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Fireman''s Fund Insurance Co. v. Quackenbush

filed: June 18, 1996.


Appeal from the United States District Court for the Northern District of California. D.C. No. CV-91-2854-CAL. Charles A. Legge, District Judge, Presiding. Original Opinion Previously Reported at:,.

Before: Mary M. Schroeder, Dorothy W. Nelson and Alex Kozinski, Circuit Judges. Opinion by Judge D.w. Nelson.

Author: Nelson

D.W. NELSON, Circuit Judge:

Appellants Fireman's Fund and related insurance companies ("Fireman's Fund" or "the insurers") brought this action against Appellee John Garamendi,*fn1 Insurance Commissioner for the State of California ("the Commissioner"), alleging that regulations promulgated by the Commissioner pursuant to an insurance rate rollback initiative violated the Takings, Commerce, Due Process, Equal Protection and Supremacy Clauses, as well as the First Amendment and the McCarran-Ferguson Act. 15 U.S.C. §§ 1011-1015. The district court dismissed the claims as unripe, and invoked the Younger, Burford, and Colorado River abstention doctrines as additional bases for postponing resolution of the issues. We affirm the decision of the district court.


On November 8, 1988, California voters passed Proposition 103, which required insurers to reduce premium rates to twenty percent below the rates in effect the previous year and to maintain those rates for one year; after that year, insurers would be permitted to increase their rates only after having received the prior approval of the Commissioner. On November 9, a group of insurers petitioned the California Supreme Court to declare portions of Proposition 103 unconstitutional; in the resulting decision, Calfarm Ins. Co. v. Deukmejian, 48 Cal. 3d 805, 258 Cal. Rptr. 161, 771 P.2d 1247 (1989), the Court held unconstitutional a provision in the initiative which provided that only those insurers "threatened with insolvency" might be exempt from the rollback, but found that provision severable, and otherwise upheld the proposition. 48 Cal. 3d at 818-19, 821-26. The Calfarm court emphasized that individual insurers must be permitted to petition the Insurance Commissioner for approval of higher rates, and to make a showing that the rollback rate was confiscatory as applied to them. Id. at 825-26. Subsequently, 460 insurers filed 4,089 applications for exemption from the rollback requirements and instituted 50 lawsuits; the Chief Justice of the California Supreme Court, in his capacity as Chairperson of the Judicial Council, ordered the cases consolidated before a single Judge in the Los Angeles Superior Court.

The Commissioner promulgated regulations for implementing Proposition 103 and evaluating insurance company rates for the rollback year (1988-89);*fn2 these regulations strictly govern the manner in which an insurer's losses, expenses and profits are to be calculated. They provide that in calculating a firm's losses, actual loss data from 1989 is to be used. Cal. Code Regs. tit. 10 § 2645.4. Fixed expenses are established at the lower of either actual expenses incurred in 1989, or an amount calculated using an efficiency standard.*fn3 Certain expenses, however, such as those for political contributions and lobbying, must be excluded from the calculus. Cal. Code Regs. tit. 10 § 2644.10.

In determining an insurer's allowable profit, the regulations establish the after-tax rate of return as 10%; they further establish for various lines of insurance the appropriate capital base, as calculated by a fixed leverage ratio,*fn4 to which that rate of return is to be applied. Cal. Code Regs. tit. 10 § 2645.6(a), (b). However, when an insurer has operated on less surplus than is prescribed by the leverage ratios established in the regulations, its actual leverage ratio shall be used. Cal. Code Regs. tit. 10 § 2645.6(c).

Moreover, the regulations provide that insurers are entitled to petition the Commissioner for a hearing in which they might either demonstrate that the established rate is confiscatory, or seek approval of higher rates; they may not, however, challenge any of the generic determinations, such as the efficiency standards or leverage ratios, set forth in the regulations. Cal. Code Regs. tit. 10 § 2646.4.

The Commissioner made a preliminary determination of Fireman's Fund's rollback obligation and issued an order to show cause why Fireman's Fund should not be liable for the projected amount. Fireman's Fund then challenged the regulations in the district court, alleging that because the generic determinations contained therein require the exclusion of certain expenses, thus treating those expenses as profit, the firms' profit bases are artificially enlarged and their rollback obligations are thereby increased. Fireman's Fund made a similar argument with respect to the leverage ratios, arguing that when generic determinations rather than actual capital figures are used, the capital base is artificially diminished; consequently, when the appropriate rate of return is multiplied by that capital base, the allowable profit will be reduced as well. The insurers argued that the disallowed expenses in conjunction with the decreased capital base will ultimately have the effect of producing a final rate that is confiscatory. They further maintained that these provisions constituted Takings, Due Process, Equal Protection, First Amendment, Commerce and Supremacy Clause as well as McCarran-Ferguson Act violations. The district court dismissed the claims as unripe, and invoked various abstention doctrines as additional bases for refusing to pass upon Fireman's Fund's claims. The insurers now appeal.


Ripeness is a question of law reviewed de novo. Dodd v. Hood River County, 59 F.3d 852, 857 (9th Cir. 1995).

Whether the requirements for abstention have been met is reviewed de novo. Agriesti v. MGM Grand Hotels, Inc., 53 F.3d 1000, 1001 (9th Cir. 1995). When the requirements for abstention have been met, the district court's decision whether to abstain is reviewed for abuse of ...

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