Recently, California Administrative Law Judge Stephen J. Smith made a ruling stating that the California Department of Insurance (CDI) may not use its’ Fair Claims Practices Regulations (FCPR) as evidence of unfair claims brought up against insurance companies. This is unusual given the state’s strict enforcing of the guidelines in the past, sanctioning insurance providers with fines for all perceived violations.
The CDI has used the FCPR since 1992 to regulate the punishments levied against insurance companies guilty of violations. Because of this tough-but-fair behavior, most companies have always decided to settle. So far, only two cases have decided to challenge the accusations in court. In the first case the CDI found 450 violations according to the FCPR and in the second one close to 700.
At first glance both these cases might seem like the fault clearly lies with the insurance companies, but further scrutiny revealed that most of these violations were of a technical nature. Such a violation might include exceeding a deadline by a day or two while a more serious nontechnical violation is where the insurance provider would underpay the claim filed by a customer.
Those that are in favor of Judge Smith’s ruling state that this new approach to the FCPR will allow insignificant technical violations to be glossed over, shifting the attention to focus on substantial violations which will also endure harsher penalties. Therefore, this new practice will ensure that insurance providers are more careful with their actions and they will be discouraged to intentionally commit serious violations.
Previously, a case would be examined by an administrative law judge and he will determine if a violation of the regulations has been committed for each particular accusation. Then, the judge can impose a penalty ranging from 0 to $5,000 for each violation, going as high as $10,000 if the violation was proven to be willful. In both cases that went to court the sum total of their penalties would have been in the seven digits. According to their defense attorney, these penalties imposed on the insurance companies would have been grossly overtaxing under the FCPR.
The ruling of Judge Smith has changed how most insurance companies in California will now do business, knowing that they have a little more breathing room. However, they must still focus their attention on the 16 statutes of California law and make sure that these are not broken, using the regulations more as guidelines as how to conduct their business.