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Michigan Supreme Court Lansing, Michigan

Opinion
SUPREME COURT INSURANCE INSTITUTE OF MICHIGAN, HASTINGS MUTUAL INSURANCE COMPANY, FARM BUREAU GENERAL INSURANCE COMPANY, FRANKENMUTH CASUALTY INSURANCE, WALTER STAFFORD, JR., and MICHAEL FLOHR, Plaintiffs-Appellees, and MICHIGAN INSURANCE COALITION and CITIZENS INSURANCE COMPANY OF AMERICA, Intervening PlaintiffsAppellees, v COMMISSIONER, FINANCIAL & INSURANCE SERVICES, DEPARTMENT OF LABOR & ECONOMIC GROWTH, Defendant-Appellant.

Chief Justice:

Justices:

Marilyn Kelly

Michael F. Cavanagh Elizabeth A. Weaver Maura D. Corrigan Robert P. Young, Jr. Stephen J. Markman Diane M. Hathaway

FILED JULY 8, 2010 STATE OF MICHIGAN

No. 137400

INSURANCE INSTITUTE OF MICHIGAN, HASTINGS MUTUAL INSURANCE COMPANY, FARM

BUREAU GENERAL INSURANCE COMPANY, FRANKENMUTH CASUALTY INSURANCE, WALTER STAFFORD, JR., and MICHAEL FLOHR, Plaintiffs-Appellants, and MICHIGAN INSURANCE COALITION and CITIZENS INSURANCE COMPANY OF AMERICA, Intervening PlaintiffsAppellants, v COMMISSIONER, FINANCIAL & INSURANCE SERVICES, DEPARTMENT OF LABOR & ECONOMIC GROWTH, Defendant-Appellee. No. 137407

BEFORE THE ENTIRE BENCH CORRIGAN, J. This case concerns the validity of rules promulgated by defendant Commissioner of Financial & Insurance Services (the OFIS rules)1 banning the practice of "insurance scoring" under Chapters 21, 24, and 26 of the Insurance Code. The trial court ruled that

On February 1, 2008, Governor Jennifer Granholm signed Executive Order 2008-01, which reorganized the Office of Financial & Insurance Services (OFIS) and changed its name to the Office of Financial & Insurance Regulation (OFIR). The order took effect April 6, 2008. <http://www.michigan.gov/dleg/0,1607,7-154-10555--,00.html> (accessed June 21, 2010.) We use the former name in order to maintain consistency with the parties' briefs and the Court of Appeals opinions.

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the rules were "illegal, invalid, and unenforceable" and permanently enjoined defendant from enforcing them. The Court of Appeals issued three separate opinions, which

vacated the circuit court's order but did not agree on a rationale. We hold that the Commissioner exceeded her authority by promulgating the OFIS rules because they are contrary to the Insurance Code. Accordingly, we vacate the judgment of the Court of Appeals and reinstate the trial court's order. I. FACTS AND PROCEEDINGS As explained in a 2002 report from then-OFIS Commissioner Frank Fitzgerald, "insurance scoring" or "insurance credit scoring" is "the use of select credit information to help insurance companies establish automobile and homeowners premiums." Frank Fitzgerald, The Use of Credit Scoring in Automobile and Homeowners Insurance (2002) (Fitzgerald Report),2 p 5. An individual's credit score is calculated by applying a

standard formula to information from the individual's credit history. These formulas are developed either by the insurance companies themselves or by credit scoring companies. Id. Insurance companies that use insurance scoring offer discounts to individuals with good insurance scores. Not all insurance companies use insurance scoring. Of those that do, their practices vary concerning the extent of the discounts offered and how the insurance scores are calculated. Id. at 5-6.

Available at <http://www.michigan.gov/documents/cis_ofis_credit_scoring_ report_52885_7.pdf> (accessed June 21, 2010).

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In 1997, the Legislature enacted MCL 500.2110a, which allows insurers to establish and maintain a premium discount plan without prior approval by the Legislature or the insurance commissioner. As a result, insurance companies in Michigan began using insurance scoring. Fitzgerald Report, supra at 9. In 2002, Commissioner

Fitzgerald undertook a statewide study of this practice in order "to gather information on the use of insurance credit scoring in personal automobile and homeowners insurance policies and to take testimony concerning its effect on Michigan citizens." Id. at 1. In December 2002, OFIS issued the Fitzgerald Report, which concluded that "Michigan law permits a discount based on insurance credit scoring" but that "significant and legitimate concerns" identified during the course of the study "must be addressed to adequately protect the rights of Michigan consumers under the Insurance Code." Id. at 24. To address these concerns, the report included several "Administrative Recommendations," or "action[s] that [are] available to the commissioner under current law." Id. The report concluded that "[o]ther concerns are beyond the statutory authority of the commissioner to remedy and will require action by the Michigan Legislature." Id. The report thus "respectfully submitted" several "Legislative Recommendations" "for the consideration of legislators in their policy deliberations." Id. None of the legislative recommendations totally prohibited the use of insurance scoring. On February 14, 2003, Commissioner Fitzgerald issued a bulletin setting forth several directives taken from the December 2002 report. In the Matter of Conforming Insurance Credit Scoring Practices With Insurance Code Requirements, OFIS Bulletin

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2003-01-INS (February 14, 2003).3 On the same date, he issued an order directing OFIS staff to monitor insurance companies' compliance with the directives and to initiate compliance actions as appropriate. Order to Monitor Insurer Practices and To Initiate Compliance Actions as Appropriate, OFIS Order No. 03-005-M (February 14, 2003).4 The bulletin directed insurance companies using insurance scoring to file with OFIS such information as "the formula used to apply the discount," "the specific credit classification factors used to calculate the insurance credit score," and an annual "actuarial certification justifying the discount levels and discount tiers offered by the company." OFIS Bulletin, supra. The bulletin also directed insurance companies to "recalculate and then apply an insured's insurance credit score at least once annually" and to "annually inform . . . policyholders or applicants of the credit score used to apply an insurance credit scoring discount . . . ." Id. On May 13, 2003, then-OFIS Commissioner Linda A. Watters5 issued an "update" to her predecessor's February 14, 2003 bulletin. In the Matter of Insurance Credit Scoring Practices--Update to Bulletin 2003-01-INS, OFIS Bulletin 2003-02-INS (May

Available at <http://www.michigan.gov/dleg/0,1607,7-154-10555_12900_ 12906-61601--,00.html> (accessed June 21, 2010). Available at <http://www.michigan.gov/documents/cis_ofis_03_005_m_57777_ 7.pdf> (accessed June 21, 2010). The current OFIR Commissioner is Ken Ross. <http://www.michigan.gov/ dleg/0,1607,7-154-10555-32386--,00.html> (accessed June 21, 2010).
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13, 2003) (Watters Bulletin).6 The bulletin began by stating that "[i]nsurance scoring is problematic at best. Perhaps no other widespread practice of insurers presents so many technical and social issues." After providing several examples, the bulletin continued: Such considerations led Governor Granholm to call for a ban on the use of insurance credit scoring altogether. In February, two bills were introduced that would ban the use of insurance credit scoring in the rating of automobile and home insurance. . . . If a ban cannot be achieved, at least significant reform legislation is imperative to protect the interests of consumers on such an important matter as the amount they pay for automobile and home insurance. This agency will be fully supportive of the Governor in these matters. In the meantime, it is incumbent upon the Commissioner to make the most of current law in addressing the concerns above. Bulletin 2003-01INS was designed to conform insurance credit scoring practices to Insurance Code requirements. The bulletin also reiterated that insurers must inform policyholders or applicants of the credit score used to apply a discount and revised the directive requiring annual recalculation of insurance scores to require recalculation only upon the request of the insured. Id. In July 2004, after neither of the above-mentioned bills was enacted into law, OFIS developed proposed administrative rules prohibiting the use of insurance scoring. It held four public hearings--in Lansing, Detroit, Grand Rapids, and Flint--"to receive public comments on proposed rules clarifying a reasonable classification system under the Insurance Code, by requiring insurers to adjust base rates and by prohibiting the use Available at <http://www.michigan.gov/dleg/0,1607,7-154-10555_12900_ 12906-75302--,00.html> (accessed June 21, 2010).
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as a rating factor after January 1, 2005, of a credit-based insurance score." See OFIS Notice of Public Hearing on Proposed Rules to Reduce Insurance Base Rates and To Ban the Use of Credit Scoring.7 After submission to and approval by the Office of Regulatory Reform,8 the Commissioner formally adopted the rules. See MCL 24.245. On February 17, 2005, the Joint Committee on Administrative Rules (JCAR)9 issued a notice of objection to the proposed rules. See MCL 24.245a.10 JCAR determined that "[t]he agency is exceeding the statutory scope of its rule-making authority" and that "[t]he rule is in conflict with state law, the Insurance Code of 1956," and "is arbitrary or capricious." JCAR Revised Notice of Objection, # 05-3 (February 17, 2005). Bills to rescind the OFIS rules upon their effective date were introduced in both the House and Senate on February 22, 2005. SB 233; HB 4374. See MCL 24.245a(3).11 After Governor Granholm indicated her

Available at <http://www.michigan.gov/documents/2004-022_newspaper_hrg_ notice_94059_7.pdf> (accessed June 21, 2010). The Office of Regulatory Reform has now been restructured and renamed the State Office of Administrative Hearings and Rules. <http://www.michigan.gov/dleg/0, 1607,7-154-10576_35738-15543--,00.html> (accessed June 21, 2010). According to the website of the Michigan Legislative Council, JCAR "is a statutorily created bipartisan legislative committee, comprised of 5 house and 5 senate members, which is responsible for the legislative oversight of administrative rules proposed by state agencies." <http://council.legislature.mi.gov/jcar.html> (accessed June 21, 2010). Pursuant to MCL 24.245a(1), JCAR has 15 days after receipt to consider a proposed rule and to object by filing a notice of objection.
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MCL 24.245a(3) provides, in relevant part:

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intention to veto these bills, however, Senator Mike Bishop stated during a March 9, 2005 session of the Senate that "it would be futile for us to take up these bills and pointless to pursue passage of Senate Bill No. 233." Statement of Senator Bishop, Journal of the Senate, March 9, 2005, pp 247-248. No legislative action ensued. Under MCL 24.245a(5),12 ORR filed the rules with the Secretary of State on March 25, 2005. On March 29, 2005, plaintiffs filed a complaint for declaratory and injunctive relief, and the Michigan Insurance Coalition and Citizens Insurance Company of America filed a complaint and a motion to intervene as plaintiffs.13 Plaintiffs and

If the committee files a notice of objection within the time period prescribed in subsection (1), the committee chair, the alternate chair, or any member of the committee shall cause bills to be introduced in both houses of the legislature simultaneously. Each house shall place the bill or bills directly on its calendar. The bills shall contain 1 or more of the following: (a) A rescission of a rule upon its effective date.
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MCL 24.245a(5) provides:

If the legislation introduced pursuant to subsection (3) is defeated in either house and if the vote by which the legislation failed to pass is not reconsidered in compliance with the rules of that house, or if legislation introduced pursuant to subsection (3) is not adopted by both houses within the time period specified in subsection (4), the office of regulatory reform may file the rule with the secretary of state. The rule shall take effect immediately upon filing with the secretary of state unless a later date is specified within the rule. According to plaintiffs' brief in Docket No. 137407, p 1 n 4, plaintiff Insurance Institute of Michigan "is a trade association comprised of 38 property and casualty insurance companies," including plaintiffs Hastings Mutual Insurance Company (Hastings), Farm Bureau General Insurance Company of Michigan (Farm Bureau), and Frankenmuth Casualty Insurance (Frankenmuth). "Plaintiffs Walter Stafford, Jr. and Michael Flohr are policyholders of Farm Bureau whose insurance premiums would be increased by the OFIS rules." Id. Intervening plaintiff Michigan Insurance Coalition "is
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proposed intervening plaintiffs also sought a preliminary injunction.

The parties

subsequently stipulated to the intervention of the proposed intervening plaintiffs as plaintiffs. Defendant moved for a change of venue and also argued that plaintiffs were not permitted to bring an original action in the circuit court, but were limited to filing a petition for judicial review under MCL 500.244(1). On April 15, 2005, the trial court heard arguments on both defendant's motion and on the merits of the case. It denied defendant's motion for a change of venue. At the close of plaintiffs' arguments on the merits, defense counsel declined to present any additional testimony or evidence, stating the defense position that review should be limited to the administrative record.14 The court then stated it would "consolidate this hearing with the final trial."

a property-casualty trade association based in Michigan" and intervening plaintiff Citizens Insurance Company of America (Citizens) "is a property and casualty company based in Michigan." Id. at 2 n 4.
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The following exchange took place on the record:

The Court: Okay, let me just ask [defense counsel]. My understanding is that you do not wish to present any additional testimony or evidence at this hearing today. Is that correct? [Defense Counsel]: That's correct. The Court: Or

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