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CA Department of Insurance

Court upholds Fair Claims Settlement Practices Regulations after decade-long legal challenge to insurance commissioner’s authority

News: 2018 Press Release

For Release: September 21, 2018
Media Calls Only: 916-492-3566
Email Inquiries: cdipress@insurance.ca.gov
Court upholds Fair Claims Settlement Practices Regulations after decade-long legal challenge
The decision paves the way to affirming $91 million in fines against PacifiCare for unlawful claims-handling practices

LOS ANGELES, Calif. — After a decade of legal wrangling over the regulations that implement the Unfair Insurance Practices Act (UIPA), a three-justice panel of the California Court of Appeal, 4th Appellate District, upheld the Insurance Commissioner's Fair Claims Settlement Practices Regulations, which prescribe how insurance companies must process insurance claims and are the foundation in determining the number of violations committed when assessing fines against insurers that have committed unfair claims practices.

Department of Insurance examinations of PacifiCare's claims-handling uncovered evidence of numerous unfair claims practices—which included wrongful denials for life-saving treatment for people battling serious illness and claim payment denials for providers and hospitals—all because the insurer was focused on maximizing profits through what it called "efficiencies" measures after the 2005 botched $7 billion acquisition of PacifiCare by UnitedHealthcare. The Department examinations also uncovered evidence the company was well aware of the egregious issues.

Under the Insurance Code, these unfair acts or practices include misrepresenting what medications or treatments an insurance policy covers, failing to promptly pay claims where liability is reasonably clear, and forcing claimants to file lawsuits to get full payment, and other acts. The Insurance Code allows the commissioner to impose fines of up to $5,000 each time an insurer commits an unfair act or practice on a consumer, or up to $10,000 each time if the insurer did so willfully.

"UnitedHealthcare purchased PacifiCare and imposed cost-cutting measures that destroyed PacifiCare's claims-handling processes and its arguments in litigation that insurance companies should be allowed to willfully harm consumers as long as they don't do it too often, reflect a gross disregard of the lives and well-being of the consumers who paid for the promise of coverage," Commissioner Jones said. "Customers have no choice but to rely on the integrity of their health insurance companies. PacifiCare breached that trust. By any measure, 908,000 violations reflect a general business practice of violating consumer protection laws. I am delighted the court of appeal has affirmed the authority of the insurance commissioner to punish insurance companies for knowingly harming even one consumer."

Based on departmental examination results and following and administrative hearing that took three years, Insurance Commissioner Dave Jones found PacifiCare committed 908,547 separate violations of the UIPA, and he imposed fines aggregating $173,603,750 in penalties. On behalf of PacifiCare, UnitedHealthcare sued the commissioner, arguing that none of its harmful conduct violated the Insurance Code.

PacifiCare argued that insurers are immune from fines for committing these unfair acts, even if the insurer did so intentionally, unless the commissioner is also able to show that the insurer knew it had committed the acts frequently enough to constitute a "general business practice." The court of appeal rejected the argument, stating: "PacifiCare's interpretation of section 790.03(h) is not only internally problematic, it stands in contrast to virtually every other statute the Legislature has enacted in connection with (1) enforcement of the Insurance Code against insurers generally; (2) enforcement of the UIPA in particular; and (3) the imposition of administrative penalties against insurers in other contexts."

The court also rejected PacifiCare's argument that the commissioner must prove an insurer had "actual knowledge" of its illegal conduct and held that it was within the commissioner's authority to hold the insurer responsible if its agents or employees were aware of facts that would cause a reasonable person to know of the violations. The court also found the commissioner's reasoning was sensible in that restricting the definition of "knowingly" to one particular individual's actual knowledge would fail to take into account that many people handle a claim, and an unfair practice can be committed by cumulative acts, not simply the intentional act of one person."

Further, the court of appeal also upheld the commissioner's interpretation that an insurer's "willful" violation of the act may be established by showing a purpose or willingness to commit the act and agreed that penalties for willful violations do not need to require a showing that the insurer intended to violate the law or injure someone. The court held, "As the Commissioner points out, he engaged in an extensive, formal rulemaking process in the course of promulgating these regulations. That careful consideration, combined with the Commissioner's expertise in the area, weighs in favor of according significant deference to the Commissioner's interpretation of the terms, and we do so."

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Media Notes:

  • PacifiCare Opinion in PacifiCare Life and Health Insurance Company v. Dave Jones as Insurance Commissioner of the State of California, 4th District Court of Appeal # G053914.

  • The case against PacifiCare was prosecuted at the administrative hearing by Michael Strumwasser and Bryce Gee, Strumwasser & Woocher, LLP, 10940 Wilshire Blvd., Suite 2000, Los Angeles, CA 90024, (310) 576-1233.

  • UnitedHealthcare filed a lawsuit on behalf of PacifiCare in the Orange County Superior Court, challenging the fines, and also claiming that the Fair Claims Settlement Practices Regulations under which the fines were imposed, were illegal.

  • The regulations were adopted by Commissioner John Garamendi in 1992, in response to legislation that gave the commissioner the power to fine insurers for violating the Unfair Insurance Practices Act. The legislation was enacted following the Supreme Court's decision in Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287, which held that private parties could not sue insurance  companies for violating the Act. Prior to the new legislation, the insurance commissioner only had the power to sue an insurer and ask the court for a cease and desist order.  

  • The case was bifurcated by the superior court with the challenge to the regulations going first. In the first phase, the superior court first ruled three of the regulations were illegal.

  • The superior court rejected the regulations' interpretation of Insurance Code section 790.03(h) which allows the commissioner to impose fines either whenever an insurer knowingly commits any of the 16 acts or practices on a single instance, or when an insurer commits the acts or practices with a frequency that indicates a general practice. Instead, the superior court incorrectly ruled that the code only authorized fines when an  insurer knowingly performed the acts with a frequency that indicates a general business practice.

  • The superior court also rejected the regulations' broad  interpretation of "knowing," which included "constructive" knowledge (knowledge of facts that would cause a reasonable person to understand there was a problem), and "implied" knowledge (e.g., an employer is charged with the knowledge possessed by its agents or employees). The superior court ruled that the statute was limited to "actual" knowledge, but the  court didn't explain how a corporation could have actual knowledge.

  • The superior court also rejected the regulations' definition of "willful," which included only the intent to commit the act, but did require proof that the insurer specifically intended to break the law.

  • This court of appeal's decision reverses all three of the superior court's findings, and holds that the commissioner's regulations were proper interpretations of the Unfair Insurance Practices Act, and that they were designed to further the law's intent to protect consumers.

  • In the second phase, the superior court decided that the first ruling negates $91 million in penalties. The court of appeal's first-phase decision thus paves the way for a ruling reaffirming $91 million in penalties involving PacifiCare's claims-handling practices following the corporate acquisition.

  • In the second phase the superior court also reversed $82 million in penalties on other grounds. An appeal of that decision is pending in the court of appeal, to follow the decision just released.

  • The second phase decision has been appealed by both sides, but has not yet been briefed.



The California Department of Insurance, established in 1868, is the largest consumer protection agency in California. Insurers collect $310 billion in premiums annually in California. Since 2011 the California Department of Insurance received more than 1,000,000 calls from consumers and helped recover over $469 million in claims and premiums. Please visit the Department of Insurance website at www.insurance.ca.gov. Non-media inquiries should be directed to the Consumer Hotline at 800.927.4357. Telecommunications Devices for the Deaf (TDD), please dial 800.482.4833.

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