As Matter of First Impression, California Appellate Court Holds that Department of Insurance Interpretation of Statute was not Entitled to Deference and that Trial Court Erred in Holding that Interest Charged by Insurer for Installment Payments Was a “Premium” Required to be Disclosed Under California law
Plaintiff filed a putative class action against her insurer, Interinsurance Exchange of the Automobile Club (IEAC) alleging violations of California law in that the insurer failed to advise her of the fees associated with paying her insurance premium in installments rather than in one lump sum. Interinsurance Exch. of the Auto. Club v. Superior Court, ___ Cal.App.4th ___, 56 Cal.Rptr.3d 421, 423 (Cal.App. March 26, 2007). Defense and plaintiff attorneys moved for summary judgment; the trial court granted plaintiff’s motion and denied the defense motion, id. Defense attorneys filed a petition for writ of mandate with the Court of Appeal and the appellate court reversed, holding that a “premium” within the meaning of the applicable California law “does not include charges imposed for making payments of the annual premium in installments” and, accordingly, IEAC did not violate California law and was entitled to summary judgment against plaintiff’s class action complaint. Id. Defense attorneys filed a petition for writ relief with the Court of Appeal; the appellate court accepted the case in part because it presented an issue of first impression, and ultimately reversed the trial court.
In 2002, plaintiff obtained car insurance from IEAC with an annual premium of $1049, and in 2002 and 2003 she paid the premium in one lump sum. IEAC, at 423. Her renewal statement for 2004 reflected an annual premium of $986 (after a $63 discount), and provided plaintiff the option of paying the premium in one lump sum or in 9 installments “subject to additional charges for interest at a rate of 17.99 percent per year and requiring payment of only the first installment of $53.60,” id. Plaintiff understood the notice and “understood an election to pay the annual premium in installments would subject her to interest charges”; nonetheless, she “elected to pay the annual premium in installments rather than in one lump sum.” Id. The following year plaintiff received another renewal notice, this one reflecting an annual premium of $846, and again providing her with “the option of paying the $846 annual net premium in either one lump sum or nine monthly installments, subject to additional charges for interest at a rate of 18 percent per year and requiring payment initially of only the first installment of $34.48.” Id., at 424. Plaintiff again selected the installment option, id.
Plaintiff filed a class action complaint in October 2004 alleging inter alia unfair business practices and violations of California’s Consumers Legal Remedies Act (CLRA); the gravamen of the class action was that IEAC charged and received a fee for the option of paying insurance premiums in installments, and that this “premium” was not disclosed in the insurance policy. IEAC, at 424. After the court granted plaintiff’s motion to certify the lawsuit as a class action, plaintiff and defense attorneys filed cross-motions for summary judgment, id. The trial court granted a defense request to stay the court proceedings and to refer the question of whether installment fees constitute “premiums” within the meaning of Insurance Code section 381(f) to the California Department of Insurance (DOI). Id. The DOI concluded that installment fees are premiums under § 381, id., at 424-25, and noted that it was “giving consideration to promulgating regulations and/or proposing legislation to clarify what charges must be disclosed under premium and to address other issues raised by this referral,” id., at 425. The trial court granted plaintiff’s motion for summary judgment, giving deference to the DOI’s opinion, id., and defense attorneys sought writ relief from the appellate court.
The Court of Appeal noted that “[b]oth parties agree the question of the meaning of the term “premium,” as used in section 381, subdivision (f), is one of first impression.” IEAC, at 426. The Court held that IEAC’s monthly installment payments reflected the “time value of money,” and – as a matter of first impression – the appellate court held that “the plain and ordinary meaning of the term ‘premium,’ as used in section 381, subdivision (f), does not include interest charged for the time value of money.” Id., at 430. In part, the Court reasoned that “a premium is to be paid on commencement of the period of insurance coverage” and that “in the case of an annual period of renewal of insurance coverage, an insurer is entitled to payment of the annual premium in one lump sum at the beginning of the policy period.” Id. By contrast, “To the extent an insurer provides an insured with the option of paying that one lump sum in installments of partial premium payments together with interest on the unpaid premium balance, the interest charged for the time value of money for the option of making payments of premium over time is not considered part of the premium paid for insurance coverage.” Id. Because the interest IEAC charged was not a “premium,” it was not required to disclose the interest in the declarations page or anywhere else in the insurance policy. Id., at 430-31.
The Court of Appeal also rejected plaintiff’s claim that the DOI opinion was entitled to substantial deference. IEAC, at 434. To the contrary, the appellate court held that the trial court erred in giving deference to the DOI opinion, because it was not founded on a “long-standing administrative construction” of § 381(f): “On the contrary, it is implicit in that opinion that the DOI had never before expressly addressed the specific issue in this case.” Id. Accordingly, the Court held at page 435 that “the proper interpretation of the term ‘premium’ under section 381, subdivision (f) is a question of law for our independent determination, [and] we are not bound by the DOI’s opinion on that question.”
Based on its holding concerning the scope of § 381(f), the appellate court held that the defense motion for summary judgment should have been granted. IEAC, at 436-37. Because the interest component was not a “premium” required to be disclosed, IEAC did not violate the law and was entitled to judgment. Id.