Recent high-stakes litigation has captured the attention of insurance professionals everywhere. A California Court of Appeal’s finding in Pacificare Life & Health Ins. Co. v. Jones affirmed on September 20, 2018,1 $91 million in fines against an insurer for violating the Insurance Commissioner’s Fair Claims Settlement Practices Regulations, which prescribe how insurers must process insurance claims and how the number of violations are calculated when assessing fines against insurers. These regulations implement the statutory provisions of the Unfair Insurance Practices Act (“UIPA”).2
In this case, the insurer had violated the UIPA over 900,000 times in wrongfully denying lifesaving treatment for people battling serious illnesses, denying payment for claims to providers and hospitals, misrepresenting what medications or treatments insurance policies covered, failing to promptly pay claims where liability is reasonably clear, and forcing claimants to file lawsuits to receive full policy benefits, among other acts. According to Insurance Commissioner Dave Jones, a parent company had previously purchased the insurer and “imposed cost-cutting measures that destroyed [the insurer]’s claims-handling processes” in order to maximize profits.3
The crux of the dispute regarding the insurer’s liability for the fines focused on the scope of the insurance commissioner’s authority to issue regulations that interpret and arguably expand the statutory language in the UIPA, specifically, Section 790.03(h),4 which states that any one action (out of the 16 identified) can constitute “unfair methods of competition and unfair and deceptive acts or practices in the business of insurance” if they are “[k]nowingly committ[ed] or perform[ed] with such frequency as to indicate a general business practice . . . .”
The three regulations at issue, which provide interpretive guidance for Section 709.03, provide the following: (1) a violation could be either a single occurrence committed knowingly or a series of occurrences that together indicate a general business practice,5 (2) “knowledge” includes implied and constructive knowledge,6 and (3) “willfulness” does not require a specific intent to cause harm or violate the law.7 Since their adoption in 1992, these regulations have assisted the commissioner in determining the number of violations in assessing fines against insurers.
In Pacificare Life & Health Ins., the trial court issued an injunction preventing the commissioner’s enforcement of the three regulations (and therefore the $91 million in fines it had previously assessed) — holding that the regulation allowing for violations based on a single occurrence knowingly committed is inconsistent with (1) Section 790.03(h)’s language and (2) prior California Supreme Court decisions interpreting Section 790.03(h) as only applying to general business practices. It also held that the two definitions relating to “knowledge” and “willfulness” were invalid.
The court of appeal reversed the injunction in its entirety, stating that the definitions were valid, that the regulations were consistent with Section 790.03, and that a correct interpretation of Supreme Court authority shows support for the imposition of fines for single violations knowingly committed.8 In short, the commissioner has broad authority to issue regulations relating to the Unfair Insurance Practices Act “from time to time as conditions warrant.”9 The court of appeal’s decision is now being appealed to the California Supreme Court.
A decade-long dispute regarding the authority of the commissioner to issue regulations that purport to broaden the interpretation of “bad faith” under Section 709.03(h) is resolved in favor of the commissioner, at least for now. However, because an analysis of previous Supreme Court decisions relied upon by the court of appeal raises questions regarding the latter’s proper interpretation of such precedence10 and, thus, the viability of the three regulations, insurance professionals will continue to monitor the Supreme Court’s review of Pacificare Life & Health Ins. with great interest – especially since issues of law (which include interpretation of statutes) are reviewed de novo, meaning without deference to the court of appeal.
At a much higher level, the Pacificare Life & Health Ins. decision underscores the power of ambiguous language to affect the results of a court’s interpretation of the wording, especially because the same rules of construction apply to both statutes and insurance policies. As to insurance policies, well-crafted and clear policy language also is important for insurers in light of the longstanding presumption in favor of coverage in the face of ambiguity, which several courts around the country still apply.
1 See Pacificare Life & Health Ins. Co. v. Jones, 2018 Cal. App. LEXIS 836, *48 (Cal. Ct. App. Sept. 20, 2018) (reversing injunction order enjoining Insurance Commissioner from enforcing three of its regulations relating to Insurance Code § 790.03(h)). The remaining $82 million in fines against the same insurer is subject to a separate appeal.
2 Cal. Ins. Code § 790, et seq. (Unfair Insurance Practices Act).
3 Press Release, Court upholds Fair Claims Settlement Practices Regulations after decade-long legal challenge to insurance commissioner’s authority, Cal. Dept. of Ins. (Sept. 21, 2018), available at https://www.insurance.ca.gov/0400-news/0100-press-releases/2018/release116-18.cfm.
4 Unless otherwise indicated, at “section” references shall be to the California Insurance Code.
5 Cal. Code Regs., tit. 10 § 2695.1(a).
6 Cal. Code Regs., tit. 10 § 2695.2(l).
7 Cal. Code Regs., tit. 10 § 2695.2(y).
8 See Pacificare Life & Health Ins. Co. v. Jones, 2018 Cal. App. LEXIS 836, *21-24 (holding that Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880, 891 (Cal. 1979) established the application of Section 790.03(h) to single violations knowingly committed; that Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287, 303 (Cal. 1988) provided only negative dicta commentary against Royal Globe’s holding, which was not binding; and that Zhang v. Superior Court, 57 Cal. 4th 364, 388 (Cal. 2013) affirmed the limited holding of Moradi-Shalal that the UIPA did not intend to create a private right of action).
9 Cal. Ins. Code § 709.10
10 In Royal Globe Ins. Co., the Supreme Court initially held that “[a]lthough the language of [Section 790.03] is not clear, if the premise is accepted that a private party may bring an action for an insurer’s violation of subdivision (h). . . then a single violation knowingly committed is a sufficient basis for such an action.” Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880, 891 (Cal. 1979). Nine years later, the Supreme Court heavily criticized its prior decision in Royal Globe:
[T]he cases from other states without exception reject Royal Globe’s holding that an action under section 790.03 could be based upon a single wrongful act. Such unanimity of disagreement strongly suggests we erred in our contrary holding. Yet, for the reasons stated by the majority in Royal Globe, the plaintiffs in these cases (whether insureds or third party claimants) seldom have the ability to prove any widespread pattern of wrongful settlement practices on the part of the insurer. Although the Royal Globe majority believed this proof problem justified its conclusion that a single act will subject the insurer to liability for damages for unfair practices, it is more likely that the majority’s initial premise – that a direct action is permitted under section 790.03 was incorrect, and that the provision was instead limited to providing administrative sanctions by the Insurance Commissioner, once an investigation revealed such a pattern.
It seems evident that resolution of these issues regarding the application of Royal Globe involves a difficult weighing of competing policies. Such a determination is more properly made by the Legislature. Yet the interpretive difficulties and complex public policy choices arising under Royal Globe result solely from its conclusion that the Legislature intended to confer a private right of action for violation of section 790.03. Reconsideration of that decision seems a far better alternative than allowing ourselves to be swept deeper into the developing interpretive whirlpool it has created.
Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287, 303 (Cal. 1988) (internal citations omitted).