California regulators are blocking a subsidiary of UnitedHealth Group from paying a $120 million dividend to two of its parent companies, saying the health plan may need the money to pay penalties in an ongoing case.

Insurance Commissioner Steve Poizner, who issued the order Monday to PacifiCare Life & Health Insurance Co., is prosecuting a case against PacifiCare in which he alleges that PacifiCare violated state insurance laws almost a million times. Allegations include underpaying doctors or paying them late, wrongfully denying claims, losing documents and failing to fix problems in a timely manner.

It is the biggest case ever brought by California against an insurer. Commission hearings on the case began Dec. 7, 2009, and show no signs of wrapping up.

"The goal is to make sure if the case comes to a resolution, and there are penalties that PacifiCare is liable for, that they have enough money to pay for it," said Ioannis Kazanis, a spokesman for the California Department of Insurance.

The alleged violations occurred two to four years ago, and UnitedHealth has maintained that the vast majority of claims errors were administrative in nature and did not harm members.

"We disagree with the commissioner's refusal to allow PacifiCare to issue an ordinary dividend, and it's inappropriate to use this process to try to gain leverage in a separate case about administrative issues that have long since been addressed," UnitedHealth spokesman Tyler Mason said. "We are reviewing the decision and deciding upon our next steps."

PacifiCare will have an opportunity to contest the order on Dec. 21.

Minnetonka-based UnitedHealth bought PacifiCare in 2005 for $9.2 billion in one of the biggest insurance mergers in the nation. The deal brought UnitedHealth 3 million new members and a strong presence in the western United States.

The company has acknowledged problems after the California merger but says it has since fixed them.

Last week, PacifiCare notified the insurance commissioner that it intended to pay $118.8 million in ordinary dividends to PacifiCare Health Plan Administrators Inc. and $1.2 million to PacifiCare Health Systems LLC.

The $120 million would come from a statutory surplus, or excess funds, which totaled $773 million as of Sept. 30.

But the insurance department contends that since the maximum fine for each of the 993,000 alleged violations is $10,000, any penalties could consume the entire surplus and potentially more.

In the past, stock analysts had said that they expect any penalty to be modest and perhaps immaterial to UnitedHealth's finances.

Chen May Yee • 612-673-7434