SAN FRANCISCO, CA, Aug. 16, 2022 — IIABCal has urged the California Supreme Court to grant a Petition for Review and overturn an appellate court decision that endorsed an attempt by the California Department of Insurance to radically rewrite California’s Unfair Insurance Practices Act (UIPA).

“We are gravely concerned by the decision of the Court of Appeal because it reaffirms (by refusing to revisit) its prior decision in PacifiCare Life & Health Ins. Co. v. Jones,” IIABCal General Counsel wrote in an amicus letter filed last month.  “The Court of Appeal’s analysis of the UIPA in these cases disregards the plain meaning of the statutory language at issue, the available legislative history behind the statute, this Court’s clear and unambiguous interpretation of these laws, and the dire consequences this decision could engender, which we respectfully submit the appellate court either chose to disregard or failed to give appropriate weight.”

The litigation commenced in 2015, when then-Commissioner Dave Jones disregarded a CDI Administrative Law Judge’s ruling in an enforcement hearing against PacifiCare, a health insurer that had been accused of violating several provisions of the California Insurance Code.  

The Commissioner unilaterally issued a new decision predicated upon a “radically new” interpretation of the UIPA crafted by his lawyers, which increased the fine on the insurer ten-fold (to $173 million), and then used a provision in the Administrative Procedures Act to designate the new interpretation as a legal “precedent” that could be applied against any licensee of the Department—including any agent or broker.

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"If the Commissioner is permitted to invoke the full weight of all UIPA remedies against any licensee, for any violation whatsoever of the California Insurance Code—even innocent, unknowing errors—then the Commissioner’s powers of enforcement will know no check or balance."      Steve Young, IIABCal General Counsel
 

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After a lengthy trial in Orange County Superior Court, Judge Kim Dunning ruled in favor of PacifiCare, flatly rejecting the legal theories advanced by the Commissioner’s lawyers.  She ruled that CDI had acted unlawfully in asserting:

1. that violation of any provision in the California Insurance Code constitutes a violation of the UIPA (§§ 790.03, et al.) and supports the imposition of UIPA penalties;
2. that any act taken by a licensee is “knowing”—one of the legal conditions precedent for invoking UIPA enforcement powers—even in the complete absence of intent or even actual knowledge;
3. that misrepresentation of pertinent facts, which UIPA prohibits, can include omission of a statutory notice in a form, and that any incorrectly paid claim constitutes misrepresentation of a pertinent fact;
4. that in imposing thousands of dollars in penalties for each incorrectly paid claim, the CDI is not bound by Constitutional prohibitions against excessive fines;
5. that a single erroneous act can constitute a “general business practice” (one of the other conditions precedent for UIPA liabilities); and
6. that the Commissioner may create new prohibited acts under UIPA without holding a public hearing as expressly required by the Insurance Code.

“We believe the Court of Appeal erred when it upheld the Insurance Commissioner’s regulatory interpretation of California Insurance Code Section 790.03(h) to define an unfair claims settlement practice as either a licensee’s knowing commission of the prohibited conduct on a single occasion, or the performance of the conduct with such frequency as to indicate a general business practice,” Young wrote the Court.

“Combined with the Commissioner’s definition of “knowingly” as “actual, implied, or constructive knowledge”, this means an insurer or any broker-agent can be liable for an unfair practice, and subject to penalties, for a single act performed without actual knowledge. […] 

Moreover, the Insurance Commissioner’s interpretation of Section 790.03(h) transforms any innocent mistake into an unfair insurance practice.”

"If the Commissioner is permitted to invoke the full weight of all UIPA remedies against any licensee, for any violation whatsoever of the California Insurance Code—even innocent, unknowing errors—then the Commissioner’s powers of enforcement will know no check or balance,” Young wrote in the amicus letter.

The original PacifiCare litigation was split into two separate actions.  The California Supreme Court declined to review the appellate court’s holding after the first case, but industry lawyers hope the Court may be more inclined to review the legal issues now that the second and final part of the case is ripe for review.

Although the Court rejects an overwhelming number of discretionary appeals it receives, Young said lawyers for PacifiCare are hopeful the Court will accept this case—because the decision of the appellate court differs from decisions other appellate courts have rendered on the same legal issues, as well as the Supreme Court’s own opinions.

To review the IIABCal amicus letter, click here.