BILL ANALYSIS Ó
AB 1922
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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