Only in California “Wilfull” is also “Unintentional” or “Accidental
The California Supreme Court suggested that only the California Department of Insurance (CDOI) could enforce the Unfair Claims Settlement Practices Act (California Insurance Code Section 790.03 (h)) by Regulation. The California CDOI enacted Regulations to do so that, in my opinion, allowed it to exceed the mandate of 790.03 (h), by allowing punishment of insurers for single acts in violation of the Regulations, by allowing punishment of acts not prohibited by 790.03 and by finding an innocent or unintentional act in violation of the Regulations to be a wilful violation.
In Pacificare Life And Health Insurance Company v. Dave Jones, As Insurance Commissioner, G053914, In The Court Of Appeal Of The State Of California, Fourth Appellate District, Division Three (September 2018) the California Court of Appeal agreed with the Commissioner and upheld the CDOI’s right to impose fine for more than $173 million.
Dave Jones, in his capacity as Insurance Commissioner of the State of California (the Commissioner), appealed from an order enjoining him from enforcing three regulations, adopted in 1992, to implement the unfair claims settlement practices provision of the Unfair Insurance Practices Act (UIPA) (Ins. Code, § 790, et seq.) The injunction was issued at the conclusion of the first phase of a trial in which PacifiCare Life and Health Insurance Company is challenging the Commissioner’s finding that it had committed over 900,000 acts and practices in violation of the Insurance Code.
The first of the three enjoined regulations states that, for purposes of the statute defining unfair claims settlement practices (§ 790.03, subd. (h) (790.03(h)), 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.” (Cal. Code Regs., tit. 10, § 2695.1(a).) The second regulation defines the word ‘“[k]nowingly”’ to include implied and constructive knowledge (Reg. 2695.2(l)). The third regulation defines the word ‘“[w]illful”’ without requiring any specific intent to cause harm or violate the law. (Reg. 2695.2(y).)
The trial court determined the first regulation was inconsistent with the language of section 790.03(h), which it concluded had been interpreted by our Supreme Court in Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287, 303 (Moradi-Shalal), and in Zhang v. Superior Court (2013) 57 Cal.4th 364, 379-380, fn. 8 (Zhang), to apply only to insurers engaged in a pattern of misconduct. The California Supreme Court’s only binding interpretation of that statutory language is found in Royal Globe Ins. Co. v. Superior Court (1979) 23 Cal.3d. 880, 891 (Royal Globe), which was reversed by the California Supreme Court that concluded its finding incorrect about allowing direct action for the violation of the UIPA. Relying on the reversed Royal Globe case, the Court of Appeal noted it held that section 790.03(h) can be violated by an insurer’s single knowing act.
In 2008, following a lengthy investigation, the California Department of Insurance filed an administrative enforcement action against PacifiCare, alleging it engaged in multiple unfair claims settlement practices described in section 790.03(h), as well as other violations of the Insurance Code. Following an evidentiary hearing, the Commissioner issued a lengthy decision and order, finding PacifiCare engaged in over 900,000 acts and practices in violation of the Insurance Code. As a result, the Commissioner imposed penalties in excess of $173 million.
PacifiCare claims the regulation’s language is inconsistent with section 790.03(h), which it contends does not include the single knowing commission of an enumerated act in its definition of an unfair claims settlement practice. As a result, PacifiCare argues that this regulation is invalid.
The second challenged regulation is Reg. 2695.2(l), which defines ‘“[k]nowingly committed”’ for purposes of the fair claims settlement practices regulations as “performed with actual, implied or constructive knowledge, including but not limited to, that which is implied by operation of law.” PacifiCare argues this definition is inconsistent with section 790.03(h) because “knowingly,” in ordinary parlance, must mean deliberately—a meaning PacifiCare claims is inconsistent with implied or constructive knowledge.
The third challenged regulation is Reg. 2695.2(y), which defines “‘[w]illful’ or ‘[w]illfully’ when applied to the intent with which an act is done or omitted [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.”
The trial court granted PacifiCare’s motion with respect to all three regulations, declaring that all three regulations “impermissibly conflict and are inconsistent with . . . . sections 790.03, subdivision (h) and 790.035.”
The UIPA was adopted in 1959, and was patterned after the National Association of Insurance Commissioners’ model legislation. Its purpose is to regulate trade practices in the business of insurance by defining such practices in this State which constitute unfair methods of competition or unfair or deceptive acts or practices and by prohibiting the trade practices so defined or determined. The UIPA authorizes the Commissioner to investigate those engaged in the insurance business to determine whether insurance companies are or have been engaged in any deceptive act or practice prohibited by Section 790.03.
Section 790.03(h) prohibits sixteen specific “unfair claims settlement practices” which are prohibited when “[k]nowingly commit[ed] or perform[ed] with such frequency as to indicate a general business practice.”
Ignoring the clear and unambiguous language of the statute the Court of Appeal argued that grammar – the placement of commas – caused the Court of Appeal to believe the phrase “unfair claims settlement practices” refers to practices that exist in the insurance industry generally. Thus, it concluded amazingly that an individual insurer could engage in a listed “practice” by just once committing the described misconduct and be found to have done so with “such frequency as to indicate a general business practice. ”
In the years following its enactment, section 790.03(h) generated no small amount of debate as to its meaning. Finally, in 1979, the Supreme Court decided Royal Globe, in which it resolved several disputes about how the statutory scheme embodied in the UIPA was intended to operate. First, the court held that section 790.03(h) was not solely a basis for imposing administrative penalties. Instead, a third party claimant could bring a direct civil action against an insurer to impose liability based on its commission of the unfair practices described in the provision. (Royal Globe, supra, 23 Cal.3d. at pp. 885-888.) The court also held that “a single violation knowingly committed is a sufficient basis for such an action,” and thus it was not necessary to prove the insurer engaged in an alleged violation as a general business practice.
Nine years later the Supreme Court reversed Royal Globe’s holding that section 790.03(h) gave rise to a private right of action because “[n]either section 790.03 nor section 790.09 was intended to create a private civil cause of action against an insurer that commits one of the various acts listed in section 790.03, subdivision (h).” (Moradi-Shalal, supra, 46 Cal.3d. at p. 304.)
In December 1992, the Commissioner filed the Fair Claims Settlement Practices Regulations (Regs. 2695.1 et. seq.), which include the regulations challenged in this case. Those regulations took effect in January 1993.
The Court of Appeal concluded that although the Supreme Court overruled Royal Globe in Moradi-Shalal, it concluded that contrary to the full reversal the Supreme Court 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 Court of Appeal noted, to support its decision, that six of the unfair claims practices listed in section 790.03(h) involve a failure to perform a specific act—e.g., “[f]ailing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.” (§ 790.03(h)(2).) Such omissions might easily be, and perhaps often are, accomplished “unknowingly.” Moreover, an affirmative “misrepresentation,” which is also included in the list of unfair claims settlement practice, can be committed unknowingly. Regardless, the Court of Appeal – relying on Royal Globe – found these acts could be single acts regardless of the requirements of section 790.03(h). The Court of Appeal concluded an unfair claims settlement practice to be either an insurer’s single knowing commission of the described conduct, or its performance of the conduct “with such frequency as to indicate a general business practice.”
“‘Willful’ or ‘Willfully’”
Reg. 2695.2(y) states: “‘Willful’ or ‘Willfully’ when applied to the intent with which an act is done or omitted means simply a purpose or willingness to commit the act, or make the omission referred to in the California Insurance Code or this subchapter. It does not require any intent to violate law, or to injure another, or to acquire any advantage.” This language mirrors that of Penal Code section 7, subdivision (1). The same is true of the other acts and omissions listed in section 790.03(h). Thus, as applied to section 790.03(h), the definition of “willful” or “willfully” set forth in Reg. 2695.2(y) does not blur the distinction between willful and nonwillful violations.
Finding no merit in PacifiCare’s contention that Reg. 2695.2(y) is invalid, we reverse the trial court’s injunction prohibiting its enforcement.
The statute and precedent – before this decision – concludes that the CDOI cannot fine or otherwise discipline an insurer for violating any of the provisions of the Regulations unless they are also a clear violation of California Insurance Code § 790.03 (h) and not the more restrictive language of the Regulations. Applying the principle of eApressio unius est exclusion alterius [The expression of one thing is the exclusion of another] the Legislature’s expressed intention to make exclusive the list of unfair methods of competition and unfair and deceptive acts or practices in the business of insurance set forth in section 790.03, any additional purportedly unlawful settlement practice is necessarily prohibited. One can only hope that, on appeal, the California Supreme Court will reverse this odd decision, conclude that “willfulness” requires actual intent, that only acts prohibited by section 790.03 (h) can be punished and that a single act can never be “performed with such frequency as to indicate a general business practice.” To rule otherwise, as has the Court of Appeal, will provide the CDOI with a bludgeon against every insurer and allow findings that are both unfair and unreasonable.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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