NEW YORK--UnitedHealthcare will pay $12 million in penalties and overhaul its claims handling practices under a settlement announced Thursday with 37 state insurance departments.

Total penalties could rise to as much as $20 million if additional states join the agreement, UnitedHealthcare said.

The Minnetonka, Minn.-based unit of UnitedHealth Group had been under investigation by 37 state regulators following nationwide complaints about coordination of benefits, appeals and grievances, explanation of benefits letters, utilization review procedures and other areas of claims handling.

Among other things, the investigations found numerous claims processing errors, such as not applying correct fee schedules and deductibles, according to a statement by the New York State Insurance Department.

New York will receive $3.7 million from the settlement in addition to $320,000 from a separate agreement it reached with the insurer based on findings that UnitedHealthcare had violated the state's prompt payment statute and claim appeal rules, among other violations.

Under terms of the larger settlement, UnitedHealthcare will implement a national claims handling improvement plan and undergo collective monitoring of its market practices by the five states that led the investigations: New York, Iowa, Florida, Connecticut and Arkansas. The plan also establishes benchmarks for improving claims accuracy and timeliness, reviewing appeals and handling consumer complaints, with the possibility of additional penalties if it fails to meet those standards.

The agreement, in effect until Dec. 31, 2010, will affect substantially all of UnitedHealthcare's commercial health plan operations.

In response to the settlement, Kenneth Burdick, UnitedHealthcare's chief executive officer, issued a statement saying: "This new, forward-thinking approach focuses the regulatory process for the states and our company on a practical set of uniform performance standards while providing clearer and more meaningful means of assessing how well we are serving customers. We greatly appreciate the efforts of the five lead states in developing this agreement and believe it breaks new ground in how we can work with states across the country for the benefit of our members and business partners."