Health Net 2005 Annual Report Download - page 27

We face risks related to litigation, which, if resolved unfavorably, could result in substantial penalties and/
or monetary damages, including punitive damages. In addition, we incur material expenses in the defense
of litigation and our results of operations or financial condition could be adversely affected if we fail to
accurately project litigation expenses.
We are subject to a variety of legal actions to which any corporation may be subject, including employment
and employment discrimination-related suits, employee benefit claims, wage and hour claims, breach of contract
actions, tort claims, fraud and misrepresentation claims, shareholder suits, including suits for securities fraud, and
intellectual property and real estate related disputes. In addition, we incur and likely will continue to incur
potential liability for claims particularly related to the insurance industry in general and our business in
particular, such as claims by members alleging failure to pay for or provide health care, poor outcomes for care
delivered or arranged, improper rescission, termination or non-renewal of coverage, claims by employer groups
for return of premiums and claims by providers, including claims for withheld or otherwise insufficient
compensation or reimbursement, claims related to self-funded business, and claims related to reinsurance
matters. Such actions can also include allegations of fraud, misrepresentation, and unfair or improper business
practices and can include claims for punitive damages. For example in McCoy v. Health Net, Inc. et al., and
Wachtel v. Guardian Life Insurance Co., the plaintiffs allege that the manner in which our various subsidiaries
paid member claims for out of network services was improper. Plaintiffs have sought potentially severe sanctions
against us for a variety of alleged misconduct, discovery abuses and fraud on the court. The sanctions sought by
plaintiffs and being considered by the court include, among others, entry of a default judgment, monetary
sanctions, and either the appointment of a monitor to oversee our claims payment practices and our dealings with
state regulators or the appointment of an independent fiduciary to replace the Company as a fiduciary with
respect to our claims adjudications for members. Also, there are currently, and may be in the future, attempts to
bring class action lawsuits against various managed care organizations, including us. In some of the cases
pending against us, substantial non-economic or punitive damages are also being sought. See “Item 3. Legal
Proceedings” and Note 12 to our consolidated financial statements for additional information regarding McCoy
and our other legal proceedings.
We cannot predict the outcome of any lawsuit with certainty, and we are incurring material expenses in the
defense of litigation matters including without limitation substantial discovery costs. While we currently have
insurance coverage for some of the potential liabilities relating to litigation, other such liabilities (such as
punitive damages or the cost of implementing changes in our operations required by the resolution of a claim),
may not be covered by insurance, the insurers could dispute coverage or the amount of insurance could not be
sufficient to cover the damages awarded. In addition, insurance coverage for all or certain types of liability may
become unavailable or prohibitively expensive in the future or the deductible on any such insurance coverage
could be set at a level which would result in us effectively self-insuring cases against us. The deductible on our
errors and omissions (“E&O”) insurance has reached such a level. Given the amount of the deductible, the only
cases which would be covered by our E&O insurance are those involving claims that substantially exceed our
average claim values and otherwise qualify for coverage under the terms of the insurance policy.
In addition, recent court decisions and legislative activity may increase our exposure for any of the types of
claims we face. There is a risk that we could incur substantial legal fees and expenses, including discovery
expenses, in any of the actions we defend in excess of amounts budgeted for defense. In certain cases, we could
also be subject to awards of substantial legal fees and costs to plaintiffs’ counsel. Although we have established
reserves for litigation costs, we cannot assure you that our recorded reserves are adequate to cover such costs.
Therefore, the litigation to which we are subject could have a material adverse effect on our financial condition
or results of operations and could prompt us to change our operating procedures.
Our forecasts and other forward-looking statements are based on a variety of assumptions that are subject
to significant uncertainties. Our performance may not be consistent with these forecasts and forward-
looking statements.
From time to time in press releases and otherwise, we publish forecasts or other forward-looking statements
regarding our future results, including estimated revenues, net earnings and other operating and financial metrics.
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