In PacifiCare Life & Health Insurance Company v. Jones, 27 Cal. App. 5th 391 (2018), the Fourth Appellate District for the California Court of Appeal reversed a trial court's order imposing an injunction that prevented Dave Jones, as California Insurance Commissioner, from enforcing three regulations.

The first of the three enjoined regulations states that, for purposes of the statute defining unfair claims settlement practices (§ 790.03, subd. (h) (section 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, subd. (a).) [Footnote] The second regulation defines the word "'[k]nowingly'" to include implied and constructive knowledge (Reg. 2695.2, subd. (l)). The third regulation defines the word "'[w]illful'" without requiring any specific intent to cause harm or violate the law. (Reg. 2695.2, subd. (y).)

The Court of Appeal disagreed with the trial court's analysis, finding Royal Globe Insurance Company v. Superior Court, 23 Cal. 3d 880 (1979) ("Royal Globe") held an insurer's "single knowing act" can constitute a violation of California Insurance Code section 790.03(h). The Court of Appeal also disagreed with the trial court as to regulations defining "knowingly committed" and "willful" or "willfully" to be invalid, determining the courts "must accord substantial deference" to the Commissioner's "broad authority to promulgate regulations relating to the UIPA."

In 2008, Jones brought an administrative enforcement action against PacifiCare, alleging violations of Section 790.03(h) as well as other provisions of the Insurance Code. Following hearing, the Commissioner found PacifiCare engaged in over 900,000 acts and practices in violation of the Insurance Code, and imposed penalties in excess of $173 million. Subsequently, PacifiCare filed a petition for writ of mandate and a complaint for declaratory and injunctive relief in the trial court, challenging the three regulations at issue, inter alia.

The first challenged regulation is Reg. 2695.1, subdivision (a), which is part of the preamble to the regulatory article entitled "Fair Claims Settlement Practices Regulations." (Regs. 2695.1–2695.14.) PacifiCare objected to the clause in that regulation describing section 790.03(h) as "enumerat[ing] sixteen claims settlement practices that, when either knowingly committed on a single occasion, or performed with such frequency as to indicate a general business practice, are considered to be unfair claims settlement practices ... ." (Reg. 2695.1, subd. (a).) 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, subdivision (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, subdivision (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." PacifiCare objected to this definition as inconsistent with section 790.035, the statute that sets forth the penalties applicable to violations of section 790.03—including enhanced penalties for "willful" violations. (§ 790.035, subd. (a).) PacifiCare argues this regulation impermissibly blurs the distinction between willful and nonwillful violations, and is inconsistent with the statutory definitions of willful found in the Insurance Code.

PacifiCare moved for summary judgment on its declaratory relief claim; the trial court granted the motion as to all three regulations. PacifiCare next moved for an injunction prohibiting the Commissioner from enforcing the challenged language; the trial court issued the requested injunction.

The Court of Appeal determined California Government Code section 11342.2 provides the general standard of review for administrative regulations, and noted California Insurance Code section 790.01 grants "quite broad" authority to the Commissioner to promulgate reasonable rules and regulations. The Court starts by presuming a challenged regulation is valid and the courts exercise independent judgment as to statutory construction, which is a question of law. As PacifiCare raised a facial challenge to the validity of the regulations, "it can prevail only if the text of the regulation, on its face, is inconsistent with the relevant statute[s]." The Court will consider only the text itself – not its application to the particular circumstances of the case.

The Court then turned to the UIPA and the challenged regulations. Section 790.02 prohibits a person from engaging "in any trade practice which is defined in this article as, or determined pursuant to this article to be, an unfair method of competition or an unfair or deceptive act or practice in the business of insurance." Section 790.10 requires the Commissioner to "promulgate reasonable rules and regulations, and amendments and additions thereto, as are necessary to administer this article." Enacted a year later, Section 790.03(h) refers both to "general business practice" and an "unfair claims settlement practice." The Court determined that, in context, "'unfair claims settlement practices' refers to practices that exist in the insurance industry generally. [Citation.] Thus, an individual insurer would engage in a listed 'practice' by just once committing the described misconduct."

The enactment of Section 790.03 "generated no small amount of debate as to its meaning." In Royal Globe, the California Supreme Court determined a third party claimant may bring a direct civil action against an insurer based on violations thereof, holding that "a single violation knowingly committed is a sufficient basis for such an action." Subsequently, in Moradi Shalal v. Fireman's Fund Insurance Companies, 46 Cal. 3d 287 (1988) ("Moradi-Shalal"), the Court reversed Royal Globe's holding that Section 790.03 gives rise to a private right of action. After Moradi-Shalal, the Legislature enacted Section 790.035, which authorized additional financial penalties for violations of Section 790.03.

Regulation 2695.1, identified as the "preamble" to the fair claims settlement practices regulations, describes Section 790.03 as "enumerating sixteen claims settlement practices that, when either knowingly committed on a single occasion, or performed with such frequency as to indicate a general business practice, are considered to be unfair claims settlement practices . . . prohibited by this section of the California Insurance Code." The Court rejected PacifiCare's challenge to the italicized language. The Royal Globe Court held that Section 790.03(h) applies to "a single violation knowingly committed." While the Moradi-Shalal Court "appeared to struggle with the propriety of its Royal Globe holding that 'an action under section 790.03 could be based upon a single wrongful act [ . . . ] the court did not overrule Royal Globe on this issue." As such, the Court determined the Moradi-Shalal Court's "negative commentary on the point is not binding precedent."

The Court also explained that, "[e]ven if Royal Globe were not binding on the point, we would agree with its conclusion that section 790.03(h) applies to an insurer's single knowing commission of the prohibited conduct" based on principles of statutory interpretation. In part, the Court based this determination on the fact that six of the enumerated unfair claims settlements practices "involve a failure to perform a specific act." The Court also found PacifiCare's proposed interpretation to be inconsistent with "clear Legislative mandates" as to the Commissioner's enforcement powers.

Based on the Court's conclusion that "section 790.03(h), properly construed, defines 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,'" the Court consequently held "the trial court erred in determining Reg. 2695.1, subdivision (a) is inconsistent with this statute."

 As to the two remaining challenged Regulations:

The terms "knowingly committed," "willful," and "willfully" are not defined in the UIPA. Thus, the Commissioner's broad mandate to administer the UIPA [citation] provides him with authority to interpret those undefined terms in the context of the act. [Citations.]

As the Commissioner points out, he engaged in an extensive, formal rulemaking process in the course of promulgating these regulations. That careful consideration, combined with the Commissioner's expertise in the area, weighs in favor of according significant deference to the Commissioner's interpretation of the terms [citation], and we do so.

With respect to "knowingly committing," PacifiCare argued that courts should look at the plain meaning of the word (i.e. dictionary definition). The Court declined to do so as the definition was not a "blank slate."

The regulation defines the knowledge of an institution or entity, rather than any individual, and it is consistent with traditional principles establishing corporate knowledge. As a general rule, an institution or entity acts "knowingly"—or deliberately—based on the knowledge or deliberate conduct of those authorized to act on its behalf. "'A corporation, of course, can acquire knowledge only through its officers and agents. Generally, the knowledge of a corporate officer within the scope of his employment is the knowledge of the corporation.'" [Citations.] Moreover, a corporation can be held responsible for knowing information dispersed among its employees. [Citation.]

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The Commissioner also argues that the inclusion of imputed and constructive knowledge in the definition of "knowingly" is necessary to effectuate the purposes of section 790.03(h) because it creates incentives for insurers to "make all proper inquiries and to exercise diligence" in the claims settlement process. Restricting the definition of "knowingly" to one particular individual's actual knowledge "would 'fail to take into account that ... many people handle a claim, and an unfair practice can be committed by cumulative acts, not simply the intentional act of one person.'" These arguments are reasonable and reflect the Commissioner's particular expertise in the area of regulating insurance claims practices. We consequently accord them significant weight.

The Court "conclude[d] that Reg. 2695.2, subdivision (l), which defines '[k]nowingly committed' for purposes of section 790.03(h), is valid" and "reversed the trial court's injunction prohibiting its enforcement."

With respect to "willful" or "willfully," PacifiCare "persuaded the trial court this regulation was invalid because it 'is inconsistent with the two-tier penalty scheme in Insurance Code section 790.035, which fixes a lower maximum penalty for non-willful acts than for willful acts.'" PacifiCare relied on Kwan v. Mercedes-Benz of North America, Inc., 23 Cal. App. 4th 174 (1994) ("Kwan") (regarding jury instructions), which the Court found to be distinguishable, not least of all because the Kwan Court's decision was clearly "grounded in the specific facts of that case." Further, based on the acts and omissions listed in Section 790.03(h), the Court found the Regulation's definition of "willful" "does not blur the distinction between willful and nonwillful violations." The Court also rejected PacifiCare's argument that the definition was inconsistent with other provisions of the Insurance Code:

Thus, when properly applied to the type of punishable conduct described in section 11756, the definition of willfulness in Reg. 2695.2, subd. (y) would also require a belief that some contemplated act or omission would violate a final order of the Commissioner, as well as an intent to engage in that violation. Consequently, Reg. 2695.2, subdivision (y) actually operates consistently with the definition of "willfully" contained in section 11750.1, subdivision (d). [Citation.]

The two other Insurance Code statutes cited by PacifiCare operate in a similar manner, and thus do not alter our analysis. [Footnote] We consequently reject PacifiCare's contention that definition of "'[w]illful' or '[w]illfully'" in Reg. 2695.2, subdivision (y) is inconsistent with the way in which those terms are defined in the Insurance Code.

PacifiCare's final challenge to Reg. 2695.2, subdivision (y) is that it "fails to harmonize section 790.035 with section 790.03" because it so dilutes the meaning of a willful violation that it transforms the "enhanced" penalty under section 790.035 into the "customary" penalty. PacifiCare fails to cite any authority for the proposition that the definition of a willful violation must ensure that it be a relative rarity. We are aware of none and can fathom nothing in law or logic to support such a requirement.

Finding no merit in PacifiCare's contention that Reg. 2695.2, subdivision (y) is invalid, we reverse the trial court's injunction prohibiting its enforcement.

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