Annual ACIC General Counsel Seminar / San Diego July 2017 Ron Kent, Dentons US LLP CHALLENGING CDI'S REGULATORY ACTIONS: A CONTINUUM

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1 Annual ACIC General Counsel Seminar / San Diego July 2017 Ron Kent, Dentons US LLP CHALLENGING CDI'S REGULATORY ACTIONS: A CONTINUUM I. Introduction Similar to many state regulatory agencies across the country, the California Department of Insurance ("CDI") continues to increase the scope and intensity of its quasi-legislative and adjudicatory activities. Many regulated entities at the same time have chosen under appropriate circumstances to challenge CDI's efforts directly. These materials and my remarks will focus on three actual case studies concerning litigation with CDI -- in two of which I was personally involved. The goal is to illustrate a continuum on which different types of challenges might be placed, as well as some of the multi-faceted strategies these challenges may incorporate. More specifically, the continuum runs from traditional, "on their face" attacks on CDI regulations, to hybrid challenges to CDI policies and "official" interpretations, to evidence-driven "as applied" strategies. II. ACIC v. Jones, 2 Cal.5th 376 (2017) This was a civil declaratory relief action challenging CDI's recently promulgated "homeowners replacement cost estimate" regulation. This regulation was subject to formal California APA enactment procedures. An intermediate Court of Appeals held the regulation invalid primarily based on argument that the Legislature had listed specific types of illegal misrepresentations in Ins. Code , and the Commissioner could not use his rule-making authority under to add to that list, as opposed to following the procedure provided by (acts "not defined in Section "). The California Supreme Court, though, reversed in a 7-0 decision. The Supreme Court applied a rather deferential analysis: the regulation need only be "'consistent and not in conflict with' the statute and whether it is 'reasonably necessary to effectuate the purpose of the statute.'" 2 Cal.5th at 411. With respect to our "continuum," this exemplified a traditional "on its face" challenge to the subject regulation.

2 III. In the Matter of PacifiCare Life and Health Insurance Company, File No. UPA , OAH No ; David Jones, Commissioner v. Superior Court, Orange County Superior Court Case No CU-WM-CXC (on appeal California Court Of Appeals, Fourth Appellate District, Division 3, Case No. G053914) On January 25, 2008, the California Department of Insurance initiated an administrative enforcement action against PacifiCare, an affiliate of UnitedHealthcare. The administrative evidentiary hearing commenced December 7, After 240-plus days of testimony and hearings, on August 5, 2013, the administrative law judge issued a Proposed Decision rejecting CDI's demand for approximately $250 million in penalties (CDI had demanded $1 billion at the outset of hearing) and instead recommended approximately $11 million in penalties. To put this in perspective, and according to Public Records Act requests, CDI had paid outside counsel nearly $10 million to that point. On June 9, 2014, however, Commissioner Dave Jones issued a Decision and Order rejecting the administrative law judge's Proposed Decision, and imposing a $173 million penalty. On July 10, 2014, PacifiCare filed a writ of administrative mandamus in the Orange County Superior Court challenging the Commissioner's $173 million penalty. On August 14, 2015, the court heard PacifiCare's motion for judgment on the pleadings. The court found that section , subdivision (a) [definition of "single act"], section , subdivision (l) [definition of "knowingly"], and section , subdivision (y) [definition of "wilfull"], of Title 10 of the California Code of Regulations were invalid because they impermissibly conflict and are inconsistent with Insurance Code sections , subdivision (h) and CDI then sought to remand the matter back to the Commissioner for readjudication of the claims in light of the invalidated regulations. The court rejected this piecemeal approach and entered a preliminary injunction on August 8, The Commissioner subsequently appealed the court's invalidation and injunction rulings. On a writ of supersedeas, the court of appeal declined to stay the trial court proceedings, but granted a stay of the preliminary injunction against enforcement of the invalidated regulations pending appeal. With the appeal of the invalidated regulations still pending, the trial court ultimately heard argument on all 19 categories of alleged UIPA violations over six days in January and February On March 28, 2017, the court issued a tentative Statement of Decision, and invited the - 2 -

3 parties to lodge objections and comments. The parties did so and argued those matters on June 23, The court took the matter under submission and intends to issue a formal Statement of Decision from which the Commissioner will either take an appeal or, alternatively, seek to remand the matter back to himself to make new findings of fact in areas where his Decision and Order were rejected by the trial court. PacifiCare could also file a cross-appeal, which would effectively take the matter out of the Commissioner's hands for the next 18 months or so. Substantively, the Court's March 28 tentative ruling largely rejected the Commissioner's Decision and Order: Failure to Include a Statutory Notice in EOBs of an Insured's Right to an Independent Medical Review o Penalty: $22.75 million Failure to Give Providers Notice of CDI Appeal Rights in EOPs o Penalty: $30 million Failing to Timely Pay Claims o Penalty: $55 million (in part) Failure to Pay Statutory Interest o Penalty: $7.79 million (in part) Untimely Collection Notices on Overpaid Claims o Penalty: $6.77 million Improper Denial of Claims Due to an Erroneous Exclusionary Period for Pre-Existing Conditions o Penalty: $2.9 million (in part) - 3 -

4 Failure to Maintain COCCs o Penalty: $12.6 million (in part) Failing to Acknowledge Receipt of Claims o Penalty: $7.5 million Failing to Correctly Pay Provider Claims o Penalty: $22.2 million (in part) Failing to Timely Respond to Provider Disputes o Penalty: $5.6 million Illegal Closing of Files o Penalty: $35,000 Failure to Timely Respond to CDI Inquiries o Penalty: $101,500 Failure to Conduct Business in Own Name o Penalty: $7,250 Failure to Timely Respond to Claimants o Penalty: $31,500 Failure to Conduct Thorough Investigation o Penalty: $149,

5 Misrepresenting Pertinent Facts o Penalty: $127,500 Failure to Implement Date of Receipt Policy o Penalty: $6,500 Failure to Maintain Complete Claims Files o Penalty: $5,250 Failure to Train Claims Agents on FCSP Regulations o Penalty: $51,750 The court declined to find that the fines were unconstitutionally excessive and violative of due process noting that [b]ased on this court s decision, well over $100,000,000 in civil penalties are reversed and cannot be reimposed and declined to invade the initial province of the Commissioner to exercise his discretion in the first instance on remand. As to the continuum, PacificCare challenged CDI on the subject regulations both "on their face" (inconsistent with the enabling statutes and legally impermissible statutory interpretations) and as applied

6 IV. Patrick Kirk v. First American Title Insurance Company, Superior Court of Los Angeles County Case No. BC372797; David Jones, Insurance Commissioner of the State of California v. Superior Court of the State of California, California Court of Appeal, 2d Dist., Div. 3, Case no. B This was a Business & Professional Code certified class action alleging excessive fees charged for escrow and other related services. It was tried on the merits over eight weeks in December February At closing, plaintiffs asked for $34 million in restitution; the Court instead awarded approximately $1.5 million and rejected plaintiffs' request for $12 million in "private attorney general" attorneys fees. CDI actively assisted plaintiffs pre-trial and at trial by supplying witnesses, including testimony regarding "official" CDI policies, and statutory and regulatory interpretations. CDI also actively resisted First American's discovery efforts. The discovery disputes continued literally beyond commencement of trial and culminated in an order issued by the trial judge. In response, CDI filed a writ with the Second District Court of Appeal, which ultimately was rejected, and a petition for review by the California Supreme Court, which similarly was denied. Judgment in the class action was affirmed on appeal in its entirety. CDI claims of official information and deliberative process privileges were rejected: "In this case, there is a powerful public interest in disclosure of the documents, as they bear directly on the Department's historical treatment and current policies toward the regulatory filings of the Defendant. In addition, the credibility and impartiality of the testimony of CDI personnel with respect to the historical treatment of the Defendant's filings with the CDI regarding escrow charges between 1999 and 2007 is directly at issue. The documents are plainly relevant." CDI claims of attorney-client work product privileges also were largely rejected: "While it seems that many, if not most, of the senior staff of the CDI have law licenses, it is important to distinguish between their actions taken as lawyers and their actions taken in their official capacity as government servants, conducting the business of the Department of Insurance." Collateral estoppel as to CDI? See also, RLI Ins. Group v. Superior Court, 51 Cal.App.4th 415 (1996) (discoverability of CDI "working law")

7 As to the continuum, First American challenged CDI's policies and interpretations both on their face (non-existent/no notice) and as applied (inconsistent application)