BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 684
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          SENATE THIRD READING
          SB 684 (Corbett)
          As Amended  August 22, 2011
          Majority vote

           SENATE VOTE  :23-13  
           
           INSURANCE           10-1        JUDICIARY           10-0        
           
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          |Ayes:|Solorio, Hagman, Carter,  |Ayes:|Feuer, Wagner, Atkins,    |
          |     |Feuer, Hayashi, Miller,   |     |Dickinson, Beth Gaines,   |
          |     |Olsen, Skinner, Torres,   |     |Huber, Huffman, Jones,    |
          |     |Wieckowski                |     |Monning, Wieckowski       |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Grove                     |     |                          |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :   Requires a workers' compensation insurer to disclose 
          to a California employer, at the time an offer of insurance is 
          made, that a dispute resolution or arbitration clause that may 
          involve law and venue or forum other than California may be a 
          part of the offer.  Specifically,  this bill  :  

          1)Provides that a workers' compensation insurer that intends to 
            use a dispute resolution or arbitration agreement to resolve 
            disputes arising in California shall disclose to the employer, 
            contemporaneously with a written quote that offers to provide 
            insurance, that choice of law and choice of venue or forum may 
            be a jurisdiction other than California.

          2)Requires the disclosure to include a statement that these 
            terms are negotiable.

          3)Requires the disclosure to be signed by the employer as 
            evidence of receipt of the disclosure where the employer 
            accepts the offer of coverage from that insurer.

          4)Provides that, once the disclosure is made, a dispute 
            resolution or arbitration agreement may be freely and 
            voluntarily negotiated between the insurer and employer at any 
            time prior to a dispute arising.

          5)Defines "employer" to be an employer whose principal place of 








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            business is California, and whose California payroll 
            constitutes the majority of the employer's payroll.

          6)Specifies that a failure to comply with the disclosure 
            requirements results in a default to California law and venue 
            in the event of a dispute.

          7)Provides that nothing in the bill is intended to interfere 
            with any authority granted to the Insurance Commissioner (IC) 
            pursuant to existing law.

          8)Provides that the bill applies to workers' compensation 
            policies issued or renewed on or after July 1, 2012.

          9)Contains legislative findings and declarations to the effect 
            that requiring California employers to be subject to the law 
            of other states, and to conduct dispute resolution proceedings 
            in other states, is a burden on these employers, but that in 
            order to save time and costs, insurers and employers may 
            freely and voluntarily use types of dispute resolution, 
            including arbitration, and that these parties should be free 
            to voluntarily agree to the terms of dispute resolution.

           EXISTING LAW  :

          1)Provides for a comprehensive system of workers' compensation 
            benefits to be paid to employees who are injured on the job.

          2)Requires every employer in the state to obtain a policy of 
            workers' compensation insurance from an insurer licensed to 
            transact this insurance in the state, or obtain a certificate 
            of self-insurance from the Department of Industrial Relations.

          3)Authorizes employers to purchase "high-deductible" workers' 
            compensation insurance policies, subject to certain 
            conditions, whereby the employer is effectively self-insured 
            below the deductible, even though the insurer is initially 
            responsible for payment of benefits.

          4)Prohibits a workers' compensation insurer from using a policy 
            form or endorsement unless it is filed with the IC's 
            designated statistical agent and either approved by the IC, or 
            30 days have passed from the filing with the IC.

           FISCAL EFFECT  :   The Senate Appropriations Committee referred 








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          this bill to the Senate Floor pursuant to Senate Rule 28.8, 
          indicating that state costs, if any, are insignificant.  The 
          current version of the bill, which deleted a duty imposed on the 
          Insurance Commissioner, is no longer identified as fiscal.

           COMMENTS  :   

          1)According to the author, the use of unfiled side agreements to 
            workers' compensation policies "can be a hardship for 
            California employers, especially small businesses without the 
            resources to travel outside the state, or without offices 
            located in the state where the arbitration takes place.  This 
            practice has become a major problem for businesses and a 
            financial burden."

          2)Employers -- as a practical matter only larger employers --  
            that believe they can save workers' compensation expenses by 
            retaining some of the risk are authorized to purchase policies 
            that involve a large deductible - sometimes as small as 
            $100,000 or $250,000, but for much larger companies, often $5 
            to $10 million.  However, the law requires the insurer to 
            provide the benefits to the injured worker in the first 
            instance.  As a result, the insurer and employer have to enter 
            into an agreement concerning how the employer will repay the 
            insurer for fronting the employer's contractual obligation.  
            These agreements range from very simple arbitration and choice 
            of law and forum agreements, to complex agreements that define 
            in great detail how the risks and financial relationship 
            between the insurer and employer will be structured, including 
            how disputes will be resolved.  These are the agreements that 
            are the subject of the bill.

          3)Insurance Committee staff has been presented with a number of 
            unpublished court decisions that deal with the issue of 
            whether the so-called side agreements that are the subject of 
            this bill are required to be filed with the Insurance 
            Commissioner.  One case, an unpublished Court of Appeal 
            decision, Ceradyne, Inc. v. Argonaut Insurance Company, 4th 
            Dist., Div. 3, case no. G039873, held that arbitration clauses 
            relating to workers' compensation insurance policies that have 
            not been submitted to the IC for approval are unenforceable.  
            Other cases have come to the opposite conclusion, and ordered 
            the disputes to be arbitrated as provided in the agreements.

          4)The primary objection to the bill is that the policyholders 








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            who are "protected" by the bill's provisions are 
            sophisticated, larger-sized businesses that have chosen to 
            assume a certain level of risk by choosing to enter into a 
            large deductible workers' compensation policy with an insurer. 
             Presumably, these businesses have concluded that they can 
            save money by managing a portion of their workers' 
            compensation risks on their own.  There is a cost-benefit 
            analysis that must go into this decision, and choice of law 
            and choice of venue for dispute resolution, should problems 
            arise between the insurer and employer over the splitting of 
            the various risks, are a part of that analysis.  As one 
            insurer has phrased it, "We are happy to negotiate a different 
            venue and choice of law, but the policyholder understands that 
            it may increase its costs to do so, and the policyholder may 
            value the tangible lower costs more than the uncertain value 
            of different venue and choice of law benefits."  It can be 
            argued that an employer that lacks the sophistication to 
            engage in this analysis ought not be purchasing a large 
            deductible policy in the first place, and if it chooses to 
            enter into a risky arrangement that it is unsuited to handle, 
            it should not be bailed out by legislation.

          5)Subsequent to the June 27, 2011 special hearing of the 
            Assembly Insurance Committee, where the bill failed passage, 
            stakeholders met and came to agreement on new language for the 
            bill.  The July 1, 2011, version of the bill involved timely 
            disclosure to defined employers, with specified consequences 
            for a failure to comply.  Most insurers agreed with these 
            changes, and removed opposition.  The remaining insurers went 
            to a support position.  Based on this agreement on language, 
            and the change in position by opponents, the bill passed the 
            Assembly Insurance Committee.  Subsequent to the Assembly 
            Insurance Committee's three hearings of the bill, it was heard 
            in the Assembly Judiciary Committee, due to a double referral. 
             The Assembly Judiciary Committee added language intended to 
            be technical and clarifying amendments, consistent with the 
            intent of the bill as a whole and not intended to negate 
            application of general principles of contract formation or 
            enforcement. 
           
          6)AB 2490 (Jones) of 2010 contained provisions similar to the 
            earlier versions of this bill.  It was vetoed by the Governor. 
             In his veto message, former Governor Schwarzenegger asserted 
            that the bill was unnecessary. 
              








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           Analysis Prepared by  :    Mark Rakich / INS. / (916) 319-2086


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