BILL ANALYSIS Ó AB 1922 Page 1 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 AB 1922 Page 2 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 AB 1922 Page 3 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 AB 1922 Page 4 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. AB 1922 Page 5 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 AB 1922 Page 6 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 AB 1922 Page 7 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. AB 1922 Page 8 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) AB 1922 Page 9 The Hartford Opposition California Department of Insurance (CDI) Roxborough, Pomerance, Nye, & Adreani LLP Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086