Skip to Content
Claims Practices

California Case Comes Down Hard on Insurers

Barry Zalma | October 19, 2018

On This Page
California law book and gavel

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, which, 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 willful violation.

In PacifiCare Life & Health Ins. Co. v. Jones, 27 Cal. App. 5th 391 (Sept. 20, 2018), the California Court of Appeal agreed with the commissioner and upheld the CDOI's right to impose a fine for more than $173 million.


Dave Jones, in his capacity as insurance commissioner of the state of California, 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 '"knowingly"' to include implied and constructive knowledge. (Reg. 2695.2(l)).

The third regulation defines the word '"willful"' 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 the California Supreme Court in Moradi-Shalal v. Fireman's Fund Ins. Cos., 46 Cal. 3d 287 (1988), and in Zhang v. Superior Court, 57 Cal. 4th 364 (2013), 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, 23 Cal. 3d 880 (1979), which was reversed by the California Supreme Court and concluded its finding incorrect about allowing direct action for the violation of the UIPA. Relying on the reversed Royal Globe case, the California Court of Appeal noted it held that section 790.03(h) can be violated by an insurer's single knowing act.

Facts of the Case

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 claimed the regulation's language is inconsistent with section 790.03(h), which it contended did not include the single knowing commission of an enumerated act in its definition of an unfair claims settlement practice. As a result, PacifiCare argued that this regulation was invalid.

The second challenged regulation is Reg. 2695.2(l), which defines '"knowingly 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 argued that this definition was inconsistent with section 790.03(h) because "knowingly," in ordinary parlance, must mean deliberately—a meaning PacifiCare claimed was inconsistent with implied or constructive knowledge.

The third challenged regulation is Reg. 2695.2(y), which defines "'willful' or 'willfully' 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 that 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 16 specific "unfair claims settlement practices" that are prohibited when "knowingly 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 California Court of Appeal argued that grammar—the placement of commas—caused the California Court of Appeal to believe the phrase "unfair claims settlement practices" referred 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 California 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. 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 California Supreme Court reversed Royal Globe's holding that section 790.03(h) gave rise to a private right of action because "neither 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)."

In December 1992, the commissioner filed the Fair Claims Settlement Practices Regulations (Regs. 2695.1 et. seq.), which included the regulations challenged in this case. Those regulations took effect in January 1993.

The California Court of Appeal concluded that, although the California 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 California 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., "failing 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 practices, can be committed unknowingly. Regardless, the California Court of Appeal—relying on Royal Globe—found these acts could be single acts regardless of the requirements of section 790.03(h).

The California 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) was invalid, the court reversed the trial court's injunction prohibiting its enforcement.


The statute and precedent before this decision concluded that the CDOI could not fine or otherwise discipline an insurer for violating any of the provisions of the regulations unless there was 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 was 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 California Court of Appeal, will provide the CDOI with a bludgeon against every insurer and allow findings that are both unfair and unreasonable.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.