Health Net 2011 Annual Report Download - page 39

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.
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 may 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
the best interests of the Company and its stockholders. We record reserves and accrue costs for certain significant
legal proceedings which represent our best estimate of the probable loss, including related future legal costs, for
such matters, both known and unknown. However, our recorded amounts might differ materially from the
ultimate amount of any such costs. The costs associated with any settlement of or judgment relating to the
various legal proceedings to which we are or may be subject from time to time, such as the proceedings described
in Note 13, could be substantial and, in certain cases, could result in a significant earnings charge or impact on
our cash flow in any particular quarter. For example, as a result of the Louisiana Supreme Court’s decision in the
AmCareco litigation, we recorded a pretax charge of $181 million in the year ended December 31, 2011. The
costs associated with any settlement of or judgment relating to the various legal proceedings to which we are or
may be subject from time to time, such as the proceedings described in Note 13, could have a material adverse
effect on our financial condition, results of operations, cash flow and/or liquidity.
We are subject to risks associated with outsourcing services and functions to third parties.
We currently contract with independent third party vendors and service providers who provide services to us
and our subsidiaries or to whom we delegate selected functions. These third parties provide a material amount of
services to us, and include, but are not limited to, information technology infrastructure and applications
solutions providers, medical management providers, claims administration providers, billing and enrollment
providers, third party providers of actuarial services, call center providers and specialty service providers. We are
continuing to explore further opportunities to outsource certain other business process functions, including in the
area of information technology. Our current and any future arrangements with third party vendors and service
providers may make our operations vulnerable if those third parties fail to satisfy their obligations to us,
including their obligations to maintain and protect the security and confidentiality of our information and data. In
addition, we may have disagreements with third party vendors and service providers regarding relative
responsibilities for any such failures under applicable business associate agreements or other applicable
outsourcing agreements. Any contractual remedies and/or indemnification obligations we may have for vendor or
service provider failures may not be adequate to fully compensate us for any losses suffered as a result of any
vendor’s failure to satisfy their obligations to us or under applicable law. Our current and any future outsourcing
arrangements could be adversely impacted by changes in vendor’s or service provider’s operations or financial
condition or other matters outside of our control. If we fail to adequately monitor and regulate the performance of
our third party vendors and service providers, we could be subject to additional risk. If these vendor and service
provider relationships were terminated for any reason, we may not be able to find alternative partners in a timely
manner or on acceptable financial terms, and may incur significant costs and/or disruption to our operations in
connection with any such vendor or service provider transition. As a result, we may not be able to meet the full
demands of our customers and, in turn, our business, financial condition and results of operations may be
harmed. In addition, we may not fully realize the anticipated economic and other benefits from our outsourcing
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