Health Net 2010 Annual Report Download - page 137

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As necessary, we make contributions to and issue standby letters of credit on behalf of our subsidiaries to
meet risk based capital (RBC) or other statutory capital requirements under various state laws and regulations,
and to meet the capital standards of credit rating agencies. During the year ended December 31, 2010, we made
no such capital contributions. As a result of the regulatory capital requirements and other requirements of state
law and regulation, certain subsidiaries are subject to restrictions on their ability to make dividend payments,
loans or other transfers of cash to us, or their ability to do so is conditioned upon prior regulatory approval or
non-objection. Such restrictions, unless amended or waived, limit the use of any cash generated by these
subsidiaries to pay our obligations. The maximum amount of dividends which can be paid by the insurance
company subsidiaries to us without prior approval of the insurance departments is subject to restrictions relating
to statutory surplus, statutory income and unassigned surplus. Management believes that as of December 31,
2010 all of our active health plans and insurance subsidiaries met their respective regulatory requirements in all
material respects.
Note 13—Commitments and Contingencies
Legal Proceedings
Litigation Related to the Sale of Businesses
AmCareco Litigation
We are a defendant in two related litigation matters pending in Louisiana and Texas state courts, both of
which relate to claims asserted by three separate state receivers overseeing the liquidation of three health plans in
Louisiana, Texas and Oklahoma that were previously owned by our former subsidiary, Foundation Health
Corporation (FHC), which merged into Health Net, Inc. in January 2001. In 1999, FHC sold its interest in these
plans to AmCareco, Inc. (AmCareco). We retained a minority interest in the three plans after the sale. Thereafter,
the three plans became known as AmCare of Louisiana (AmCare-LA), AmCare of Oklahoma (AmCare-OK) and
AmCare of Texas (AmCare-TX). In 2002, three years after the sale of the plans to AmCareco, each of the
AmCare plans was placed under state oversight and ultimately into receivership. The receivers for each of the
AmCare plans filed suit against us contending that, among other things, we were responsible as a “controlling
shareholder” of AmCareco following the sale of the plans for post-acquisition misconduct by AmCareco and
others that caused the three health plans to fail and ultimately be placed into receivership.
On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in
state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and
the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same
proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict
against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million
in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million
and $45.5 million, respectively, and entered judgments against us in those amounts.
The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on
July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims and awarded $9.5
million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK,
respectively. The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive
damages. We thereafter appealed both judgments, and the receivers for AmCare-LA and AmCare-OK each
appealed the orders denying them attorneys’ fees and punitive damages.
On December 30, 2008, the Court of Appeal issued its judgment on each of the appeals. It reversed in their
entirety the trial court’s judgments in favor of the AmCare-TX and AmCare-OK receivers, and entered judgment
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