Health Net 2007 Annual Report Download - page 32

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 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 and insufficient payments for out-of-network services; 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. 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.
For example in the McCoy,Wachtel, and Scharfman cases described in Note 12 to our consolidated
financial statements, the plaintiffs allege that the manner in which our various subsidiaries paid member claims
for out-of-network services was improper. Plaintiffs also sought severe sanctions against us for a variety of
alleged misconduct, discovery abuses and fraud on the court in connection with the litigation proceedings. Based
on our assessment of developments in this litigation, during the three months ended December 31, 2006, we
recorded a pretax charge of approximately $37 million in anticipation of our ongoing litigation defense expenses
in these cases, as well as the probable award of attorneys’ fees. In August 2007, we reached an agreement in
principle with the plaintiffs in McCoy,Wachtel and Scharfman to settle those cases. A definitive settlement
agreement has not yet been finalized and is subject to court approval. During the three months ended
September 30, 2007, we recorded a $296.8 million pretax charge primarily related to the settlement in principle
of McCoy,Wachtel and Scharfman and related matters. Until a definitive settlement agreement is executed and
approved by the court, these matters will remain outstanding. If we are unable to reach an agreement that is
acceptable to all parties and the court, these proceedings will continue and an unfavorable resolution of these
proceedings could have a material adverse effect on our results of operations and/or financial condition. See Note
12 to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” for additional information regarding the matters and the charges associated with these
matters.
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. 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.
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
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