Health Net 2009 Annual Report Download - page 31

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. Plaintiffs’ attorneys have increasingly used
expansive electronic discovery requests as a litigation tactic. Responding to these requests, the scope of which
may exceed the normal capacity of our historical systems for archiving and organizing electronic documents,
may require application of significant resources and impose significant costs on us. In certain cases, we could
also be subject to awards of substantial legal fees and costs to plaintiffs’ counsel.
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 policies that may provide coverage for some of the potential liabilities relating to litigation matters,
there can be no assurance that coverage will be available for any particular case or liability. Insurers could
dispute coverage or the amount of insurance could not be sufficient to cover the damages awarded or settlement
amounts. In addition, certain liabilities such as punitive damages, may not be covered by insurance. 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 that 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.
We regularly evaluate litigation matters pending against us, including those described in Note 13 to our
consolidated financial statements, to determine if settlement of such matters would be in the best interests of the
Company and its stockholders. The costs associated with any such settlement could be substantial and, in certain
cases, could result in an earnings charge in any particular quarter in which we enter into a settlement agreement.
Although we have recorded litigation reserves which represent our best estimate on probable losses, both known
and incurred but not reported, our recorded reserves might prove to be inadequate to cover an adverse result or
settlement for extraordinary matters, such as the matters described in Note 13. Therefore, costs associated with
the various litigation matters to which we are subject and any earnings charge recorded in connection with a
settlement agreement could have a material adverse effect on our financial condition or results of operations.
If we are unable to manage our general and administrative expenses, our business, financial condition or
results of operations could be harmed.
The level of our administrative expenses can affect our profitability, and our ability to manage
administrative expense increases is difficult to predict. While we attempt to effectively manage such expenses,
including through the development of online functionalities and other projects designed to create administrative
efficiencies, increases in staff-related and other administrative expenses may occur from time to time. These
increases could be caused by any number of things, including difficulties or delays in projects designed to create
administrative efficiencies, reliance on outsourced services, acquisitions and divestitures, business or product
start-ups or expansions, changes in business or regulatory requirements, including compliance with HIPAA
regulations, or other reasons. In November 2007, we announced a reorganization plan to enhance efficiency and
achieve general and administrative cost savings. The reorganization is nearly complete and is intended to enable
us to streamline our operations, including combining duplicative administrative and operational functions and
outsourcing certain operations where appropriate. However, there can be no assurance that the reorganization
will produce the anticipated savings.
Under the United Administrative Services Agreements, HNNE has agreed to provide certain administrative
services to the Acquired Companies until all of their members have either transitioned to legacy United products
or non-renewed. As these operations wind-down, we will seek to reduce the scale of, and ultimately eliminate,
certain of our administrative functions. In addition, we will need to reduce the scale of our overhead to reflect the
smaller size of the remaining company. In the event that the costs of the wind-down are greater than we
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