The state Department of Insurance is considering how to respond to an appeals court panel’s decision that would nullify a portion of the Homeowners’ Bill of Rights issued by Insurance Commissioner John Garamendi shortly after taking office in January 2003.

If it stands, the ruling by a panel of the 3rd Appellate District Court of Appeals would toss out emergency regulations that were intended to halt “use it and lose it” practices, whereby insurers were canceling homeowners’ policies after a claim, or drastically raising premiums.

The panel upheld a lower court’s ruling that Garamendi did not have the authority to issue regulations restricting the cancellation and pricing of policies.

The practice of canceling homeowners’ insurance has come under increasing scrutiny because some homeowners said they were being penalized for either minor claims or claims they never actually filed, because insurance industry databases were faulty.

The emergency regulations specified that insurers needed to take into account future risk in making decisions about a policy and not simply rely on past claims history, especially if a problem had been rectified.

“We are pleased with the Court of Appeal ruling because it points out that the insurance commissioner does not have the power to create new laws by fiat. Regulations must first be presented to the Legislature for approval,” said Dan Dunmoyer, president of the Personal Insurance Federation of California, one of three industry trade groups that challenged the rules.

Garamendi said attorneys were reviewing the case to determine the department’s next move but that he would likely pursue legislation to ensure he has that authority. “The ‘use it or lose it’ insurance syndrome is a very real problem with very real victims,” he said.

Last year, the Legislature approved some new regulations of homeowners insurance but a bill that would have written the emergency regulations into law failed to make it out of the Assembly.