Navigating the CDI notice of non-compliance

The California Department of Insurance is known for its rigorous oversight, making it the overseer of California’s insurance industry. CDI regulates all aspects of insurance, acting as judge, jury and executioner when it comes to ensuring compliance.

For insurers operating in California, the stakes couldn’t be higher, and receiving a Notice of Non-Compliance (NNC) from CDI is, to say the least, daunting given the potential for monetary penalties and regulatory action. before a funded CDI. administrative law judge (ALJ). That said, understanding how to effectively navigate this process can help carriers mitigate risk and potentially avoid severe penalties or even loss of license.

What is a notice of non-compliance?

An NNC is issued by CDI following an examination triggered by a consumer complaint or other information. The NNC outlines the alleged non-compliance, specifies how the insurer has breached insurance regulations and provides a deadline – usually no less than 10 days – for the company to remedy the problem. The notice also includes the potential penalties that could be imposed if the non-compliance is not resolved.

It is important to note that an NNC is not a hearing, but essentially a formal warning that gives the carrier one last opportunity to address any given issue before CDI moves forward with more severe enforcement action. The good news is that at this stage there is still time to resolve the matter without escalating it to a full hearing.

Responding to a NNC: Insurer Options

Under California Insurance Code (CIC) § 1858.1, insurers have several options when receiving an NNC:

• Demonstrate compliance: The company can try to prove to the commissioner that the alleged non-compliance does not exist. This is the most favorable outcome as it effectively cancels the NNC and shifts the burden back to the CDI to review and possibly close the case.
• Request a hearing: If the insurer cannot resolve the issue informally, it may request a public hearing. This step should be considered carefully as it could lead to a prolonged process with uncertain results.
• Engage in informal conciliation: The carrier may initiate informal negotiations with the commissioner and any complainant to resolve the matter. This option can be valuable in reaching an agreement without the need for a formal hearing.
• Enter a consent command: The insurer may agree to correct the specified non-conformity within a specified period and pay any penalties. This option allows for a more controlled resolution process, albeit with some financial penalties.

What happens if the issue is not resolved?

If a company fails to establish that there is no violation or does not correct the noncompliance, the CDI may proceed to a hearing—a process where the odds can be heavily skewed in the regulator’s favor.

This administrative proceeding is conducted by an ALJ or hearing officer employed by the CDI itself, with the burden of proof on the CDI. Given that the CDI is both the executor and the adjudicator’s employer, insurers may face an uphill battle in these proceedings. Discovery is governed by specific regulations designed by the CDI, and a proposed decision must be issued within 60 days of the conclusion of the hearing. However, even after a decision is made, the commissioner retains the authority to adopt, revise, or permanently reject the ALJ’s decision, further tipping the balance against the insurer.

Penalties for non-compliance can be severe, including fines of up to $10,000 per day for each day the violation continues, with a cap of $100,000. In addition, the commissioner may suspend or revoke the insurer’s license if the insurer fails to comply with the final order. In cases of willful noncompliance, penalties can be as high as $250,000 – penalties that could affect a carrier’s operations in California.

Strategies to prevail against an NNC

Given the power dynamics involved, insurers would be wise to approach a NNC strategically to avoid escalating the matter to a hearing. Here are key considerations:

• Check the alleged violation: Review the NNC and the underlying statutes or regulations closely. If the company can demonstrate that the alleged violation did not factually and/or legally occur, the NNC may be dismissed. Important questions to ask include whether the breach actually occurred and whether it was resolved before the NNC was issued.
• Determine the nature of the violation: Not all violations have the same consequences. For example, if the NNC refers to an “insurance rule” rather than a “rate, rating plan, or rating system,” the penalties under CIC § 1858.07 may not apply. Understanding this distinction is crucial to formulating an effective response.
• Confirm Jurisdiction: CIC § 1858.07 limits penalties to violations of the statutes of chapter 9 of division 1, part 2 of the Insurance Code. If the alleged violation does not fall under this chapter, it can be a reason to challenge the NNC and request penalties.
• Challenge the CDI interpretation: Insurers should review CDI’s interpretation of the relevant statutes. The CDI can often misinterpret or misapply the law, and a careful legal analysis could reveal reasons for the NNC’s dismissal.

Practical recommendations

When faced with an NNC, insurers should consider the following best practices:

• Leverage informal conciliation: Before requesting a hearing, carriers should explore informal conciliation with the CDI. This approach allows for a potentially amicable solution without the need for a formal legal process.
• Assert compliance early: Insurers should promptly gather evidence to demonstrate that the alleged non-compliance does not exist. This proactive approach can prevent the situation from escalating and may even solve the problem altogether.
• Interact constructively with CDI: Establishing a cooperative relationship with CDI can be beneficial. Companies should aim to work collaboratively with CDI to address and resolve issues raised in NNC.
• Do not assume that the NNC is correct: Insurers should critically evaluate the validity of the NNC. Often, NNCs are too broad or include violations that have already been corrected. Identifying these issues can provide leverage in CDI negotiations.

Final thoughts

Receiving an NNC from CDI is a serious matter that requires immediate and strategic action. However, with a clear understanding of the process and available options, carriers can effectively navigate the challenges presented by CDI.

By carefully reviewing the NNC, verifying suspected violations, and engaging in constructive dialogue with the CDI, insurance companies can mitigate risks and avoid the significant penalties that come with non-compliance. In a regulatory environment as challenging as California’s, being prepared and informed is the best defense against CDI and an NNC.

Jacobs is a partner at Michelman & Robinson LLP, a national law firm. He represents clients in a wide range of industries—including the insurance space—in complex, class action and commercial litigation. Phone: (310) 299-5500; email: [email protected].

Vincent Loh is an advisor at M&R. Operating out of the firm’s Irvine office, he litigates on behalf of a range of clients, including insurance-related companies. Phone: (714) 557-7990; email: [email protected].