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PacifiCare Life & Health Ins. Co. v. Jones
Citation: Not availableDocket: G053914
Court: California Court of Appeal; September 20, 2018; California; State Appellate Court
Original Court Document: View Document
Dave Jones, as Insurance Commissioner of California, appeals an order that enjoined him from enforcing three regulations established in 1992 related to unfair claims settlement practices under the Unfair Insurance Practices Act (UIPA). The injunction followed a trial phase in which PacifiCare Life and Health Insurance Company contested the Commissioner's findings of over 900,000 violations of the Insurance Code. The first regulation states that a violation occurs if a prohibited practice is either knowingly committed once or frequently enough to indicate a general business practice. The second regulation defines "knowingly" to include implied and constructive knowledge, while the third defines "willful" without necessitating intent to cause harm or violate the law. The appellate court reversed the injunction, disagreeing with the trial court's interpretation that the first regulation was inconsistent with section 790.03(h), which it believed to apply only to insurers with a pattern of misconduct. Instead, the court asserted that the California Supreme Court's binding interpretation allows for a violation based on a single knowing act, as established in Royal Globe Ins. Co. v. Superior Court. The appellate court dismissed the trial court's reliance on earlier cases as dicta, affirming that PacifiCare's interpretation contradicted legislative direction over the past 80 years. Additionally, the court ruled that the regulations defining "knowingly committed" and "willful" were valid, emphasizing the Commissioner's broad authority to create regulations under the UIPA and the necessity of substantial deference to those regulations. Both parties have sought judicial notice of various documents, with the Commissioner’s requests granted concerning legislative history and rulemaking documents related to the Fair Claims Settlement Practices Regulations. However, PacifiCare’s request for judicial notice of the former Commissioner’s amicus curiae brief was denied. In 2008, the California Department of Insurance initiated an administrative enforcement action against PacifiCare, alleging numerous violations of section 790.03(h) and the Insurance Code. Following an evidentiary hearing, the Commissioner found PacifiCare guilty of over 900,000 violations and imposed penalties exceeding $173 million. In July 2014, PacifiCare challenged the Commissioner’s decision by filing a petition for a writ of mandate and a complaint for declaratory and injunctive relief, contesting the validity of three regulations relied upon in the enforcement action. The first challenged regulation, Reg. 2695.1(a), describes section 790.03(h) as listing unfair claims settlement practices, which PacifiCare argues is inconsistent with the statute’s definition that does not include single acts as unfair practices. The second, Reg. 2695.2(l), defines "knowingly committed" in a way PacifiCare claims conflicts with the ordinary meaning of "knowingly" as requiring deliberate action. The third, Reg. 2695.2(y), defines "willful" actions without requiring intent to violate the law, which PacifiCare contests as inconsistent with the enhanced penalties outlined in section 790.035. In April 2015, PacifiCare sought judgment on the pleadings for declaratory relief, asserting that all three regulations were facially invalid due to their inconsistency with the relevant statutes. The trial court agreed, declaring the regulations invalid and granting PacifiCare a preliminary injunction to prevent enforcement of the regulations. The court granted an injunction preventing the Commissioner from enforcing specific provisions of Regulation 2695.1(a) regarding claims settlement violations based on a single instance of conduct, the definition of 'knowingly committed' in Regulation 2695.1(l), and Regulation 2695.2(y) as it relates to interpreting 'Willful' or 'Willfully' under Insurance Code section 790.035. Subsequently, in November 2016, the court suspended the injunction while an appeal was pending without addressing the appeal's merits. The discussion outlines the review standards for the validity of administrative regulations under Government Code section 11342.2, which requires that regulations be consistent with statutory authority and necessary for implementing the statute. The Commissioner has broad regulatory authority under section 790.10 to adopt rules necessary for administering the Unfair Insurance Practices Act (UIPA). The Supreme Court emphasized that the authority includes the power to interpret and implement the law, and rejected arguments suggesting limitations on the Commissioner's authority based on distinctions drawn in another case (Association of California Ins. Companies v. Jones). The court clarified that the Legislature retains the right to define specific misconduct while granting the Commissioner broad discretion to address issues within the regulatory framework. Section 790.03, subdivision (b) addresses general misrepresentations by insurers without providing specific examples, granting the Commissioner under the Unfair Insurance Practices Act (UIPA) broader authority to determine violations compared to section 790.03(h). The current regulations do not specify which acts constitute unfair claims settlement practices under section 790.03(h) but rather interpret the statutory language. The validity of a regulation is presumed, and any challenge regarding its consistency with the statute is a legal question subject to independent judicial review. Courts give significant deference to an agency's interpretation, weighing factors such as the agency's technical expertise and the care taken in promulgating the regulation. Quasi-legislative rules, which carry the weight of statutes, undergo narrow judicial review. In this case, PacifiCare's facial challenge to the regulations was declared invalid without any factual findings from the trial court, limiting their reliance on disputed claims regarding the regulations' effects. The UIPA, established in 1959 based on model legislation from the National Association of Insurance Commissioners, aims to regulate insurance trade practices by defining and prohibiting unfair methods of competition and deceptive acts. The Commissioner is empowered to investigate potential violations of these defined practices, with section 790.02 prohibiting any engagement in such practices within the state. Section 790.03 outlines prohibited unfair methods of competition and deceptive practices in the insurance business. Enacted in 1971, section 790.10 mandates the Commissioner to establish rules and regulations for administration, with further refinement occurring in 1972 when section 790.03(h) was introduced. This subdivision, differing from the model legislation by including the term "knowingly," prohibits sixteen specific unfair claims settlement practices when committed knowingly or indicative of a general business practice. The prohibited practices include: 1. Misrepresentation of pertinent facts or policy provisions. 2. Failing to promptly acknowledge and act on claims communications. 3. Not implementing reasonable standards for timely claims investigation and processing. 4. Not affirming or denying coverage within a reasonable time after proof of loss is submitted. 5. Not attempting good faith settlement of claims where liability is clear. 6. Compelling litigation by offering significantly less than recoverable amounts. 7. Settling claims for less than reasonable expectations based on advertising materials. 8. Settling claims based on altered applications without the insured's knowledge. 9. Not informing insureds of coverage after claim payment upon request. 10. Revealing a practice of appealing arbitration awards to pressure settlements. 11. Delaying claims investigation or payment by requiring redundant submissions. 12. Failing to settle obvious claims under one coverage to influence others. 13. Not providing a timely explanation for claim denial or settlement offers. 14. Advising claimants against obtaining legal representation. 15. Misleading claimants about the statute of limitations. 16. Delaying payment for medical benefits related to AIDS for over 60 days to investigate preexisting conditions. The analysis focuses on the interpretation of statutory language in section 790.03 regarding unfair claims settlement practices. The placement of commas in the main clause could indicate whether the statute encompasses two distinct categories of conduct or a single category. The text points out that the language suggests dual meanings, as 'practice' references both an insurer’s general business practice and specific unfair claims settlement practices. PacifiCare's argument that both uses of 'practice' refer to an insurer's general business practice is rejected. The interpretation leans toward the understanding that 'unfair claims settlement practices' apply to the insurance industry as a whole, allowing for enforcement against an insurer for isolated instances of misconduct. The language of the 16 unfair practices listed in section 790.03(h) varies, indicating that some practices may involve multiple claims while others can occur singularly, raising questions about legislative intent—specifically, whether the Commissioner is authorized to act on individual instances or only established patterns of misconduct. Ultimately, the conclusion is that the Legislature intended to empower the Commissioner to take action against both single acts of misconduct and repeated violations. This interpretation is supported by the inclusion of both 'unfair and deceptive acts or practices' in the statutory language. Additionally, the Supreme Court's ruling in Royal Globe clarified that section 790.03(h) allows third-party claimants to pursue direct civil actions against insurers for unfair practices, not limited solely to administrative penalties. The court ruled that a single knowingly committed violation is sufficient to support an action against an insurer, negating the need to prove a general business practice of violations. A third-party plaintiff cannot simultaneously sue both the insured and the insurer; the insurer can only be sued after the insured's liability is established. Nine years later, in Moradi-Shalal, the Supreme Court overturned Royal Globe’s interpretation that section 790.03(h) provided a private right of action against insurers, clarifying that the sections were not intended for such civil actions. However, the court emphasized that this did not permit insurers to commit unfair practices, urging continued enforcement of the Insurance Code by the Insurance Commissioner and courts. Following Moradi-Shalal, the Legislature enacted section 790.035, which introduced additional financial penalties for violations of section 790.03, authorizing the Commissioner to define what constitutes an act, except for inadvertent policy actions, which are treated as a single act. In 1990, the Legislature required the Commissioner to establish a consumer complaint investigation program by July 1, 1991, which included a toll-free number and standardized complaint forms. The program mandates the Commissioner to track processing times for complaints in alignment with the Unfair Insurance Practices Act (UIPA). In December 1992, the Commissioner introduced Fair Claims Settlement Practices Regulations, which became effective in January 1993. PacifiCare challenged Regulation 2695.1, specifically objecting to language suggesting that both single violations and patterns of violations are unfair practices. Despite PacifiCare's claims, the interpretation of section 790.03(h) as applicable to single violations was upheld, as Royal Globe is binding on this point, despite the Supreme Court's overruling in Moradi-Shalal concerning the private right of action. Interpretive challenges and public policy decisions stemming from Royal Globe arise from its assertion that the Legislature intended to provide a private right of action for violations of section 790.03. The Supreme Court, in Moradi-Shalal, focused on whether a private individual could sue an insurer for unfair claims practices and acknowledged complexities regarding Royal Globe’s stance on single act liability. Despite expressing concern over its prior ruling, the court did not formally overrule Royal Globe, instead indicating that conflicting opinions from other states suggested a possible error in Royal Globe’s conclusion. The court asserted that resolving these matters is better suited for legislative action. In the subsequent case of Zhang, the Supreme Court clarified that the Legislature did not intend to create a private cause of action under the Unfair Insurance Practices Act (UIPA) for the unfair practices listed in section 790.03 subdivision (h). Justice Werdeger's concurring opinion reinforced that Moradi-Shalal rejected Royal Globe’s interpretation of a private right of action. The opinion established that Moradi-Shalal did not invalidate Royal Globe regarding whether a single action could constitute an unfair claims practice under section 790.03(h), as only necessary statements in a decision are binding precedents, while explanatory remarks are not. The complexity of these legal issues necessitates thorough examination and argumentation, highlighting the purpose of the dicta rule. Royal Globe remains authoritative regarding the application of section 790.03(h) to single violations committed knowingly and aligns with the Commissioner’s interpretation of regulatory language. Even if Royal Globe were not binding, the conclusion that section 790.03(h) pertains to an insurer’s single knowing violation is supported through established principles of statutory interpretation, emphasizing the importance of the statute's language and legislative intent. Avoiding surplusage in statutory interpretation is essential. Statutory language must be analyzed within its context, considering the statute's purpose and ensuring harmony between related sections. When ambiguity arises, the potential consequences of interpretations should be evaluated. Legislative history and the context of enactment can inform legislative intent. The analysis begins with section 790.03, which addresses "unfair methods of competition and unfair and deceptive acts or practices in the business of insurance," indicating that both acts and practices are prohibited if they meet statutory definitions. The argument that "unfair claims settlement practice" pertains solely to patterns of conduct is rejected; instead, an insurer can violate this provision through a single act. The interpretation that distinguishes between a single instance of a prohibited practice and repeated occurrences does not hold, as the statute suggests that "knowingly" applies to both "committing" and "performing" the act. Certain unfair practices can occur unknowingly, contradicting the notion that all violations must be knowingly performed. The view that the language of section 790.03(h) creates unnecessary surplusage is affirmed, as it is incorrect to assert that "committed" and "performed" serve only as alternatives. The interpretation that restricts the understanding of these terms would diminish the statute's intended scope. PacifiCare argues that the language in section 790.03(h) should not imply a distinction between 'knowingly committed' violations and those occurring frequently enough to suggest a general business practice. They assert that the Legislature typically uses different wording to create such distinctions in other statutes. However, PacifiCare's position is weakened by its reference to Labor Code section 5814.6, which explicitly states that administrative penalties apply only when a violation is both knowing and frequent. This contrasts with section 790.03(h), which does not make a similar distinction, indicating that no inference can be drawn regarding the Legislature's intentions. Furthermore, while PacifiCare presents examples of Insurance Code statutes that differentiate between knowing and frequent violations as support, these examples show that the Legislature has consistently authorized penalties for single knowing violations in contexts similar to section 790.03(h). Specifically, various sections of the Insurance Code impose lower penalties for singular violations but higher penalties for knowing or frequent violations. Although these statutes were enacted after section 790.03(h), they suggest that a single knowing violation should not be exempt from administrative penalties, which aligns with public policy considerations. However, the lack of direct evidence regarding the Legislature's intent when enacting section 790.03(h) in 1972 remains noted. Section 12926, established in 1935, indicates that by 1972, California's Legislature had a long-standing policy of zero tolerance for insurance code violations, placing the Commissioner in charge of enforcement. The Commissioner is mandated to ensure full compliance with the Insurance Code. In 1971, the Legislature granted the Commissioner extensive regulatory authority over the Unfair Insurance Practices Act (UIPA). Specific provisions allow for penalties for violations related to life insurance and annuity policies, with heightened penalties for knowing violations or those indicating a general business practice. Section 10718.5(d) empowers the Commissioner to impose further penalties against insurers for knowing violations, including the suspension of their authority to transact disability insurance. Labor Code section 5814.6 authorizes significant administrative penalties—up to $400,000—for employers or insurers that knowingly violate certain provisions frequently. However, this section also allows for penalties based on a single violation, showcasing the Legislature's intent to enforce compliance even in isolated incidents. The intent behind section 790.03(h) is clear: constraining the Commissioner's enforcement capabilities, as suggested by PacifiCare, contradicts the Legislature's explicit mandates. The addition of the word "knowingly" to the model provision enhances the Commissioner's enforcement authority, allowing penalties for both single and repeated violations, thus preserving the Legislature's intent to maintain strict regulatory oversight. PacifiCare’s interpretation would undermine this enforcement framework, limiting penalties for isolated violations and reducing the effectiveness of the legislative provisions. The model language would have established a violation whenever an insurer engaged in prohibited conduct frequently, regardless of intent. In contrast, PacifiCare's interpretation limits enforcement and penalties to cases where the Commissioner proves intentional misconduct. This interpretation would exempt insurers from penalties for unintentional but regular unfair claims settlement practices, which is not supported by legislative intent. Section 12926 mandates full compliance from insurers, and PacifiCare's view contradicts section 790.035, which includes inadvertent actions in enforceable conduct. Amici curiae highlight that a later amendment to model legislation allows penalties for both single intentional violations and general misconduct, but argue this is not applicable in California because the state did not adopt the amended language. However, this argument presupposes the conclusion it seeks to prove. Section 790.035, enacted in 1989, clarifies section 790.03(h) despite its earlier enactment in 1972, as later provisions prevail in cases of conflict. The interpretation of section 790.035, which encompasses inadvertent misconduct in claims handling, contradicts PacifiCare's understanding and extends the Commissioner's discretion in defining enforceable acts. This suggests legislative intent to empower the Commissioner to determine violations, irrespective of previous binding authority. The Legislature's enactment of section 790.035 in 1989 indicates its intention to provide the Commissioner with broad discretion to create policies and regulations regarding insurance claims-handling practices, particularly following the Moradi-Shalal decision. This, along with other statutes like section 12926, section 790.10, and section 12921.1, shows a consistent legislative policy requiring insurers to adhere fully to legal provisions and delegating enforcement authority to the Commissioner. PacifiCare’s interpretation of section 790.03(h) is deemed inconsistent with the statutory framework and other related laws concerning the enforcement of the Insurance Code and the Unfair Insurance Practices Act (UIPA). The trial court's ruling that Reg. 2695.1(a) is inconsistent with the statute is rejected. The definition of "unfair claims settlement practice" under section 790.03(h) encompasses both a single knowing violation by an insurer and repeated conduct indicative of a general business practice. The terms "knowingly committed," "willful," and "willfully" lack definitions in the UIPA, granting the Commissioner authority to interpret these terms. The Commissioner’s regulatory process and expertise warrant significant deference to his interpretations, particularly the definition of "knowingly committed" in Reg. 2695.2(l), which includes actions performed with actual, implied, or constructive knowledge. PacifiCare contends that in defining terms lacking specific meaning, courts should refer to the plain and dictionary definitions, utilizing Black’s Law Dictionary to define "knowing" as awareness or deliberation. However, the focus is not on defining a term from scratch but on assessing the validity of the Commissioner’s definition, which should be given deference. PacifiCare agrees that "knowingly committing" an act implies deliberation but disputes the inclusion of implied and constructive knowledge in regulation 2695.2(l), arguing it undermines the requirement for an insurer's deliberate conduct. The regulation, however, pertains to an entity's knowledge, which is derived from the knowledge and actions of its authorized personnel. It is established that a corporation acquires knowledge through its officers and may be held accountable for knowledge distributed among its employees. The Commissioner highlights that similar definitions have been used for regulatory penalties in workers' compensation law, asserting that a corporation is aware of facts known by its employees acting within their authority. Furthermore, the Commissioner argues that including imputed and constructive knowledge is essential for enforcing section 790.03(h), incentivizing insurers to conduct thorough inquiries during the claims process. Limiting "knowingly" to an individual’s actual knowledge would overlook the collective nature of claims handling, where unfair practices may arise from cumulative actions rather than a single person’s intent. The arguments presented reflect the Commissioner’s expertise in regulating insurance practices and are granted significant weight. PacifiCare's claim that this definition removes any scienter element from the statute and allows penalties for inadvertent actions is dismissed as it is based on a disputed factual interpretation, which cannot be addressed in this context. The trial court's injunction declaring Regulation 2695.2(l) invalid due to its inconsistency with section 790.03(h) was improperly based on a legal conclusion rather than factual analysis. The regulation defines "knowingly committed" for section 790.03(h) and is thereby valid, leading to the reversal of the injunction against its enforcement. Regulation 2695.2(y) clarifies that "willful" or "willfully" refers to the purpose or willingness to commit an act without needing to intend to violate the law or cause harm. This definition aligns with Penal Code section 7, subdivision (1). PacifiCare argued that this definition conflicts with the two-tier penalty scheme in Insurance Code section 790.035, which distinguishes between willful and non-willful acts. The trial court agreed, stating that defining "willful" merely as a willingness undermines this distinction and broadens the regulation's scope inappropriately. PacifiCare cited Kwan v. Mercedes-Benz of North America, Inc., but that case is distinguishable due to its specific context regarding the Song-Beverly Consumer Warranty Act, which imposes explicit obligations and penalties for noncompliance. The court noted that the definitions of "willful" in the regulation do not intersect with the obligations outlined in the Song-Beverly Act. In Kwan, the jury penalized the dealer despite its manager asserting that his decision not to offer a refund or replacement stemmed from a reasonable belief that the plaintiff was satisfied with the vehicle's repair. The dealer contended that the jury instruction regarding willfulness, based on Penal Code section 7(1), was insufficient as it did not differentiate between a dealer acting in good faith and one who did not. The Kwan court concurred with the dealer's argument but clarified that the agreement was based on the specific case facts, not a general rejection of the Penal Code's willfulness definition. The court stated that MBNA deserved an instruction indicating that its actions were not willful if it reasonably believed no refund or replacement was necessary. This instruction would have provided essential legal guidance on whether a civil penalty could be imposed. The Penal Code's definition alone was inadequate for the case's context. Furthermore, Kwan emphasized that willfulness should be assessed in light of the specific statutory obligations violated, avoiding interpretations that would eliminate the distinction between willful and nonwillful violations. Consequently, Kwan does not necessitate dismissing the language of Penal Code section 7(1) or Reg. 2695.2(y) in cases with two-tiered penalties; rather, it calls for evaluating the language within the statute's context to ensure it does not negate the willful/nonwillful violation distinction. In this context, Reg. 2695.2(y) maintains this distinction, as the acts prohibited by section 790.03(h) are defined by specific facts indicating wrongfulness. For instance, misrepresenting facts related to insurance coverage can occur inadvertently, while willful misrepresentation requires intent. Similarly, settling claims based on an unnotified alteration of an application constitutes a violation, regardless of whether the act was done unknowingly by the claims representative. To establish willfulness in committing a prohibited act, an insurer must intentionally choose to settle a claim based on a knowingly altered application. The distinction between inadvertent and willful acts is clear, particularly regarding the violations outlined in section 790.03(h). The definition of "willful" in Reg. 2695.2(y) aligns with the statutory definitions in the Insurance Code, contrary to PacifiCare’s claims of inconsistency. PacifiCare references section 11750.1(d), which defines "willful" as an act done with knowledge it constitutes a violation, but this definition applies specifically to noncompliance with a final order from the commissioner, not to generic acts of wrongdoing. For a willful violation under section 11750.1, knowledge and intent to violate an order must be present. When aligning this with unfair practices in section 790.03(h), willfulness would necessitate a deliberate intention to fail to comply with the commissioner’s order. Therefore, Reg. 2695.2(y) is consistent with section 11750.1, requiring awareness of a violation and intent to commit it. Other Insurance Code provisions cited by PacifiCare similarly do not disrupt this analysis. Consequently, PacifiCare's argument that Reg. 2695.2(y) dilutes the meaning of "willful" to the extent that it undermines penalties under section 790.035 lacks legal support. The trial court's injunction against enforcing Reg. 2695.2(y) is thus reversed. The definition of "willful" in section 12340.9 aligns with section 11750.1(d), applying to individuals who do not comply with a final commissioner's order. The violation of such an order constitutes the prohibited act and cannot be deemed willful without knowledge of the order and the conduct that violates it, as per Regulation 2695.2. This consistency extends to section 1850.5, which addresses the use of rates or rating systems in violation of the chapter, where enhanced penalties for willful violations are justified. The prohibited act is distinctly framed as a statutory violation, necessitating both awareness of the chapter's requirements and intent to breach them for a willful classification. Consequently, the regulation adheres to the statutory definition. The order for a preliminary injunction against enforcing Regulations 2695.1(a), 2695.2(l), and 2695.2(y) is reversed, with directions to the trial court to also overturn its judgment on the declaratory relief motion. The Commissioner is entitled to recover appeal costs.