In a case challenging the California Department of Insurance’s (CDI) accusation against life and health insurers of multiple unfair and deceptive practices in violations of the California Insurance Code and the Fair Claims Practices Regulations (FCPR), an administrative law judge ruled that the CDI had overstepped its powers deriving from the Fair Claims Settlement Practices Regulations, and particularly Section 790.03 of Insurance Code.  A copy of the decision is available here.

Administrative Law Judge Stephen Smith ruled that the CDI’s Fair Claims Settlement Practices Regulations might not be brought as unfair claims acts, and regulators cannot use the FCPR to dramatically expand the scope of the unfair claims settlement practices set forth in Section 790.03. “None of the duties, requirements or standards required or practices and procedure proscribed in the Fair Claims Settlement Practices Regulations appear anywhere in Section 790.03,” Judge Smith said. He added that these are additional standards added exclusively by regulatory action of the CDI.

Jude Smith added that, in order to assert a violation of Section 790.03, the CDI must prove both that the violation was knowingly committed and that it was performed with such frequency as to reflect a general business practice.

This ruling affects how the CDI has imposed penalties against insurers for claims since the inception of the FCPR in 1992. For the past two decades, the department has been using the threat of an OSC proceeding and hefty fines to require insurers to follow the FCPR.

Judge Smith’s ruling threw off the CDI’s strategy to stop insurers’ unfair practices by threatening them with heavy penalties, and may result in changes on how a Market Conduct Examination is done.