BILL ANALYSIS Ó SB 684 Page 1 SENATE THIRD READING SB 684 (Corbett) As Amended August 22, 2011 Majority vote SENATE VOTE :23-13 INSURANCE 10-1 JUDICIARY 10-0 ----------------------------------------------------------------- |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 SB 684 Page 2 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 SB 684 Page 3 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 SB 684 Page 4 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. SB 684 Page 5 Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086 FN: 0002033