Entitled “Standards for Estimates of Replacement Value,” this elaborate Regulation set forth requirements for establishing replacement cost limits for homeowner’s policies. The Association of California Insurance Companies (ACIC) filed a declaratory relief complaint against the Insurance Commissioner, arguing: (1) that the Regulation was invalid because the Commissioner lacked the authority to regulate the underwriting of homeowners insurance; (2) that Cal. Ins. Code § 790.03 (the “Unfair Insurance Practices Act” or UIPA) did not authorize the imposition of a single detailed method for estimating the replacement cost of houses; and (3) that the Regulation violated the insurance companies’ free speech rights under the First Amendment of the United States Constitution. ACIC also argued that the Regulation was ineffective because it rendered, as unfair and deceptive, estimates that were accurate but not in the format directed by the Regulation while at the same time it did not sanction an inaccurate estimate that complied with its format and content requirements.

The California Court of Appeal has issued an opinion which, if allowed to stand, threatens to eat away at the once-settled body of law that prohibits third-party claimants who were injured by an insured from suing the insured’s insurance company for unfair claims settlement practices under California Insurance Code § 790.03. Over 20 years ago, the State Supreme Court held that only the State’s Insurance Commissioner may pursue insurers for improper settlement practices under that statute; § 790.03 does not grant either insureds or third-party claimants the right to sue insurers for violating the statute’s prohibitions.

try groups, especially those representing small- and mid-size insurers, were concerned that they have little leverage when contracting with third parties to change contract language to include the terms specified by the NAIC draft Bulletin. The Committee seemed particularly interested in hearing from insurers about the amount of control they have when products are purchased to include language-requiring coordination with insurance departments that may have questions of third-party vendors.The Committee signaled that a question it has been evaluating is whether third-party AI service providers can be regulated through the insurers they do business with or need to licensed separately by insurance departments. This last point was not elaborated on but is worth paying attention to. With the rise of such recent cases as Kisting-Leung et al. v. Cigna Corp. et al., 2:23-cv-01477-DAD-KJN (E.D. Cal. Aug. 8, 2023), which alleges violation of, inter alia, certain insurance regulations, including Cal. Ins. Code § 790.03(h) (Unfair Practices) and Cal. Code Regs. tit. 10, §2695.7(b)(1), (d) and (e) (Standards for Prompt, Fair and Equitable Settlements), regulators are starting to take an even closer look at both AI solutions developed and used in-house by insurers and those developed by third-party AI service providers.

PacifiCare’s suit asserted that the Commissioner and the CDI misinterpreted the Unfair Insurance Practices Act and the Fair Claims Settlement Practice Regulations. PacifiCare contested the Commissioner’s assertions that: Under California Insurance Code section 790.03(h), "there can be no ambiguity that the Legislature intends to punish single acts knowingly committed or acts performed with such frequency that they demonstrated a general business practice." Knowingly committed includes constructive knowledge, not just actual knowledge.

PacifiCare’s suit asserted that the Commissioner and the CDI misinterpreted the Unfair Insurance Practices Act and the Fair Claims Settlement Practice Regulations. PacifiCare contested the Commissioner’s assertions that:Under California Insurance Code section 790.03(h), "there can be no ambiguity that the Legislature intends to punish single acts knowingly committed or acts performed with such frequency that they demonstrated a general business practice."Knowingly committed includes constructive knowledge, not just actual knowledge."[C]ommitting the same violation over and over again indicates a ‘general business practice’" and frequency is not established by reference to tolerance thresholds in the National Association of Insurance Commissioners’ Market Regulation Handbook.A "willful act is one committed or omitted with a purpose or willingness to commit the act, or make the omission … It ‘does not require any intent to violate the law, or to injure another, or acquire any advantage.’"Section 790.035’s exception for "inadvertent" issuance, amendment, or servicing of a policy – under which multiple acts are viewed as a single act for purposes of assessing penalties – does not apply if the violation is repeated after notice, either constructive or ac

In his Second Amended Complaint, he sought $25,000 for the costs of the arbitration, as well as additional attorneys’ fees. He alleged that the insurer had violated Cal. Ins. Code § 790.03(h)(5), by failing to “attempt in good faith to effectuate [a] prompt, fair, and equitable settlement of [a] claim in which liability ha[d] become reasonably clear.” The trial court dismissed the complaint, without leave to replead, on the ground that the plaintiff could not establish causation: he could not show, that is, that the arbitration and its attendant costs had been caused by the insurer’s failure to make an offer, rather than by the excessive amount of his own demand.

The insured subsequently commenced a lawsuit alleging that the insurer breached the covenant of good faith and fair dealing by forcing the insured into arbitration without investigating, evaluating and attempting to resolve the claim. Specifically, the insured argued that the insurer had breached its statutory duty of good faith and fair dealing under California Insurance Code section 790.03 by failing to attempt to effectuate a prompt, fair and equitable settlement for a claim in which liability had become reasonably clear, and that as a result, “Plaintiff was forced to go to Arbitration and to incur costs in excess of $25,000 as well as additional attorney fees.” The insurer demurred on the basis that there had been a “genuine dispute” regarding payment due under the policy, as demonstrated by the arbitrator’s ultimate decision to award less than the policy’s $250,000 limit.

The plaintiffs’ bar should be thankful for Zhang v. Superior Court, 57 Cal.4th 364(2013), a partial and long-anticipated answer to the question of whether California’s pernicious (to businesses) Unfair Competition Law (UCL) applies to insurers in lawsuits brought by their insureds. That answer: Yes, sort of. A policyholder may sue its own insurer for false advertising, one of the prohibited acts in the UCL, even though the same conduct would not be actionable under the state’s Unfair Insurance Practices Act, Cal. Ins. Code sections 790.03 et seq. Although damages cannot be awarded in UCL cases, they can be highly intrusive and expensive to defend against, and a prevailing plaintiff may be awarded attorneys’ fees as well as disgorgement and other equitable remedies. Later cases will try to stretch Zhang to other circumstances, but for now it is limited to actions by first-party claimants (the carrier’s own policyholders).

The claimant refused the offer and obtained a judgment in excess of the policy limits, then filed a bad faith suit as the insured’s assignee.Decision The Court in Reid held that the insurer did not have a duty under either California Insurance Code § 790.03 (the Unfair Claims Practices Act) or prior case law to initiate settlement discussions or offer its policy limits as soon as the insured’s liability in excess of policy limits had become clear. A bare request for policy limit information was not treated as a demand.

Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 does not preclude insureds from maintaining a claim for violations of California’s Unfair Competition Law (UCL) against insurers. In Moradi-Shalal, the court held that, when the Legislature enacted California Insurance Code 790.03(h) (UIPA), it did not intend to create a private cause of action for commission of the various unfair insurance practices set forth in the UIPA. Thereafter, a split of authority developed in the California Courts of Appeal concerning whether an insurer could be subject to liability for UCL violations based upon conduct that was also a violation of the UIPA.