Health Net 2007 Annual Report Download - page 45

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 in those amounts on November 3, 2005. We thereafter
filed a motion for suspensive appeal and posted the required security as required by law.
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 that 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 filed motions for suspensive appeals in connection with both judgments and posted the
required security as required by law, and the receivers for AmCare-LA and AmCare-OK each appealed the
orders denying them attorneys’ fees and punitive damages. Our appeals of the judgments in all three cases have
been consolidated in the Louisiana Court of Appeal. On January 17, 2007, the Court of Appeal vacated on
procedural grounds the trial court’s judgments denying the AmCare-LA and AmCare-OK claims for attorney
fees and punitive damages, and referred those issues instead to be considered with the merits of the main appeal
pending before it. The Court of Appeal also has considered and ruled on various other preliminary procedural
issues related to the main appeal. Oral argument on the appeals was held on October 4, 2007. Decisions by the
Court on the various appeals are expected to be rendered within six months of the date of oral argument.
On November 3, 2006, we filed a complaint in the U.S. District Court for the Middle District of Louisiana
and simultaneously filed an identical suit in the 19th Judicial District Court in East Baton Rouge Parish seeking
to nullify the three judgments that were rendered against us on the grounds of “ill practice” which resulted in the
judgments entered. We have alleged that the judgments and other prejudicial rulings rendered in these cases were
the result of impermissible ex parté contacts between the receivers, their counsel and the trial court during the
course of the litigation. Preliminary motions and exceptions have been filed by the receivers for AmCare-TX,
AmCare-OK and AmCare-LA seeking dismissal of our claim for nullification on various grounds. The federal
magistrate, after considering the briefs of the parties, found that Health Net had a reasonable basis to infer
possible impropriety based on the facts alleged, but also found that the federal court lacked jurisdiction to hear
the nullity action and recommended that the suit be dismissed. The federal judge dismissed Health Net’s federal
complaint and Health Net has appealed to the U.S. Fifth Circuit Court of Appeals. The state court nullity action
has been stayed pending the resolution of Health Net’s jurisdictional appeal in the federal action which is
scheduled for oral argument on March 5, 2008.
We have vigorously contested all of the claims asserted against us by the plaintiffs in the consolidated
Louisiana actions since they were first filed. We intend to vigorously pursue all avenues of redress in these cases,
including the actions for nullification, post-trial motions and appeals, and the prosecution of our pending but
stayed cross-claims against other parties. During the three months ended June 30, 2005, we recorded a pretax
charge of $15.9 million representing the estimated legal defense costs for this litigation.
These proceedings are subject to many uncertainties, and, given their complexity and scope, their outcome,
including the outcome of any appeal, cannot be predicted at this time. It is possible that in a particular quarter or
annual period our results of operations and cash flow could be materially affected by an ultimate unfavorable
resolution of these proceedings depending, in part, upon the results of operations or cash flow for such period.
However, at this time, management believes that the ultimate outcome of these proceedings should not have a
material adverse effect on our financial condition and liquidity.
Litigation Relating to Rescission of Policies
In recent years, there has been growing public attention in California to the practices of health plans and
health insurers involving the rescission of members’ policies for misrepresenting their health status on
applications for coverage. On October 23, 2007, the California Department of Managed Health Care (DMHC)
and the California Department of Insurance (DOI) announced their intention to issue joint regulations limiting
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