Viewpoint: Navigating the CDI’s Notice of Non-Compliance

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

For insurers operating in California, the stakes could not be higher and receiving a Notice of Non-Compliance (NNC) from the CDI is daunting, to say the least, with the looming possibility of monetary penalties and a regulatory trial before a CDI-funded administrative law judge (ALJ). That being said, understanding how to navigate this process effectively can help carriers mitigate risks and potentially avoid severe penalties or even loss of licensure.

What Is a Notice of Non-Compliance?

An NNC is issued by the CDI following an examination triggered by a consumer complaint or other information. The NNC outlines the alleged noncompliance, specifies how the insurer has violated insurance regulations, and provides a deadline—typically no less than 10 days—for the company to correct the issue. The notice also includes the potential penalties that could be imposed if the noncompliance is not resolved.

It is important to note that an NNC is not a hearing, but essentially a formal warning that gives the carrier a final opportunity to address any given issue before the CDI moves forward with a 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 an NNC: The Insurer’s Options

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

• Demonstrate Compliance: The company can attempt to prove to the commissioner that the alleged noncompliance does not exist. This is the most favorable outcome, as it effectively nullifies the NNC and shifts the burden back to the CDI to review and potentially close the case.
• Request a Hearing: If the insurer cannot resolve the issue informally, it may request a public hearing. This step must be carefully considered, as it could lead to a drawn-out process with uncertain outcomes.
• Engage in Informal Conciliation: The carrier may enter into informal negotiations with the commissioner and any complainants to resolve the matter. This option can be valuable for reaching a settlement without the need for a formal hearing.
• Enter a Consent Order: The insurer may agree to correct the specified noncompliance within a set 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 no violation exists or does not correct the noncompliance, the CDI can proceed to a hearing—a process in which the odds can be heavily skewed in favor of the regulator.

This administrative proceeding is conducted by an ALJ or hearing officer employed by the CDI itself, with the CDI bearing the burden of proof. Given that the CDI is both the enforcer and the employer of the adjudicator, 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 after the hearing concludes. However, even after a decision is made, the Commissioner retains the sweeping authority to adopt, revise, or outright reject the ALJ’s decision, further tipping the scales against the insurer.

Penalties for noncompliance can be severe, including fines of up to $10,000 per day for each day the violation continues, with a cap of $100,000. Additionally, the commissioner may suspend or revoke the insurer’s license if it fails to comply with the final order. In cases of willful noncompliance, penalties can reach up to $250,000—penalties that could potentially cripple a carrier’s operations in California.

Strategies for Prevailing Against an NNC

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

• Verify the Alleged Violation: Review the NNC and the underlying statutes or regulations closely. If the company can demonstrate that the alleged violation did not occur factually and/or legally, the NNC may be dismissed. Important questions to ask include whether the violation actually happened and whether it was resolved before the NNC was issued.
• Determine the Nature of the Violation: Not all violations carry the same consequences. For example, if the NNC concerns an “underwriting rule” rather than a “rate, rating plan, or rating system,” the penalties under CIC § 1858.07 may not apply. Understanding this distinction is crucial for formulating an effective response.
• Confirm Jurisdiction: CIC § 1858.07 limits penalties to violations of statutes within Chapter 9 of Division 1, Part 2 of the Insurance Code. If the alleged violation falls outside this chapter, it may be grounds to challenge the NNC and a request for penalties.
• Challenge CDI’s Interpretation: Insurers should scrutinize the CDI’s interpretation of the relevant statutes. Often, the CDI may misinterpret or misapply the law, and a careful legal analysis could reveal grounds for dismissing the NNC.

Practical Recommendations

When facing 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 resolution without the need for a formal legal process.
• Assert Compliance Early: Insurers should promptly gather evidence to demonstrate that the alleged noncompliance does not exist. This proactive approach can prevent the situation from escalating and may even resolve the issue entirely.
• Engage with CDI Constructively: Establishing a cooperative relationship with the CDI can be beneficial. Companies should aim to work collaboratively with the CDI to address and resolve the issues raised in the NNC.
• Do Not Assume the NNC Is Correct: Insurers should critically assess the validity of the NNC. Often, NNCs are overly broad or include violations that have already been corrected. Identifying these issues can provide leverage in negotiations with the CDI.

Final Thoughts

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

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

Jacobs is a partner at Michelman & Robinson LLP, a national law firm. He represents clients across a range of industries—the insurance space, included—in complex, class action and commercial business litigation. Phone: (310) 299-5500; email: mjacobs@mrllp.com.

Vincent Loh is counsel 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: vloh@mrllp.com.