Court upholds Commissioner’s Contention: A Single Insurance Code Violation Can Constitute Bad Faith Without Evidence of a General Business Practice

Every insurance policy, including disability, life, health or accidental death policies, contains an implied covenant of good faith and fair dealing between the insurance company and the insured.  This covenant requires that insurance companies refrain from acting in a way that unreasonably jeopardizes, impairs or interferes with the rights of the insured to receive the benefit of the insurance contract.  The Unfair Insurance Practices Act (California Insurance Code Sections 790, et seq., “UIPA”) was enacted to regulate the business of insurance by defining and prohibiting practices which constitute unfair methods of competition or unfair or deceptive acts or practices.

California Insurance Code Section 790.03(h) (“Section 790.03(h)”) enumerates a list of sixteen specific unfair claims settlement practices that insurance companies are prohibited from engaging in and which, if the insurance company is found to be in violation, could subject the company to severe penalties.  These unfair claims settlement practices include, but are not limited to, misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverage at issue, failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under the insurance policies, failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured, and failing to provide promptly a reasonable explanation of the basis relied on  for the denial of a claim.

The California Insurance Commissioner (“the Commissioner”) is tasked with implementing regulations necessary to administer the UIPA.  The Commissioner’s authority to promulgate such regulations was recently challenged in the matter of PacifiCare Life & Health Ins. Co. v. Jones, No. G053914, __ Cal. App.4th __ (September 20, 2018).  The plaintiff PacifiCare Life & Health Ins. Co. (“PacifiCare”) brought an action challenging the validity of three regulations which the Commissioner relied on in finding that PacifiCare engaged in over 900,000 violations of the Insurance Code and imposing penalties in excess of $173 million.  Specifically, PacifiCare argued that the regulation which purported to authorize enforcement action based on a single, knowing commission of a violation is facially invalid since it is inconsistent with Section 790.03(h).  PacifiCare claimed Section 790.03(h) does not include the single knowing commission of a violation in its definition of an unfair claims settlement practice, but rather applies only to repetitive acts of misconduct which indicate a general business practice.  PacifiCare also argued that the regulation which purported to define the term “knowingly committed” as including implied or constructive knowledge was invalid since this definition is inconsistent with the ordinary meaning of the term, and that the regulation which defined the term “willful” or “willfully” as not requiring intent to violate law or to injure another was also invalid snice the definition was inconsistent with the statutory definition of “willful” found in the Insurance Code.

The trial court granted PacifiCare’s motion for judgment on the pleadings and request for injunctive relief.  The Commissioner appealed.  Upon review, the California Court of Appeal reversed, disagreeing with PacifiCare and concluding that the Legislature intended to authorize the Commissioner to regulate activities based not only on patterns of unfair claims settlement practices, but also on single acts of misconduct by an insurer.  The Court therefore upheld the validity of the challenged regulation and found that Section 790.03(h) defines an unfair claims settlement practice to be either a single knowing commission of a violation, or conduct that is committed with such frequency as to indicate a general business practice.  The Court also determined that the regulations defining the terms “knowingly committed” and “willful” or “willfully” were permissible interpretations of UIPA and were therefore valid.

This case is significant in that it makes clear that insurance companies can engage in the sixteen prohibited acts enumerated in Section 790.03(h) by just once committing the described misconduct, and that the Commissioner is authorized to pursue enforcement action based on a single knowing commission of a prohibited practice.  As the Court of Appeal stated, this result is consistent with the Legislature’s intent in enacting Section 790.03(h) and related provisions of the UIPA to curb insurer violations of the California Insurance Code.

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