BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:  May 4, 2016


                           ASSEMBLY COMMITTEE ON INSURANCE


                                   Tom Daly, Chair


          AB 1922  
          (Daly) - As Amended April 28, 2016


          SUBJECT:  Workers' compensation policies


          SUMMARY:  Establishes exceptions from workers' compensation  
          insurance policy filing requirements for large employers that  
          purchase high deductible policies.  Specifically, this bill:  


          1)Defines the documents that constitute an "ancillary agreement"  
            to a workers' compensation insurance policy.


          2)Defines "limiting and restricting documents" and "customized  
            limiting and restricting documents" and specifies that this  
            category of documents do not constitute an ancillary  
            agreement.


          3)Provides that all ancillary agreements must be filed with the  
            Workers' Compensation Insurance Rating Bureau (WCIRB), and  
            cannot be used in the market until 30 days have passed, or the  
            Insurance Commissioner (commissioner) has approved the  
            documents.


          4)Provides that the filing rules governing ancillary agreements  








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            shall not apply to an employer that is purchasing a workers'  
            compensation insurance policy that includes a deductible  
            obligation of at least $250,000 if that employer meets at  
            least 3 of the following criteria:


             a)   Has a full time risk manager;


             b)   Is represented by counsel during negotiations over the  
               agreements;


             c)   Has 500 or more employees;


             d)   Has annual gross revenue in excess of $20,000,000; or


             e)   Has a workers' compensation manual standard premium on a  
               countrywide basis in excess of $750,000.


          5)States that it is unlawful for an insurer to use an ancillary  
            agreement if the commissioner notifies the insurer that the  
            agreement does not comply with the law.


          6)Requires the insurer to file, even in cases involving exempted  
            large employers, any ancillary document that would alter the  
            coverage provided by the policy, or the benefits payable under  
            the policy.


          EXISTING LAW:  


          1)Requires every employer to provide workers' compensation  
            benefits to its employees who are injured or suffer conditions  








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            that arise out of or occur in the course of employment.


          2)Allows employers to satisfy this obligation by either  
            purchasing a workers' compensation insurance policy, or  
            obtaining a certificate of self-insurance from the Department  
            of Industrial Relations (DIR).


          3)Authorizes workers' compensation insurance policies to be  
            either standard, guaranteed premium policies, or deductible  
            policies.


          4)Provides that the WCIRB is the commissioner's designated  
            statistical agent for workers' compensation purposes, and  
            specifies a range of functions the WCIRB performs on behalf of  
            and with the approval of the commissioner.


          5)Requires insurers to file workers' compensation insurance  
            policies and endorsements with the WCIRB, and prohibits the  
            use of the policy or endorsement until 30 days have passed, or  
            the commissioner has approved the filing.


          6)States that it is unlawful for an insurer to use an ancillary  
            agreement if the commissioner notifies the insurer that the  
            agreement does not comply with the law.


          7)States that it is unlawful for an insurer to use a policy or  
            endorsement if the commissioner notifies the insurer that the  
            agreement does not comply with the law.


          8)Does not define "policy" or "endorsement" in statute, but the  
            commissioner has interpreted these terms in recently adopted  
            regulations that define "ancillary agreement" as within the  








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            filing requirement, and "limiting and restricting documents"  
            and "customized limiting and restricting documents" as not  
            within the filing requirement.


          9)Requires an insurer that uses an ancillary agreement that  
            addresses choice of law or choice of venue to disclose to the  
            policyholder, contemporaneously with a quote for the policy,  
            that the choice of law or choice of venue provisions are  
            negotiable.


          10)Requires, even in cases of deductible workers' compensation  
            insurance policies where the benefits are within the  
            deductible amount retained by the employer, the insurer to pay  
            the benefits to the injured employee, and thereafter recover  
            those benefits payments from the responsible employer.


          FISCAL EFFECT:  Undetermined.


          COMMENTS:  


           1)Purpose  .  According to the author, AB 1922 is necessary  
            because current law does not allow the Department of Insurance  
            (DOI) sufficient discretion to adopt a regulation that is  
            commercially reasonable.  DOI plays an important role in  
            providing consumer protection to insurance policyholders who  
            are not sufficiently sophisticated to protect their own  
            interests against large insurers that hold market power.   
            However, with respect to large, sophisticated employers, the  
            so-called consumer protection role of the DOI is worse than  
            unnecessary - it is counter-productive.  In fact, there is  
            little the DOI could do to second-guess arms-length  
            negotiations between two sophisticated parties that would do  
            anything but impede appropriate commercial transactions.









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           2)Policy and endorsement filing requirements  .  Existing statute  
            mandates that workers' compensation insurers file policies and  
            endorsements.  The statutes do not specify what contractual  
            arrangements constitute a "policy" or an "endorsement."  There  
            is substantial debate over the scope of this filing  
            requirement.  In an effort to provide certainty on this issue,  
            the DOI adopted regulations earlier this year defining which  
            "ancillary" documents are covered by the statutory mandate.  A  
            case can be made that the DOI's regulations are too broad, and  
            sweep into the "mandatory filing" category documents that are  
            neither a "policy" nor an "endorsement."  Nonetheless, the  
            bill adopts the definitions directly from the regulations of  
            "ancillary agreement" (that must be filed) and "limiting and  
            restricting documents" and "customized limiting and  
            restricting documents" (that need not be filed).  Except for  
            "large, sophisticated employers," the bill does not attempt to  
            overrule the recently adopted regulations.



          The filing requirements are not, and never have been, intended  
            to be a case-by-case rule.  Rather, standard forms that will  
            be marketed to a large number of prospective policyholders are  
            filed, and upon approval or the deemer period expiring, the  
            policy forms may be sold in the marketplace.  One of the  
            primary issues raised by the bill is that many high deductible  
            policies sold to large employers involve employer-specific  
            negotiations and contractual terms.  This sort of contractual  
            relationship has never been of the class of document intended  
            for filing under the statute.
           3)Large, sophisticated employers  .  The bill provides, in  
            essence, that specialized contractual arrangements negotiated  
            between an insurer and a large employer are by definition  
            reasonable commercial transactions, and there is no reason to  
            require DOI oversight to protect this class of "consumer."   
            Indeed representatives of large employers argue that DOI has  
            nothing to offer them, and the process of DOI filing and  
            review is an actual hindrance to executing necessary  








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            commercial contractual arrangements.  Assuming this to be  
            correct, the question becomes whether or not the bill's  
            definition of the class of employer for which filing  
            requirements do not apply is sound.  



          The definition of large, sophisticated employer contained in the  
            bill is designed to create two classes of employer - on one  
            hand, the small to medium-sized employer for which DOI's  
            consumer protection functions make sense, and on the other  
            hand, large, sophisticated employers who do not need or want  
            that "protection."  According to the author, the proper source  
            for recommendation on how to draw that line is not the  
            insurers who are proposing the exception to filing  
            requirements, but rather the employer representatives who know  
            best where that line ought to be drawn.  As a result, the  
            California Chamber of Commerce (Chamber), which has a broad  
            spectrum of membership, was asked to assist in determining  
            where the line between the two classes of employers ought to  
            be drawn.  The Chamber, which supports the bill, recommended  
            the criteria adopted by the recent amendments to the bill.
           4)Duty of insurer to pay  .  The premise of a large deductible  
            workers' compensation insurance policy is that the  
            policyholder wishes to be partially, but not completely,  
            self-insured.  However, even a partially self-insured employer  
            is on the face of the contract assuming a degree of risk.  At  
            the time these arrangements were authorized by the  
            Legislature, the law mandated that the insurer be directly  
            responsible for paying benefits to injured workers.  That  
            mandate was not changed.  Thus, even though the employer is  
            obligated to provide the benefits to the injured worker up to  
            the amount of the deductible, the law mandates that the  
            insurer be responsible for paying those benefits.  As a  
            result, it is necessary for the two parties to enter into an  
            ancillary agreement that details how repayments will be made,  
            what duties the two parties owe to each other, how disputes  
            will be resolved, and related matters.  These are the bulk of  
            the agreements that the DOI regulations mandate be filed, and  








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            that both large employers and workers' compensation insurers  
            argue should not have to be filed.


           5)Choice of law and venue  .  When parties with operations in  
            multiple states contract, it is common practice that they  
            agree on where and how disputes will be resolved.  Whether  
            this is an arbitration clause, a provision that specifies  
            which state's laws will apply, or a clause that specifies  
            where court proceedings or arbitrations will occur, these  
            provisions are normal parts of contracts between sophisticated  
            parties entering into substantial contracts.  Out of an  
            abundance of caution, the Legislature added a specific  
            disclosure requirement to ensure that parties to large  
            deductible workers compensation insurance policies understand  
            that these issues are negotiable.  SB 684 (Corbett) - Statutes  
            2011, Chapter 566 - requires the insurer to make this  
            disclosure contemporaneously with any quote provided to a  
            prospective policyholder if a choice of law/venue contract may  
            be chosen.


           6)Litigation  .  As with any class of contract involving  
            substantial amounts of money, disputes have arisen between  
            insurers and policyholders who have entered into large  
            deductible workers' compensation insurance policies.  The  
            results of the various cases that have been litigated have  
            been mixed.  Courts have split on the question of whether  
            these ancillary documents constitute "policies" or  
            "endorsements" that must be filed, and they have split on the  
            effect of an insurer not filing the documents.  Some courts  
            declared that the non-filed documents are void; others have  
            not reached that far.  But it should be noted that there is  
            usually an underlying dispute that generates the litigation,  
            and the validity of the ancillary agreements are actually  
            ancillary to that underlying dispute.  In this regard, both  
            the DOI regulation, and the filing exemptions contained in  
            this bill, should clarify many issues and reduce the risk of  
            litigation.








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           7)Opposition arguments  .   Opponents to the bill, the DOI and one  
            attorney who regularly handles cases on behalf of employers  
            suing insurers, raise several issues about the bill.  DOI  
            believes the exemption in the bill is overly broad, and  
            undermines the DOI's role in reviewing important policy  
            documents.  In DOI's view, the bill will create a "race to the  
            bottom" process because large insurers will use the law to  
            evade review, "thereby harming public policy transparency."   
            Proponents counter that transparency for its own sake should  
            not be over-valued when the counter-balance is that reasonable  
            commercial activity would be impeded.  Litigation counsel has  
            suggested, unfortunately in response to an earlier version of  
            the bill that would have included much smaller employers in  
            the filing exemption, that small and medium businesses require  
            DOI's protection, and that the filing requirements in current  
            law are easy and inexpensive to comply with.  


          REGISTERED SUPPORT / OPPOSITION:




          Support


          American Insurance Association (AIA)


          California Chamber of Commerce


          Liberty Mutual Insurance


          National Association of Mutual Insurance Companies (NAMIC)









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          The Hartford




          Opposition


          California Department of Insurance (CDI)


          Roxborough, Pomerance, Nye, & Adreani LLP




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