Source: https://www.insurancelawblog.com/2018/10/articles/regulation-of-claims-handling-practices/california-fair-claims-settlement-practices-regulations-upheld-following-a-near-decade-long-legal-challenge-to-their-enforceability/
Timestamp: 2019-04-25 02:29:32+00:00

Document:
Following nearly a decade of uncertainty as to their enforceability, the California Court of Appeal upheld key components of the California Fair Claims Settlement Practices Regulations on September 20, 2018 and affirmed that the California Insurance Commissioner has the authority to penalize insurers for engaging in improper claim settlement practices based upon even a single act of misconduct.
In 1959, the California Legislature enacted the Unfair Insurance Practices Act (“UIPA”), Cal. Ins. Code § 790, et seq., in order to regulate trade practices in the business of insurance by defining and prohibiting unfair or deceptive acts or practices. In 1971, the Legislature enacted § 790.10 authorizing the Commissioner to promulgate regulations as are necessary to administer the UIPA.
Nine year later, in Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal.3d 287, the California Supreme Court reversed Royal Globe’s holding that § 790.03 created a private right of action against an insurer that commits one the acts prescribed in § 790.03(h). Hence, in the wake of Moradi-Shalal, only the Commissioner could sue an insurer for violating the UIPA and the available relief was limited to a cease and desist order. Further, Moradi-Shalal indicated that Royal Globe’s holding that a single act of misconduct could constitute a violation of § 790.03 was unfounded.
Accordingly, the following year, in 1989, the Legislature enacted Cal. Ins. Code § 790.035, which (i) authorizes the imposition of additional financial penalties for violations of § 790.03, and (ii) grants the Commissioner “the discretion to establish what constitutes an act” for purposes of imposing these new penalties.
In 1992, the Commissioner promulgated the Fair Claims Settlement Practice Regulations (the “Regulations”), 10 Cal. Code. Regs. §§ 2695.1-2695.14, which became effective in January 1993.
In 2012, a California Administrative Law Judge (an “ALJ”) issued a pre-trial order in In re Globe Life & Accident Ins. Co. holding, among other things, that the Regulations unlawfully eliminated the general business practice test from the statute. The California Department of Insurance (the “CDI”) did not appeal such order and ultimately dismissed the case on August 29, 2016. Even so, the issuance of such pre-trial order cast doubt over the future enforceability of the Regulations, which doubt was not resolved until the Court of Appeals issued its decision in PacifiCare Life and Health Ins. Co. v. Jones on September 20, 2018.
Following the completion of the examination, the CDI commenced an enforcement proceeding in order to impose penalties on PacifiCare for its allegedly unlawful claims-handling practices.
In 2013, following 230 days of evidentiary hearings taking place over three years, the ALJ issued a proposed decision finding that PacifiCare had committed 84,801 violations of § 790.03 and imposing a penalty of approximately $11.5 million.
On June 9, 2014, however, the Commissioner rejected the ALJ’s proposed decision and instead issued his own decision finding that PacifiCare had committed 908,547 violations of § 790.03 (spanning some 20 categories, ranging from the failure to timely pay claims to the failure to provide notice of the right to seek an independent medical review), and imposing an aggregate penalty of $173.6 million. Not only was the decision remarkable for the unprecedented amount of the penalty, but it was the very first enforcement action brought under the UIPA since its enactment in 1959 that had been litigated to a decision or even a proposed decision.
PacifiCare sought a determination that three of the Regulations underlying the Commissioner’s Decision, on their face, were inconsistent with the statutory language within UIPA and thereby facially invalid – namely, (i) § 2695.1(a), which states that, for purposes of defining an unfair claims settlement practice, a violation occurs when the practice is either “knowingly committed on a single occasion,” or “performed with such frequency as to indicate a general business practice[;]” (ii) § 2695.2(l), which defines the word “knowingly” to include implied and constructive knowledge; and (iii) § 2695.2(y), which defines the word “willful” for the purpose of a penalty enhancement without requiring specific intent to cause harm or violate the law (collectively, the “Challenged Regulations”).
Given the breadth and complexity of the issues, the Superior Court bifurcated the case. In the first phase, the Superior Court addressed the validity of the Challenged Regulations. At the conclusion thereof, the Superior Court sustained PacifiCare’s facial challenge to the legality of the Challenged Regulations and enjoined the Commissioner from continuing to enforce them.
In the second phase, the Superior Court determined that its first phase invalidation of the Challenged Regulations negated $91 million of the penalties, and that the remaining $82 million in penalties were invalid on other grounds. The second phase ruling is the subject of a second appeal that has yet to be briefed.
Finally, the Court of Appeal held that the third Challenged Regulation (§ 2695.2(y)), which defines the word “willful” for the purpose of a fine enhancement without requiring specific intent to cause harm or violate the law, does not blur the distinction between willful and nonwillful violations and thereby create an inconsistency between the two-tier penalty scheme in § 790.035.
Our firm has developed strategies to help insurers navigate these new challenges and we invite you to contact us for a free consultation.

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