California Fair Claims And SIU Regulations Require Annual Training

California Fair Claims And SIU Regulations Require Annual Training

You Must Comply With California Regulations by September 1

Fair Claims Settlement Practices Regulations

All insurers doing business in California must comply with the requirements of California Fair Claims Settlement Practices Regulations (the “Regulations”) or face the ire of, and attempts at financial punishment from the California Department of Insurance (“CDOI”). That punishment is now in question because some courageous insurers fought the CDOI and succeeded before an administrative law judge.

Regardless of difficulties in assessing punishment the state of California requires all who are involved in the claims process — even if only tangentially — to be trained with regard claims handling in compliance with the Regulations and attest to completion of such training under oath or that the claims person has read and understood the Regulations.
It is necessary that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the Regulations. Counsel for insurers and policyholders should be familiar with the Regulations since they set a minimum standard for claims handling.

Whether the insurer fulfilled the requirements or not can assist the lawyer in evaluating the exposure faced by an insurer or policyholder client. The existence of compliance with the Regulations is important to the evaluation of a claim for breach of the covenant of good faith and fair dealing and evaluation of a claim of damages resulting from the tort of bad faith.

In 1993, the California Department of Insurance started the regulatory process to control, through regulatory micromanagement, claims handling in the state of California. The first version of what was then called the “Unfair Claims Settlement Practices Regulations” were issued to comply with the direction of the California Supreme Court made as part of the ruling in a case known as Moradi Shalal, [enhanced version available to subscribers], that concluded: “Neither section 790.03 nor section 790.09 was intended to create a private civil cause of action against an insurer that commits one of the various acts listed in section 790.03, subdivision (h).” The Supreme Court concluded that enforcement was the obligation of the CDOI.

The CDOI, five years after receiving instruction from the Supreme Court, issued the first version of the Regulations in 1993 and modified the Regulations in 1996, 1997, 2004, 2007 and 2009. The 1997 changes renamed the Regulations the “California Fair Claims Settlement Practices Regulations,” which name remains.

The Regulations imposed on all insurance personnel a detailed laundry list of actions the CDOI considered wrongful or in violation of the Fair Claims Practices Act, California Insurance Code Section 790.03(h), [enhanced version available to subscribers].

The Regulations impose on all insurance claims personnel the requirement that they read and understand the Regulations or attend an annual training program no later than September 1 of each year. They require that insurers ascertain that every employee involved in any way in the claims process is trained about the Regulations or has submitted a sworn statement that he or she has read and understands the Regulations. The Regulations even require that the insurance claims managing executive attest, under oath, that each employee has been trained with regard to and/or understands the Regulations. This requirement must be complied with in order to avoid the possibility of administrative penalties upon the insurer or prosecution of the officer for perjury.

The Insurance Code, contrary to the statement in the Regulations, does not hold that a single act is a violation of Insurance Code Section 790.03(h). Rather, the Code requires that the wrongful acts be committed with such frequency as to indicate a general business practice.

This Preamble is a statement by the CDOI to broaden the effect of the Insurance Code, to give the CDOI power to enforce the mandate, and to allow it to punish insurers for single wrongful acts. The Regulations, by changing the meaning of the California Insurance Code for the purposes of enforcement, was designed to force insurers to be more careful than the Legislature mandated. Under the Regulations, therefore, a single violation is enough to require punishment of the insurer or the licensee by the CDOI. Whether an insurer is willing to challenge enforcement of this requirement that is more stringent than the Insurance Code requirement is yet to be seen. One insurer challenged the requirement and won.

The Administrative Law Judge ruled, in part:

All allegations seeking civil penalties pursuant to the authority of Insurance Code sections 790.03, subdivision (h) and 790.035, based exclusively upon alleged violations of the Fair Settlement Practices Regulations … are dismissed with prejudice. … [the] Regulation, section 2695.1, subdivision (a) … seeks … to add all the acts, omissions and practices set forth in the Fair Settlement Practices Regulations to the 16 actionable unlawful settlement practices detailed by the Legislature in Insurance Code section 790.03, subdivision (h), without following the exclusive process for doing so set forth in Insurance Code section 790.06. [T]he Fair Settlement Practices Regulations impermissibly seek to establish new standards and duties constituting unfair methods of competition and unfair and deceptive acts or practices in the business of insurance within the meaning of Insurance Code section 790.03, subdivision (h), and then seek to penalize respondents for failure to meet the standards, all in derogation of the precedent process required by Insurance Code section 790.06. (Emphasis added)

Details for compliance with the Regulations and how to fight impermissible punishment see Zalma on California Fair Claims Settlement Practices Regulations – 2013 available from ClaimSchool, Inc. at

The California SIU Regulations

The state of California, by statute, requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and train all integral anti-fraud personnel to recognize indicators of insurance fraud.

It is necessary, therefore, that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the SIU Regulations imposed by the state on all insurers doing business in the state.

The SIU Regulations

The CDOI enacted a set of emergency regulations, as amended in 2003, 2004, and 2005, requiring all insurers who do business in the state of California to maintain or retain a special fraud investigation unit (SIU) and a plan to defeat fraudulent insurance claims (the SIU Regulations). The SIU Regulations were approved in their final form in October 2005. The SIU Regulations attempt to micro manage the work of insurance company efforts against insurance fraud.

The CDOI has audited hundreds of insurers regarding the SIU Regulations and found that most insurers doing business in California that were audited were in violation of some portion of the SIU Regulations. Major fines, as much as $10,000 per violation, may be imposed on those insurers who refuse, or fail to, comply with the SIU Regulations. Failure to train 100 employees can result in a fine from $500,000 to $1 million.

By following the training recommendations in Zalma On California SIU insurers can inoculate themselves against the potential for paying enormous fines to the CDOI. In addition, a recent ruling by an adminstrative law judge may provide insurers with weapons sufficient to reduce if not totally avoid payment of fines for violation of the SIU Regulations.

The majority of California licensed insurers are required by California Insurance Code Sections 1875.20-24, [enhanced version available to subscribers], and California Code of Regulations, Title 10, Section 2698.30-43, [enhanced version available to subscribers], to establish and maintain Special Investigative Units (SIU).

All insurers admitted to practice insurance business in California must recognize that by the SIU Regulations the California Department of Insurance (CDOI) has made almost every employee part of what it considers the insurer’s integral anti-fraud personnel. The CDOI requires that the insurer, or its Special Investigation Unit (SIU), train all of the insurer’s integral anti-fraud personnel annually and train all new hires within 90 days of employment. The purpose of this chapter is to assist California insurers to fulfill the obligations to comply with the SIU Regulations.

When deciding who needs to be trained California Insurers should recognize that the SIU Regulations, originally enacted as Emergency Regulations in 2003 had been renewed for three consecutive years as emergency regulations. All insurers are obligated to comply. Insurers, their lawyers, and all independent claims handlers must understand that the SIU Regulations define the term “Integral Anti-Fraud Personnel” as follows:

“Integral anti-fraud personnel” includes insurer personnel who the insurer has not identified as being directly assigned to its SIU but whose duties may include the processing, investigating, or litigation pertaining to payment or denial of a claim or application for adjudication or claim or application for insurance. The personnel may include claims handlers, underwriters, policy handlers, call center staff within the claims or policy function, legal staff, and other insurer employee classifications that perform similar duties. (Emphasis added.) [SIU Regulations, Section 2698.30 (k).]

If the insurer has not trained its integral anti-fraud personnel and if the insurer does not have a training program in force the insurer is subject to a finding it is in violation of the SIU Regulations. If there is no training program that can train all employees who fit within the definition of “integral anti-fraud personnel” within ninety (90) days of their employment the insurer will be in violation of the SIU Regulations.

The methods to train, and an outline of a training course for integral anti-fraud personnel, are available in my e-book Zalma on California SIU Regulations available from ClaimSchool at

Training and compliance must be completed by September 1, 2014 and September 1 of each year thereafter.

If you comply with the California Regulations you will probably be found to have complied with the Regulations of other states.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2014, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

For more information about LexisNexis products and solutions connect with us through our corporate site