Court Upholds California Insurance Commissioner’s Authority to Enforce Insurance Regulations

Posted by Haight Brown & Bonesteel LLP on Sep 28th 2018

Court Upholds California Insurance Commissioner’s Authority to Enforce Insurance Regulations

In PacifiCare Life & Health Ins. Co. v. Jones (No. G053914, filed 9/20/18), a California appeals court upheld the California Insurance Commissioner’s authority to impose a $173 million penalty on a health insurer based on a finding of multiple violations of the State’s Insurance Code and insurance regulations.


In PacifiCare, the Insurance Commissioner, Dave Jones, imposed the fines after finding 900,000 violations of the Unfair Insurance Practices Act (Ins. Code §§ 790, et seq., “UIPA”). Insurance Code Section 790.03(h) prohibits sixteen specific “unfair claims settlement practices” when “[k]nowingly commit[ed] or perform[ed] with such frequency as to indicate a general business practice,” and section 790.10 expressly authorizes the Commissioner to adopt regulations related to implementation of the UIPA.

In response, PacifiCare obtained an injunction barring the enforcement of regulations the Commissioner had relied on in specifying the particular violations, which were: California Code of Regulations, Title 10, section 2695.1(a), stating that a violation occurs when the prohibited settlement practice is either “knowingly committed on a single occasion,” or “performed with such frequency as to indicate a general business practice;” section 2695.2(l) defining the word “[k]nowingly” to include implied and constructive knowledge; and section 2695.2(y) defining the word “[w]illful” without requiring any specific intent to cause harm or violate the law.

The main thrust of PacifiCare’s argument was that the regulations were facially invalid because they were inconsistent with Insurance Code section 790.03(h), which governs only a pattern of knowing violations, and not the commission of any single violation.

The appeals court disagreed. First, the court pointed to the general rule that a statutory or regulatory enactment is presumed valid and that an administrative agency’s determinations should be accorded deference. The PacifiCare court then explained why even if no deference were due the Commissioner’s interpretation of the statutory language, his interpretation was correct.

Specifically, the court found that the decision in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d. 880, binding on the point. The PacifiCare court pointed out that Royal Globe held that section 790.03(h) can be violated by an insurer’s single knowing act. The PacifiCare court noted that although Royal Globe had been overruled in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, Moradi-Shalal did so only with respect to Royal Globe’s holding that section 790.03(h) established a private right of action in favor of a third party.

The PacifiCare court said that this was confirmed in Zhang v. Superior Court(2013) 57 Cal.4th 364, which held that Moradi-Shalal “confined itself to succinctly repudiating Royal Globe’s discernment of a private right of action.” Therefore, the PacifiCare court stated that “[b]ecause we find Moradi-Shalal did not overrule Royal Globe on the issue of whether a single violation, knowingly committed, would qualify as an unfair claim settlement practice under section 790.03(h), its negative commentary on the point is not binding precedent as we consider the issue.”

Not satisfied to merely rely on the result on Royal Globe, the PacifiCare court then explained the basis for the holding. The PacifiCare court said that the authority to enforce individual violations was shown by the Legislature’s variance from the National Association of Insurance Commissioners’ model unfair insurance practices legislation wording in having added the word “knowingly.” According to the PacifiCare court, insertion of the word “knowingly” signaled that the Legislature intended to grant the Insurance Commissioner authority to separately enforce both “general business practices” and “knowing” practices, which could be committed singly.

The court said that PacifiCare’s interpretation of section 790.03(h) “is not only internally problematic, it also 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. We consequently reject that interpretation in favor of what we believe to be the interpretation more consistent with the overall statutory and regulatory scheme.”

The PacifiCare court then rejected arguments that the requirement for “knowing” conduct precluded enforcement based on implied or constructive knowledge, or that “willful” meant something more than deliberate.

As a result, the PacifiCare court reversed the trial court’s order granting an injunction prohibiting the Insurance Commissioner’s enforcement of the regulations.

For more information contact:

Andy Silverman

[email protected]

www.specialtyclaims.com