A California appellate court has concluded that core provisions of the Fair Claims Settlement Practices Regulations do not conflict with the Unfair Insurance Practices Act. (PacifiCare Life and Health Insurance Company v. Jones (2018) 2018 WL 4501610)
Facts
In 2008, the California Insurance Commissioner (“Commissioner”) filed an administrative action against PacifiCare Life and Health Insurance Company (“PacifiCare”). The Commissioner alleged that PacifiCare had repeatedly violated the Fair Claims Settlement Practices Regulations (10 Cal. Code Regs. § 2695.1, et seq.), which were promulgated pursuant to the Unfair Insurance Practices Act (“UIPA”) (Cal Ins. Code § 790, et seq.). Following an evidentiary hearing, the Commissioner found that PacifiCare had engaged in over 900,000 acts and practices in violation of the regulations. As a result, the Commissioner ordered PacifiCare to pay penalties of over $173 million.
PacifiCare subsequently filed a complaint for declaratory and injunctive relief challenging the Commissioner’s order. Among other things, PacifiCare challenged the validity of three regulations previously promulgated by the Commissioner.
First, PacifiCare challenged a regulation which describes the UIPA as “enumerating sixteen claims settlement practices that, when either knowingly committed on a single occasion, or performed with such frequency as to indicate a general business practice, are considered to be unfair claims settlement practices….” PacifiCare argued that the regulation’s language is inconsistent with the UIPA because the UIPA governs only an insurer’s pattern of knowing violations, not an insurer’s commission of any single violation.
Second, PacifiCare challenged a regulation which defines “knowingly committed” as “performed with actual, implied or constructive knowledge, including but not limited to, that which is implied by operation of law.” PacifiCare argued that this definition is invalid because under the UIPA, “knowingly” means deliberately, which is inconsistent with implied or constructive knowledge.
Third, PacifiCare challenged a regulation which defines “willful” as “simply a purpose or willingness to commit the act, or make the omission…. It does not require any intent to violate law, or to injure another, or to acquire any advantage.” PacifiCare argued that this regulation impermissibly blurs the distinction between willful and non-willful violations, and is inconsistent with statutory definitions of willful.
PacifiCare moved for judgment on the pleadings on its claim for declaratory relief, seeking a determination that each of the challenged regulations was inconsistent with the UIPA and, therefore, facially invalid. The trial court granted PacifiCare’s motion with respect to all three regulations, declaring that all three regulations impermissibly conflict and are inconsistent with the statutory language. Thereafter, the trial court enjoined the Commissioner from continuing to enforce those three regulations. The Commissioner appealed.
Holding
The California Court of Appeal reversed the injunction in its entirety.
After an extensive review of the history and purpose of the UIPA, the appellate court concluded the trial court had erred in finding that the statutory scheme applies only when an insurer engages in conduct with such frequency as to indicate a general business practice. Rather, as the California Supreme Court held in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d 880, and as the language of the UIPA itself indicates, the UIPA can be violated by an insurer’s single knowing act. Thus, the Commissioner could promulgate a regulation defining an unfair claims settlement practice so as to include either an insurer’s single knowing violation or an insurer’s general business practice.
Next, the appellate court concluded that the trial court had erred in declaring invalid the regulation defining “knowingly committed.” The appellate court reasoned that the Commissioner has broad authority to promulgate regulations relating to the UIPA, including regulations defining the terms used in the statutory scheme. Here, the regulation defining “knowingly committed” was not inconsistent with the statutes to which the regulation related. The regulation defines the knowledge of a corporation rather than an individual, and the definition is consistent with traditional principles establishing corporate knowledge.
Last, the appellate court concluded that the trial court had erred in declaring invalid the regulation defining “willful.” According to the appellate court, that regulation does not impermissibly blur the distinction between willful and non-willful violations. Committing a wrong in a willful manner simply requires knowledge that the specific conduct violated a regulation, and an intention to nonetheless engage in such conduct.
Comment
The UIPA expressly authorizes the Commissioner to adopt regulations necessary to implement the UIPA. In this case, the appellate court held that all of the challenged regulations were indeed consistent with the UIPA. The appellate court thus reversed the trial court’s order prohibiting enforcement of those regulations.
Given the amount at stake (over $173 million in penalties, along with interest), one can assume that PacifiCare will seek review by the California Supreme Court.