Five insurance trade groups have taken legal action to try to stop California's insurance commissioner from implementing regulations that would penalize insurers with ties to companies that conduct business in Iran.

Meanwhile, war risk underwriters at Lloyd's of London have added Iran to their list of risky areas in response to potential increased sanctions by U.S. governmental agencies.

The five trade groups representing insurers filed a petition last week with the California Office of Administrative Law, alleging that recent requirements imposed by California Insurance Commissioner Steve Poizner are illegal, “underground” regulations—or rules that a government agency attempts to pass or enforce without a public comment period or other requirements under state law.

The American Council of Life Insurers, the American Insurance Assn., the Assn. of California Insurance Cos., the Assn. of California Life & Health Insurance Cos. and the Personal Insurance Federation of California filed the petition seeking to invalidate the regulations until they have gone through a formal rulemaking process.

In February, Mr. Poizner released a list of 50 companies that he said do business in the Iranian oil, natural gas, nuclear and defense sectors. He asked insurers licensed in California to eliminate any investments in those companies and pledge by April 2 to avoid such investments in the future. Mr. Poizner threatened to post a public list of those who did not comply, and said last month that 460 insurers had agreed to the moratorium.

Mr. Poizner, who is running in the Republican primary for governor, also said that after March 31, California would not count investments in such companies or their affiliates toward reserve requirements for insurers licensed in California.

Federal law already bars U.S. companies from investing directly in Iran. A bill that would impose harsher sanctions on firms that do business with companies that do business in Iran's petroleum, nuclear and defense sectors has passed Congress and is in a conference committee.

“Commissioner Poizner has exceeded his legal authority by his well-intentioned but misguided attempts to bar insurance company investments that are not prohibited by state or federal law,” the five trade groups said in a statement. “California's insurance commissioner has broad powers to regulate insurance companies in this state. The conduct of foreign policy is not one of them.”

The trade groups argue that Mr. Poizner lacks the legal authority to enforce the Iran divestment initiatives because they would apply to insurers headquartered outside California, among other reasons. Under most states' laws and National Assn. of Insurance Commissioners regulations, insurance companies are regulated in the state in which they are domiciled, the trade groups said.

“Your action would appear to place the (insurers) that are legally domiciled elsewhere in direct conflict with their respective regulators,” the groups wrote in a Feb. 19 letter to Mr. Poizner's office.

They also said Mr. Poizner's office has not explained criteria for placing companies on its list of firms doing business in Iran, which includes Siemens A.G., Royal Dutch Shell P.L.C. and Hyundai E&C Co. Ltd. Some companies on the list no longer do business in Iran, the trade groups said.

“On what basis will the commissioner determine in the future what companies are "bad'? How will insurers make future investment decisions?...The potential list is limited only by the imagination,” the trade groups said.

Insurers' investments in companies on Mr. Poizner's list is primarily in the form of debt, not in shares of the companies, the trade groups said.

A spokesman for Mr. Poizner's office said the commissioner's job is to ensure insurance companies don't make risky investments.

“It is surprising that insurance companies are fighting to retain the ability to invest in companies that do business in Iran,” the spokesman said. “We've identified these companies as risky and our oversight authority of these investments is clear.”

Separately, the Joint War Committee of the Lloyd's Market Assn. last month added Iran to its list of areas at greater risk of war, strikes, terrorism and related perils. Underwriters who follow the guidelines now will require that ships traveling to Iran consult the underwriter first, so that he or she can assess the risk of the voyage and, often, assess an additional premium.

Typically, the committee adds an area to the list due to violence or deteriorating security, but in this case it acted because of the potential for increased sanctions from the U.S. government, said Neil Roberts, secretary to the committee. Previous versions of the U.S. legislation would have empowered the Treasury Department to freeze the U.S.-based assets and transactions of an insurer who underwrote a ship that brought refined petroleum to Iran. The final language of that proposal is not yet known but underwriters thought they needed to act in advance, Mr. Roberts said.

“Because the wording (of the legislation) isn't clear, they just need to know what's going in (to Iran),” he said. “It's an imperfect tool to approach a rather unsatisfactory situation. They don't really see what else they can do at the moment.”

Mr. Roberts said if the U.S. government prevented an insurance company from trading in dollars, it would “effectively put that company out of business.”