Health Net 2013 Annual Report Download - page 42

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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 may 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 have been in the past, are currently, or may become in the future, subject to a variety of legal actions,
including but not limited to 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.
These legal actions also include claims brought against companies in general, including, but not limited to employment
and employment discrimination-related suits, employee benefit claims, wage and hour claims, including, without
limitation, cases involving allegations of misclassification of employees and/or failure to pay for off-the-clock work,
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. For example, we currently are a party to certain putative class and collective actions relating to the alleged
misclassification of certain independent contractors under our MFLC program. See “Item 3. Legal Proceedings” for
further information on this matter. In addition, we incur and likely will continue to incur potential liability for claims by
employer groups for return of premiums; 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; and
claims alleging information security incidents and breaches. For example, we currently are party to various putative
class action lawsuits filed in federal and state courts in connection with our announcement that certain server drives
containing protected health information or personally identifying information of certain individuals are unaccounted for
in connection with the migration of our data center to a facility owned and operated by a third party vendor. These
actions assert a variety of legal claims, including claims under the California Confidentiality of Medical Information
Act, and seek damages under that statute as well as other compensatory damages, restitution, injunctive relief and
attorneys' fees. See “Item 3. Legal Proceedings” and “—If we fail to comply with requirements relating to patient
privacy and information security, including taking steps to ensure that our business associates who obtain access to
sensitive patient information maintain the privacy and security of such information, our reputation and business
operations could be materially adversely affected” for additional information. The legal actions to which we are
currently and in the future could be subject can also include allegations of fraud, misrepresentation, unfair or improper
business practices and violations of state or federal antitrust laws 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.
We cannot predict the outcome of any lawsuit with certainty, and we have in the past and continue to incur
significant expenses in the defense of litigation matters, including without limitation, substantial discovery costs.
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 any 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.
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