Judge overruled: State appeals court upholds millions in fines for insurance company

California’s 26-year-old rules for penalizing insurers for treating customers unfairly during claim settlements have been upheld by a state appeals court in the case of an insurance company facing $173 million in fines.

Overturning a judge’s decision in 2015 that the rules violated state law, the Fourth District Court of Appeal in Santa Ana allowed Insurance Commissioner Dave Jones to seek $91 million of the penalties he imposed on PacifiCare Life and Health Insurance Co. The remaining $82 million is being challenged in a separate proceeding.

Jones levied the penalties after finding that the company had violated state law 908,000 times in handling claims. Jones blamed cost-cutting measures imposed by UnitedHealthcare, which purchased PacifiCare in 2005.

The law prohibits pressuring or deceiving policy-holders into accepting inadequate settlements of their claims — for example, the court said, by misrepresenting the coverage they hold, or by secretly rewriting their application for insurance.

An Orange County judge set the fines aside after ruling in 2015 that the Insurance Department’s regulations — which increase penalties for serious, knowing and willful violations — exceeded the limits of a 1959 state law. But the appeals court allowed Jones’ office to resume enforcing the regulations in November 2016, and ruled Thursday that the department’s procedures were consistent with state law and with the Legislature’s intention to give the commissioner authority to protect consumers.

“I am delighted the Court of Appeal has affirmed the authority of the insurance commissioner to punish insurance companies for knowingly harming even one consumer,” Jones said in a statement.

Lawyers for PacifiCare did not respond to requests for comment. The company, whose arguments in the case were supported by insurance industry organizations, could ask the state Supreme Court to review the ruling.

One of the laws allows the state to fine insurers for unfair claims settlement practices that are “knowingly committed on a single occasion” or so often that they “indicate a general business practice.”

PacifiCare argued that only multiple violations showing a general business practice could be punished, and Orange County Superior Court Judge Kim Garber Dunning agreed. But the appeals court said the state Supreme Court had interpreted the law to apply to individual violations in 1979, and had never overturned that decision in later rulings.

The language of the law “strongly suggests both (individual) acts and (business) practices are prohibited” if they are knowingly committed, Justice Thomas Goethals said in the 3-0 ruling.