Opinion ID: 1428677
Heading Depth: 1
Heading Rank: 4

Heading: Premium Discount Plan:

Text: This plan provides for graduated expense loading determined through a scale of discounts graduated according to the annual amount of the employer's premium. To qualify for this plan, the employer must have premiums from workmen's compensation in excess of $1,000. This total may include premiums paid in all states to one insurer, but may not include other lines of liability insurance. (Multistate, but not multiline.) Then, the discount is applied to the California portion of the premium. This discount is received no matter how small the California portion may be; that is, the California portion need not be over $1,000. Furthermore, the discount is granted irrespective of loss experience. The California portion of the total workmen's compensation standard premium of the policy or group of policies combined in accordance with this Rule shall be subject to the following discounts: TOTAL WORKMEN'S COMPENSATION DISCOUNTS APPLICABLE TO STANDARD PREMIUM CALIFORNIA PORTION First $ 1,000 None Next 4,000 7.1% Next 95,000 12.2% Over 100,000 13.7% The foregoing premium discounts shall not be applicable to any standard premium subject to retrospective rating. (Rule VII (2) Underwriting and Auditing Procedure of the California State Insurance Commissioner.) In Statutes 1913, chapter 176, a compulsory workmen's compensation system and the State Compensation Insurance Fund were established by the Legislature, without any express constitutional authority therefor. To give legality to an already accomplished fact, article XX, section 21, California Constitution, authorizing the Legislature to create, and enforce a complete system of workmen's compensation, was adopted in 1918. Pursuant thereto, we now have Insurance Code, sections 11730 to 11742, covering State Rate Supervision. [1] By Ruling 67, the commissioner seeks to modify existing minimum workmen's compensation premium rates by putting into effect two new rating plans, one of them called the Premium Discount Plan and the other the Retrospective Rating Plan. The purpose of both rating plans is to introduce into the California workmen's compensation insurance minimum rate structure the principle of expense graduation by size of risk as a means of reflecting in premium rates the commissioner's finding that an insurance company's expense involved in handling individual risks represents a smaller percentage of the premium in the case of larger risks than in the case of smaller risks. The present system, under which minimum premium rates are loaded by the commissioner for expense on a flat percentage basis without reference to possible variation of expense by size of risk, involves a redundancy of the expense item in the case of the larger risks. The commissioner has concluded that the proposed modifications of the rating structure will maintain adequate minimum rates and at the same time reduce existing expense redundancy, and, further, that their effect will be to promote competition between all types of workmen's compensation insurance carriers and to reduce rates charged to the public. The two plans, although similar in purpose, seek to accomplish the purpose in different ways and may be considered separately. In the case of the Premium Discount Plan, the commissioner seeks to accomplish the purpose by providing that all workmen's compensation policies involving premiums in excess of $1,000, computed at the regular manual rates, shall be subject to a graduated discount in favor of the insured upon the California portion of the premium. Plaintiffs contend that this Premium Discount Plan exceeds the powers granted to the commissioner by the California Workmen's Compensation Insurance Minimum Rating Law. [2] Insurance Code, sections 11732 and 11734, provide that the commissioner shall approve or issue as adequate for all admitted insurers a classification of risks and premium rates, uniform as to all insurers affected. The commissioner is not restricted by these sections (as contended by plaintiffs) to a mere grouping of hazard in each with a corresponding rate for each such classification. Rate-making involves a consideration, not only of the particular hazards of various occupations, but also of losses (pure premium) and of expense (expense loading). This is especially true where, as under our statute, the rate must be adequate. Expense is, therefore, not only a relevant, but an essential factor to be considered. [3] It is true that the commissioner in the past has always reflected this expense factor in the rate by means of a flat percentage loading. But, there is nothing in the statute which, expressly or impliedly, restricts him to that mode of considering and reflecting the expense factor. [4] The commissioner concluded in making up the Premium Discount Plan that a flat percentage expense loading produces redundancy in rates beyond the requirements of adequacy. He may thus make such modification of the flat percentage loading as to him seems necessary to correct the redundancy. In the Premium Discount Plan, the commissioner has seen fit to do this by the device of providing for a graduated discount from the premium produced by the manual rate. Plaintiffs' argument to the effect that in so doing the commissioner fixes a premium, rather than a premium rate, is based upon form rather than substance. The discount from the manual rate becomes in effect a modifying factor in the rate-making process. Turning now to the Retrospective Rating Plan, this plan involves different features. Although it applies the principle of expense graduation by size of risk, it does so as part of a plan of merit rating issued under the merit rating provisions of the Insurance Code. Sections 11732 and 11734 provide that the commissioner may approve or issue a system of merit rating. Insurance Code, section 11730, defines merit rating as including schedule rating in which the rate is varied according to physical conditions, and experience rating in which the experience of the particular insured is used as a factor in raising or lowering his rate. [5] The Retrospective Rating Plan has been issued as a form of experience rating. Plaintiffs contend, however, that it is not experience rating within the meaning of Insurance Code, section 11730, because under that section, the experience of the particular insured which may be used as a factor in raising or lowering the rate means, according to plaintiffs' interpretation, the past experience of the insured, and does not permit use of current experience during the policy year as provided in the Retrospective Rating Plan. The statute, which expressly defines the term experience rating without any such restriction, should not be so narrowly construed and the Retrospective Rating Plan is, therefore, a form of experience rating within the power of the commissioner to issue. In this connection it is significant that in 1938, a former commissioner issued a Retrospective Rating Plan based upon the same principle and still in effect except as modified by the present plan, which embodies additional features. The uniform interpretation prior to and since 1914 of classification of risks and premium rates by persons in the business has been risk groupings by occupation, businesses and industries by degree of hazard with a corresponding rate for each classification. [6] It is claimed that what the Legislature intended by the use of these words was to freeze that method into the act. There is not any such intention in the act. It is obvious that the Legislature had no intention to freeze any particular method of classification because in section 11734 it expressly provided he may change any such classification or system.... See First Industrial Loan Co. v. Daugherty, 26 Cal.2d 545, 550 [159 P.2d 921], as to powers of an administrative officer to make changes reasonably necessary to effectuate the purpose of the statute governing him. [7] It is a general rule of statutory construction that a statute, expressed in general terms and words of present or future tense, will be applied, not only to situations existing and known at the time of the enactment, but also prospectively to things and conditions that come into existence thereafter. Legislation must be given elastic operation if it is to cope with changing economic and social conditions. (2 Sutherland, Statutory Construction, 3d ed., § 5102, pp. 509-510.) Over the years of the existence of the Fund, with the knowledge of the insurance trade, the hazard of the particular employment has not been the sole basis of classifying risks and rates. Size limits as to eligibility based on the cost of administering plans and size of the organization have also been considered. For example, minimum payrolls of packing houses and department stores and others have been considered. In 1946 the insurance commissioner approved the principle of graduation of expense by size of risk as applied to premium discount and retrospective rating plans. In 1951 he applied an additional charge on risks earning a premium under a certain amount. This is called expense constant. [8] While not determinative, the interpretation of a statute by an officer administering it as a specialist is entitled to great weight. (See Whitcomb Hotel, Inc. v. California Emp. Com., 24 Cal.2d 753, 756 [151 P.2d 233, 155 A.L.R. 405].) The plans set up by Ruling 67 contemplate rating of premiums for workmen's compensation based upon premiums paid by the California employers in other states, under Plan D for other types of liability insurance as well as workmen's compensation, in the other plans for the latter type insurance only. [9] It is contended that the commissioner had no power to authorize this interstate rating, since it was not uniform because plaintiff State Compensation Insurance Fund is permitted by statute to engage only in intrastate business, while its competitors may engage in either intrastate or interstate business. This contention is untenable. Under Insurance Code sections 11732-11734, the commissioner is not limited in his process of reflecting the expense factor to the consideration of only expense as reflected in California premiums. Even under the flat percentage loading system, the commissioner has always based his findings as to the proper expense loading of a premium upon all available statistical evidence, statewide, nationwide, or both. There is nothing in our statute to prevent similar consideration in working out a premium discount which is merely a modification of the flat percentage loading. [10] It is also contended that Ruling 67 violates Insurance Code sections 750, 11738 and related statutes which prohibit rebates. Sections 750 and 751 prohibit rebate of the premium payable on an insurance contract or not ... specified ... in the policy.... Here the rating plans, if used, would be specified in each policy and provide for discounts, not rebates. A discount is not a rebate or refund but a method of computing rate. (See Associated Indem. Corp. v. Oil Well Drilling Co., (Tex.Civ.App.) 258 S.W.2d 523, 532, 153 Tex. 153 [264 S.W.2d 697].) [11] Section 11738 provides that A refund by reason of a participating provision in a compensation policy may only be made from surplus. Participating refers to the right to share in earnings and does not refer to the price paid for insurance. Refunds to participants should only come from surplus, although there are other types of refunds which obviously do not have to come from surplus, thus, refund of unearned premium on cancellation. Premium discount and retrospective rating do not refund anything. They are merely formulae for determining amount of price of insurance ultimately to be paid. The various opinions of the attorney general and counsel for the commissioner dealt with attempts, by guaranteeing dividends, to contract for rates lower than the minimum prescribed by the commissioner. Here the rating plans as applied (including the discounts) constitute the minimum rates.