Health Net 2010 Annual Report Download - page 36

In addition, from time to time, agencies of the U.S. government investigate whether our operations are being
conducted in accordance with regulations applicable to government contractors. Government investigations of us,
whether relating to government contracts or conducted for other reasons, could result in administrative, civil or
criminal liabilities, including repayments, fines and/or penalties being imposed upon us, or could lead to
suspension or debarment from future U.S. government contracting, which could have a material adverse effect on
our financial condition and results of operations.
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 financial condition, results of operations, cash flow and/or liquidity could be adversely
affected if litigation expenses are greater than we project.
We are currently, and may become in the future, subject to a variety of legal actions, 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,
intellectual property and real estate related disputes, and claims arising from or in connection with acquisitions,
divestitures and other significant transactions, including but not limited to actions to block or unwind such
transactions. In addition, we incur and likely will continue to incur potential liability for claims 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, insufficient payments for out-of-network services and claims relating to information
security breaches; 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 and various forms of
injunctive relief. 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.
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 included in this report, to determine if settlement of such matters would be in
34