California Appellate Court Reinstates Regulation Stipulating That Unfair Insurance Practices Act Claim May be Based Upon a Single Violation

In Pacificare Life and Health Ins. Co. v. Jones, the California Court of Appeal for the Fourth District reversed a trial court decision enjoining three recent regulations enacted by the California Insurance Commissioner with regard to the unfair claims settlement provisions of the state’s Unfair Insurance Practices Act. The first regulation at issue stated that the Act may be violated if a prohibited claims settlement practice is either “knowingly committed on a single occasion,” or “performed with such frequency as to indicate a general business practice.” The plaintiff insurer contended that this regulation was inconsistent with the Unfair Insurance Practices Act, which purportedly applied only to a pattern of knowing violations. The Court of Appeal disagreed, noting that the California Supreme Court has interpreted the Act to apply to a single instance in which an insurer committed a prohibited claims settlement practice. The Court also observed that the regulation was consistent with language in the Act prohibiting certain claims settlement practices when “knowingly commit[ed] or perform[ed] with such frequency as to indicate a general business practice.” The Court interpreted such language to provide that the Act was violated when an insurer either knowingly committed a prohibited claims settlement practice or engaged in a prohibited practice with such frequency as to indicate a general business practice.

The Court next turned to a regulation defining “knowingly committed” as “performed with actual, implied or constructive knowledge, including, but not limited to, that which is implied by operation of law.” The plaintiff objected to the regulation to the extent that it includes conduct performed with “implied or constructive knowledge” in the definition of “knowingly committed.” The Court held that the definition was consistent with case law recognizing that corporations can be held responsible for knowing information learned by its employees. The Court also agreed with the Insurance Commissioner’s contention that the regulation encouraged insurers to “make all inquiries and exercise due diligence” in the claims settlement process.

Finally, the Court examined a regulation that defined “willful” or “willfully” as “simply a purpose or willingness to commit the act, or make the omission referred to in the California Insurance Code” or supporting regulations, and stipulating that “willful” conduct “does not require any intent to violate law, or to injure another, or to acquire any advantage.” The plaintiff argued that this definition eliminates any distinction between “willful” and “non-willful” conduct, thereby rendering meaningless a statutory provision that provides for lower maximum penalties for “non-willful” violations of the Act. The Court again disagreed, noting that this regulation did not eliminate the potential for non-willful violations, such as a misrepresentation regarding a claim that is made without knowing that it was false.

The Court therefore reversed the trial court’s order enjoining the Insurance Commissioner from enforcing the three regulations at issue.

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