of the evidence on the record as a whole. [ 248 Md. at 310 ], See also State of Maryland Commission on Human Relations v. Malakoff, 273 Md. 214 , 329 A.2d 8 (1974); Serio v. Mayor and City Council of Baltimore, 208 Md. 545 , 119 A.2d 387 (1956). In order to set aside an order of the Insurance Commissioner, it must be shown that the Commissioner’s decision was unsupported by substantial evidence on the record considered as a whole. Brotherhood of Railroad Trainmen v. Baltimore & Ohio Railroad Co., 248 Md. 580 , 238 A.2d 516 (1968).

Essentially, the appellants argued before the administrative agency, on appeal to the Circuit Court and to us that the hearing officer should have accepted the projections, opinions and methods of calculation espoused by Robert Hunter, President of the National Insurance Consumer Organization (NICO) rather than those of the expert produced by State Farm. The appellants did not challenge the statistical data upon which State Farm relied. To the contrary, they accepted the validity of the statistics used by State Farm but made projections from these figures which were substantially different from those of the Company. In effect, they urged the trial court below and this Court to substitute their judgment for the expertise of the Insurance Commissioner.

This we are not permitted to do by the clear mandate of § 242B (2). From our careful consideration of the extensive record in this case we conclude that the Commissioner could reasonably have decided that a preponderance of the entire evidence supported his conclusions of fact and that therefore no reversible error occurred.

II

The request for a second hearing filed by the appellants was primarily based upon an affidavit of Robert Hunter, which attacked State Farm’s filing on two separate grounds. Initially, he claimed that State Farm’s projection of the ⁴²⁸ frequency of accident claims was too high. 4 Secondly, Mr. Hunter contended that State Farm should not have been allowed a rate increase that would include any provision for underwriting profits or contingencies but instead should be required to reduce its rates by 6.4 per cent and as a result incur underwriting losses. This recommended action was based on his opinion that State Farm had underestimated the amount of income it would probably earn from its investments. At the second hearing, Mr. Hunter introduced a booklet that he had written as president of the consumer advocacy group founded by him in 1980.

The booklet, entitled Taking The Bite Out Of Insurance-Investment Income And Rate Making, contends that insurance