BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 1922 Hearing Date: June 22,
2016
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|Author: |Daly |
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|Version: |June 13, 2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Erin Ryan |
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Subject: Workers' compensation policies: ancillary agreements
SUMMARY This bill codifies the definition of ancillary
agreement for purposes of a workers' compensation insurance;
provides that the requirement to file ancillary agreements with
the Insurance Commissioner (IC) prior to issuance shall not
apply to an ancillary agreement between an insurer and a
California employer in conjunction with a workers' compensation
policy or endorsement that contains a deductible obligation
equal to or greater than $250,000 if the California employer
meets 3 out of 5 specified criteria and the agreement does not
change the benefits or coverages under the workers' compensation
policy; provides that the exemption from filing ancillary
agreements does not apply to an ancillary agreement between an
insurer and a professional employer organization, a leasing
employer, or a temporary services employer, as specified; and
applies these changes to ancillary agreements issued or renewed
on or after January 1, 2017.
DIGEST
Existing law
1. 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
(DIR); (Labor Code §3700)
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2. 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 benefit;. (Ins. Code Section 11735(e))
3. Provides that a workers' compensation policy or endorsement
shall not be issued to any person unless the insurer files a
copy of the form or endorsement with the Workers' Compensation
Insurance Rating Bureau (WCIRB) and 30 days have expired from
the date the form or endorsement is received by the IC from the
WCIRB without notice from the IC that the form or endorsement
does not comply with the requirements of law, unless the IC has
given written approval prior to that time; (Insurance Code
§11658)
4. Establishes a rating organization (WCIRB) to examine policies,
daily reports, endorsements or other evidences of insurance for
the purpose of ascertaining whether they comply with the
provisions of law and to make reasonable rules governing their
submission;
5. Requires an insurer that intends to use a dispute resolution or
arbitration agreement to resolve disputes arising in California
out of a workers' compensation policy or endorsement issued to a
California employer to disclose to the employer,
contemporaneously with any written quote, that choice of law and
choice of venue or forum may be a jurisdiction other than
California and that these terms are negotiable between the
insurer and the employer; (IC §11658.5(a)(1))
6. Provides that failure of an insurer to comply with #5` shall
result in a default to California as to the choice of law and
forum for resolution of disputes arising in California; (IC
§11658.5(c))
7. Provides that under every workers' compensation contract or
policy an insurer shall be directly and primarily liable to pay
any proper claim for compensation for which the employer is
liable, subject to the terms and conditions of the policy; (IC
§11651)
8. Requires all workers' compensation insurers to file all rates
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and supplementary rate information with the IC, and provides
that upon the written application of the insurer and insured
stating the reasons therefore, a rate in excess of that provided
by the filing otherwise applicable may be used on any specific
risk;
9. Requires supplementary rate information for purposes of
offering deductibles to policyholders for all or part of
benefits payable under the policy be included in an endorsement
attached to the policy and include specified requirements,
including that the insurer shall pay all of the obligations of
the employer for workers' compensation benefits for injuries
occurring during the policy period without regard for any
deductible and an explanation of premium reductions reflecting
the type and level of the deductible;
10. Provides that deductible workers' compensation policies shall
not be terminated retroactively for nonpayment of deductible
amounts; (IC§11735(e)(2))
11. Provides that payment by the insurer of any amounts within the
deductible shall be treated as an advancement of funds by the
insurer to the employer and shall create a legal obligation for
reimbursements, and may be secured by appropriate security; (IC
§11735(e)(3))
12. Requires the insurer under a deductible policy to report and
record losses subject to the deductible, as specified;
13. Requires the IC to establish, by regulation, those forms of
collateral or security that an insurer may designate to secure
the deductible amount of any workers' compensation policy, and
establishment of reserves and recognition of receivables;
14. Allows the IC to disapprove a rate if the insurer fails to
comply with rate filing requirements, or if the IC determines
that the premiums charges would be inadequate to cover an
insurer's losses and expenses, unfairly discriminatory, or tend
to create a monopoly in the market, as specified;
15. Prohibits an insurer from willfully withholding information
from, or knowingly giving false information to, the IC which
will affect the rates, rating systems or premiums for workers'
compensation insurance.
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Existing regulations
1.Defines a workers' compensation "policy form" as a form used to
provide workers' compensation coverage to an employer after the
form is approved by the IC; (10 CCR §2250)
2.Defines a workers' compensation "endorsement" or "endorsement
form" as a form, agreement or document that amends, adds to,
subtracts from, supplements, or revises a policy form and is
attached to a policy form to be effective;
3.Defines a "limiting and restricting endorsement" as an endorsement
that excludes from coverage some portion of workers' compensation
liability for which the employer is required to secure payment
pursuant to the Labor Code that, after approval of the endorsement
by the IC, may be endorsed to a workers; compensation policy;
4.Defines an "ancillary agreement" as an agreement that is a
supplementary writing or contract relating to a policy or
endorsement form that adds to, subtracts from, or revises the
obligations of either the insured or the insurer regarding any
terms of an insurance policy including, but not limited to,
dispute resolution agreements, policy premium amounts or rates,
expense or tax reimbursement or allocation, deductible amounts,
policy duration, cancellation, or claims administration;
5.Specifically excludes from the definition of ancillary agreement:
a. Limiting and restricting endorsements as defined;
b. Customized limiting and restricting endorsements as
defined;
c. If disclosed and negotiated contemporaneously with the
inception or renewal of a policy and mutually agreed to by
the parties:
i. The method for making payments;
ii. The method for funding deductible amounts or
other policy-related charges due under a policy;
iii. The amount of collateral or security the
insured is required to maintain for claims that do not
exceed the deductible;
iv. Payment due dates;
v. Payment transmittal information; or
vi. The method of selecting a claims
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administrator, provided that such claims administrator
may only administer claims that do not exceed the
deductible;
6.Provides that an insurer shall not use a policy form, endorsement
form or ancillary agreement unless attached to and made a part of
the policy; and an insurer who uses a policy form, endorsement
form or ancillary agreement that violates the above provisions
shall be subject to revocation or suspension of its certificate of
authority. (10 CCR §2268)
This bill
1. Codifies the definition of ancillary agreement and
exclusions from the definition in 10 CCR § 2250 (#4 and #5
above);
2. Provides that the requirement to file ancillary agreements
with the IC prior to issuance shall not apply to an
ancillary agreement between an insurer and a California
employer in conjunction with a workers' compensation policy
or endorsement that contains a deductible obligation equal
to or greater than $250,000 if the California employer meets
3 out of 5 specified criteria:
a. Has a full time risk manager involved in the
evaluation of the ancillary agreement;
b. Is represented by counsel during negotiations
regarding an ancillary agreement;
c. Has 500 or more employees;
d. Has annual gross revenues in excess of $20 million;
or
e. Has workers' compensation manual standard premium in
excess of $750,000 on a nationwide basis;
3. Provides that the exemption from filing ancillary
agreements under #2 does not apply to an ancillary agreement
between an insurer and a professional employer organization,
a leasing employer, or a temporary services employer, as
specified;
4. Provides that an ancillary agreement that is not required
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to be filed under #2 may not amend or revise the coverage
provided, or the benefits payable under the policy unless is
it filed and approved by the IC, and that the terms and
conditions of the workers' compensation policy and any
endorsements shall take precedence over the provisions in
the ancillary agreement if there is an inconsistency or
conflict;
5. Specifies that these changes apply to ancillary agreements
issued or renewed on or after January 1, 2017.
COMMENTS
1. Purpose of the bill To exempt from filing with the CDI
ancillary agreements to workers' compensation insurance
policies negotiated between large sophisticated employers
and insurers, and to simplify and facilitate the negotiation
and filing process for insurers.
2. Background Workers' compensation is a bargain between an
employer and an employee that any injuries on the job will
be paid for in exchange for the employee giving up the right
to sue. The employer is required to purchase workers'
compensation insurance, or can elect to self-insure if it
meets specific and detailed requirements and is approved by
the DIR. Some employers opt for "large deductible" policies
that have some qualities of self-insurance-the employer
bears more of the risk in exchange for dramatically lower
premiums-- but the insurer remains responsible for paying
all claims and then seeking reimbursement from the employer
for the amount of the deductible. The deductible amount
applies to each claim. Generally the minimum deductible
under a large deductible plan is $100,000 per accident or
per employee. Under California's Large Deductible Plan
developed by the WCIRB, a minimum of $500,000 of either
California or countrywide estimated annual standard workers'
compensation premium is required to be eligible for the
Plan, and an irrevocable letter of credit or other security
in a form acceptable to the insurer is required.
The requirement to file all workers' compensation policies
and endorsements was enacted in 1995 after California moved
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to "open rating" of workers' compensation policies. When
the minimum rating system was eliminated, insurers engaged
in price-cutting and expansion by acquisition of weaker
competitors to try and gain market share. Rates plunged
nearly 50% between 1993 and 1999. At the same time, a
growing workforce and higher payroll meant that there were
higher potential losses. Many large carriers underpriced
their insurance policies, experienced high loss ratios,
faced rising health costs and benefits increases and became
insolvent between 2000 and 2003. Approximately 25% of the
private workers' compensation carriers failed, creating
further stress on the entire system. The surviving insurers
ended the price war by sharply increasing rates. The
California Insurance Guarantee Association is still paying
claims related to those insolvencies.
The IC has interpreted the requirement to file all policies
and endorsements to include ancillary agreements between the
insurer and the employer that relate to issues like the
method of financing the policy, collateral or security for
the deductible under a large deductible policy, the type of
security and the selection of claims management services
that insurers had traditionally considered not to be
included in the definition of policy or endorsements. After
several years of negotiations and discussions, new
regulations took effect on April 1, 2016 that define
ancillary agreements and include them in the forms that must
be filed with the IC, subject to approval by the IC or the
expiration of 30 days from the date of filing. The forms are
also subject to a filing fee. Insurers have argued that the
definition of ancillary agreement remains vague, and
includes agreements that have not traditionally been
considered part of the policy, such as collateral and
security agreements and claims management services.
Large deductible policies . Plans are sometimes designed in a
way that the employer would expect to be responsible for
100% of its claims in a typical year, which could lead to
undetected credit risk if the employer does not have the
financial wherewithal to pay claims. One of the reasons that
employers choose large deductible plans over self-insurance
is because self-insurance regulations impose much more
stringent requirements for securing payment of the claims,
both in terms of the percentage and valuation of potential
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losses that must be secured by the employer as opposed to
what is required under large deductible plans. According to
a 2015 report by the Katie School of Insurance and Financial
Services at Illinois State University on the role of large
deductible policies for professional employer organizations
(PEOs) in the failures of small workers' compensation
insurers, the high level of discretion in the use of large
deductibles permitted for insurers and employers to
negotiate such things as oversight, credit underwriting, the
withholding of collateral and handling of claims provides an
opportunity for fraud and abuse. It found that side
agreements made outside of the policy contract may make
these large deductible policies perform more like
self-insurance with an excess policy. The difference between
large deductible policies and excess insurance is that with
large deductible policies the insurer is presumed to adjust
the claims, report the loss data to statistical agents, and
assume the risk of not being paid in a timely manner by the
employer. With excess policies the insurer only steps in
when losses occur above the agreed-upon attachment point.
The National Association of Insurance Commissioners (NAIC)
and the International Association of Industrial Accident
Boards (IAIABC) formed a working group (working group) to
examine the use, business practices, and potential risks of
large deductible policies. In its draft report of March 7,
2016, the working group found that although well managed
large deductible programs are an integral component of the
modern workers' compensation insurance marketplace, large
deductible programs also create added risk. They are complex
arrangements, and their success depends on the employer's
fulfillment of its obligation to reimburse all claims within
the deductible. If the employer has misjudged its ability to
fulfill that obligation, or is simply very unlucky, the
financial consequences to the employer could be
catastrophic, and the employer's inability to pay could have
cascading impact on the financial health of the insurer. The
report noted that insurers and regulators must have a clear
understanding of the nature and size of the insurer's
exposure, and must ensure that there are adequate measures
in place to limit and mitigate the risk of the employer's
failure to pay and ensure workers will receive their
benefits in accordance with state law.
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Co-employment organizations A PEO is a firm that provides a
service under which an employer can outsource employee
management tasks such as employee benefits, payroll and
workers' compensation, recruiting, risk/safety management,
and training and development. The PEO hires a client
company's employees, thus becoming the employer of record
for tax and insurance purposes. The client then pays a fee
for this service and borrows back its employees. This
practice is known as co-employment. Unlike temporary or
other employment staffing services, the PEO does not
typically provide new workers to the client. One of the
assertions made by PEOs is that they can help small
businesses reduce their workers' compensation insurance
costs by focusing on workplace risk management, safety
programs and good human resources practices. Unfortunately,
some PEO owners have not achieved workers' compensation
savings through value added services, but instead by using
opaque, questionable, abusive and even illegal practices to
limit payments to workers. In addition, the long tail nature
of workers' compensation coverage makes it attractive to
gamblers who seek a quick return by underpricing the risk
and then exiting the PEO business before the losses catch up
to them. For these reasons, among others, PEOs and other
temporary services employers are excluded from the
application of this bill, and all ancillary agreements
relating to their workers' compensation policies must
continue to be filed with the CDI.
Ancillary agreement regulations. The CDI has stated that
the filing of all workers' compensation agreements is a
fundamental tool that is necessary to regulate properly the
business of insurance and insurance contracts in California.
These agreements can have a significant impact on the
policy (that has been filed) and potentially affect the
financial stability of both insurers and employers and
increase risks of insurer insolvency or employer bankruptcy.
In addition, they may contain clauses and terms that are
misleading and violate rate filing, form filing and other
laws. These flaws would typically be identified by the
rating organization before the form is then submitted to the
CDI. The forms must be filed before use, and either be
approved or 30 days must pass without being disapproved. The
majority of such forms are templates, not forms specific to
a single employer. Insurers claim that this "deemed approved
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after 30 days" process is actually illusory because the CDI
will say they will disapprove the form if they are not given
more time for their review. Also, insurers argue that in the
case of large employers, the employer is the one dictating a
change to the standard form, precipitating the need to file
the ancillary agreement specific to a single employer.
Insurers and the CDI have long disagreed about what forms
properly must be filed, with insurers maintaining that
agreements regarding deductible financing arrangements,
collateral and security agreements and agreements regarding
claims administrators and safety programs did not have to be
filed. The IC has maintained that agreements that affect
the obligations of the workers' compensation insurer or
insured must be filed. This disagreement has resulted in
extensive litigation involving employers who have sued to
get out of contracts that they claim should have been filed
with the CDI. Under current statute, a form that is
determined to be required to be filed with the CDI, and has
not been, is not valid. The California Court of Appeal in
Ceradyne, Inc. v. Argonaut Ins. Co. (4th App. Dist. 2009)
found unfiled and unapproved side-agreements were void. Some
insurers have failed to file agreements that clearly
impacted the policy and were later declared fraudulent and
invalid. In other cases, the insurer has prevailed. Some
terms in unfiled agreements have been quite egregious and
violated the law beyond simple form filing requirements.
In the matter case of Shasta Linen Supply, Inc. Before the
Insurance Commissioner, the Administrative Law Judge (ALJ)
found that the EquityComp Reinsurance Participation
Agreement (RPA), sold to the employer ostensibly as a side
agreement to a guaranteed maximum rate policy, affected the
basis and rates the insured would be required to pay under
the policy, modifying the obligation of either the insured
or the insurer, and as such was required to be filed. The
agreement also failed to inform the insured of its right to
negotiate the agreement's dispute resolution provisions as
required by law. Shasta Linen was a family owned company
with 63 full time employees seeking to lower its workers'
compensation premium. Shasta Linen had a guaranteed policy
with a maximum rate of $322,623. At the end of the 3-year
RPA Shasta Linen had been billed more than $1 million, and
the insurer was seeking $290,000 more from the insured. This
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demand for the additional funds came after the employer
decided not to renew the policy. It was determined that the
RPA materially changed the terms of the guaranteed rate
policy. It was clear in that case that even the employer's
broker did not fully understand the terms or implications of
the RPA. That product, also sold to many other clients in
California and in other states, is the subject of multiple
litigation and enforcement actions. The states of Vermont
and Wisconsin recently issued cease and desist orders
against the insurer Applied Underwriters. EquityComp is a
program designed for companies with premiums in excess of
$250,000 and shifts claims risk from the insurer to the
employer, similar to a large deductible program, but
designed to avoid filing requirements. These programs tend
to be marketed to businesses as a way to reduce premiums and
financial risk by having the employer retain more of the
claim exposure. Contrary to how it has been marketed,
however, in many cases the product has shifted more, not
less financial risk to businesses because of a lack of
understanding of the complex nature of the long-duration
risk associated with workers' compensation losses.
The regulation defining ancillary agreements that must be
filed with the CDI took effect on April 1, 2016. Those
regulations were the subject of much discussion and comment
over several years. The current version of this bill
codifies the definition of ancillary agreement from the
regulation. The proponents of the bill stated that although
they did not necessarily like the final version of the
definition, they did not want it to be subject to change by
the CDI moving forward. Instead, they chose to sponsor this
legislation to add a carve-out from the ancillary agreement
filing requirement for agreements between insurers and
"large" employers. The argument is that large employers have
the sophistication and bargaining power that smaller
employers do not, and can reasonably be expected to
negotiate terms to their advantage with the assistance of a
risk manager or attorney. Proponents argue that the bill
ensures that employee benefits cannot be changed though
these agreements, and recent amendments clarify that in the
case of conflict or inconsistency between the terms and
conditions of the policy or endorsements (which continue to
be filed with the CDI) and an ancillary agreement, the
policy or endorsements take precedence.
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Under the bill as currently drafted, the CDI will not know
of ancillary agreements that qualify for the large employer
exception created by the bill. It will continue have the
authority to request any documents it becomes aware of, or
alternatively to audit any insurer it suspects of engaging
in illegal or unfair practices. Having to investigate each
and every insurance company it believes may be using unfiled
and unapproved side agreements, however, would likely strain
resources at the CDI currently allocated. Instead, insureds
would likely have to litigate the issue of the validity of
unapproved side agreements in court.
Allocated Loss Adjustment Expense. The California Workers'
Compensation Uniform Statistical Reporting Plan-1995
requires that gross incurred losses, prior to application of
the deductible, be reported. Total payroll and final
premium, prior to application of the deductible premium
credit, must also be reported. The bill as drafted could
allow such loss data from unfiled high deductible ancillary
agreements to go unreported.
Dispute resolution . Current law requires that an insurer
that intends to use a dispute resolution or arbitration
agreement to resolve disputes arising in California out of a
workers' compensation policy or endorsement issued to a
California employer disclose to the employer,
contemporaneously with any written quote, that choice of law
and choice of venue or forum may be a jurisdiction other
than California and that these terms are negotiable between
the insurer and the employer. This provision was enacted in
2011 (SB 684 Corbett, Chap. 566 Statutes of 2011). The
author of that legislation argued that some workers'
compensation insurance carriers issue contracts that require
resolution of disputes according to the laws of a foreign
jurisdiction, and sometimes in that foreign jurisdiction or
in a specified venue. As a result, the laws of another
state may apply to a California employer whose employee was
injured in a work-related incident in California. This can
be a major hardship for California employers, especially
small businesses without the resources to travel outside the
state, or without offices located in the state where the
dispute resolution takes place. This practice had become a
major problem for businesses and a financial burden.
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According to the IC at the time, employers claimed that they
were unaware that the quote they were given was predicated
on the acceptance of these side agreements. The disclosure
created by SB 684 was intended to make them aware when the
quote is given, and by requiring a signature from the
employer that they recognize and are willing to negotiate
such terms. The law also provides that a dispute resolution
agreement may be freely and voluntarily negotiated by the
insurer and the employer before any dispute arises. Any
failure by the insurer to observe the disclosure
requirements results in a default to California as the
choice of law and venue or forum for resolution of disputes
arising in California. Ancillary agreements and collateral
and security agreements also frequently contain dispute
resolution and arbitration provisions. As they are being
defined in statute for the first time in connection to
workers' compensation policies and endorsements, it would be
consistent to also require a disclosure to the employer that
these terms are negotiable.
3. Support The California Chamber of Commerce supports AB
1922 because it will streamline the contracting process for
sophisticated parties in large, complex insurance contracts
that include workers' compensation policies by clarifying
which ancillary documents must also be filed with the CDI.
Large and sophisticated employers negotiate complex policies
with insurance companies that cover multiple insurance
lines, including workers' compensation coverage. Included in
these contracts are ancillary agreements that include
volumes of documents unrelated to the coverage or benefits
provided in the workers' compensation policy. These
extremely complex contracts are negotiated at arm's length
between parties with equal bargaining power and with the
counsel of lawyers, brokers and risk managers.
The independent Insurance Agents & Brokers of California
(IIABCal) supports AB 1922 because it strikes the proper
compromise and protects the interests of the parties by
creating consistency in the terms and conditions of all
agreements, the proper recording of statistics and providing
the information that insurance agents and brokers need to
properly represent their employer clients in these
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transactions.
The National Association of Mutual Insurance Companies
supports AB 1922 because it requires appropriate disclosures
of key terms and conditions of the insuring agreement by the
insurer to the employer in a manner that is meaningful,
cost-effective, and consistent with the practical business
realities of the professional relationship of the parties.
The proposed legislation and proposed amendments are
consistent with standard contract law, promote consumer
transparency and appropriate regulatory oversight, and
informed consumer choice in a way that does not hinder
market competition or create unnecessary administrative
costs and burdens for insurers and their employer clients.
The employer-insurance clients that will benefit from this
legislation are large employers with multi-state and/or
multi-line insuring agreements, and who have the
professional guidance of their own lawyers, risk managers,
accountants and insurance brokers.
4. Opposition The California Department of Insurance opposes
AB 1922 because it creates overly broad exemptions regarding
workers' compensation contracts that would significantly
weaken CDI's role of protecting employers and California
workers by reviewing insurers' use of policy forms and
endorsements. For example, CDI believes that the bill as
amended on June 13 would exempt the EquityComp product
described earlier from filing requirements, with serious
implications for California employers. The bill will
decrease transparency, weaken consumer protections and
enable insurers to take advantage of businesses,
predominantly small and medium size businesses. AB 1922 also
eviscerates the recent changes to CDI's workers'
compensation regulation that just took effect on April 1,
2016. Insurer compliance with the policy and endorsement
form approval process is not a new problem and has been a
concern of the Department since 2011. Of particular concern
were provisions in unattached collateral agreements that
denied businesses access to California courts and allowed
workers' compensation insurers to haul California businesses
to venues in far off states and denied them protection of
California laws. Unfiled changes in policies also
significantly impacted other important terms of the policy
contract. Instead of initiating enforcement actions, the IC
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decided to initiate a rulemaking to afford the insurance
industry the opportunity to provide input in an open,
comprehensive, public rulemaking process. After a very long
process, with many changes at the request of industry, the
IC believes the regulation reflects an appropriate balance
between reasonable business needs and the CDI's obligation
to protect California workers and less sophisticated
California employers from overreaching by insurers. This
bill was introduced as a spot bill just 28 days after the
new regulation became effective. In addition, the new
regulation has not been in effect long enough to establish
any problems with its implementation. This bill instead
reduces business protective requirements for insurers
writing large deductible policies at the same time as other
states are increasing their requirements for insurers
writing such policies, reflecting the concerns raised by the
NAIC/IAIABC working group.
The California Small Business Association (CSBA) opposes AB
1922 because it will decrease transparency and harm all
businesses; predominantly small and medium size businesses,
as well as consumers. CSBA believes it is important that the
CDI has the ability to review important policy provisions,
and this bill would allow the creation of a secret workers'
compensation system that works only to the advantage of
large workers' compensation carriers and to the direct harm
of all types of California businesses and consumers. It also
argues the bill is premature as new rules in this area just
took effect.
The California Applicants' Attorneys Association opposes AB
1922 because the fact that a large employer is involved does
not negate the risk to the intended beneficiaries, the
injured workers, when these contracts are negotiated. The
last thing a worker needs to experience after a serious work
injury is to discover that there is a dispute between his
employer and the insurer over who is responsible for paying
the claim. While nothing in this bill changes the liability
of the insurer or the employer, a dispute could delay
acceptance, payment or settlement of a claim.
5. Questions
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a. The question of what forms insurers are required
to file has been the subject of much litigation, as
noted above. This bill codifies a definition of
ancillary agreement that still must be filed for all
employers other than those large employers that meet
the criteria of the exception. At the same time, the
definition of ancillary agreement seems to be
substantially similar to an endorsement in that it can
add to, subtract from, or revise the obligations of
either the insured or the insurer regarding any term of
an insurance policy. The large employer carve out
limits the non-filed agreements to those that do not
amend or revise the coverage provided, or the benefits
payable under the policy, and specifies that if there
is an inconsistency or conflict between the policy or
endorsement and the ancillary agreement, the policy or
endorsement prevails. Will this bill actually eliminate
the confusion and litigation over which documents must
properly be filed? What kinds of agreements do not
alter the benefits, coverage, financing, or collateral
and security, or are not inconsistent or conflict with
the terms and conditions of the policy or endorsements
of a large deductible policy?
b. The changes made by this bill are predicated on
the idea that the employer is large enough and
sophisticated enough to fully understand extremely
complex terms and financing arrangements in connection
with workers' compensation policies, and have equal
bargaining power with the insurer. The bill as drafted
specifies that such an employer need only comply with 3
of 5 listed criteria. The minimum gross revenue
required to be considered such a "sophisticated
employer" is just $20 million. It is unlikely that an
employer with gross revenue of $20 million has equal
bargaining power as a large insurance company.
According to U.S. Census data, companies with 200-499
employees averaged approximately $16 million in just
payroll in 2013, and for companies with between 500 and
750 employees payroll averaged approximately $29
million. Payroll generally comprises somewhere between
35% and 50% of a company's revenue, with the number
higher for smaller and non-manufacturing enterprises.
Since this bill specifically deals with insurance based
AB 1922 (Daly) Page 17
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on the number of employees and payroll, should the
revenue criteria instead be changed to nationwide
payroll in excess of $20 million?
c. A second criteria for qualifying as a large
sophisticated employer is that the employer has a
full-time risk manager involved in evaluating the
agreement or is represented by counsel in negotiating
the agreement. There is no definition of "risk manager"
in the bill, so an employer could potentially designate
any employee as a "risk manager" for these purposes.
Also, there is no requirement that the attorney have
experience negotiating these highly complex agreements
with experienced insurers. Is this criteria sufficient
to ensure the employer is adequately represented?
d. The criteria that the employer have workers'
compensation manual standard premium on a countrywide
basis in excess of $750,000 would seem to be quite low
for a large employer with a $250,000 deductible policy.
The manual standard premium is the premium before
any-generally substantial-- discounts are given for the
large deductible. For example, roofers are in
classification code 5552 with a pure premium rate of
$39.85 per $100 in payroll. This can add up very
quickly for employers with many employees in high risk
categories. Should the pure premium rate be increased?
e. To ensure proper reporting of loss data, should
Allocated Loss Adjustment Expense (ALAE) be
specifically excluded from being included in ancillary
agreements unless that agreement is filed with the CDI?
To ensure that all loss data, even that included under
ancillary agreements, continues to be reported,
language should be added to the bill to prohibit an
ancillary agreement from including any charges or costs
as ALAE which are not defined as ALAE in the California
Workers' Compensation Uniform Statistical Reporting
Plan-1995, Title 10 California Code of Regulations
Section 2318.6, and any subsequent revisions, unless
the ancillary agreement is filed and agreed approved in
accordance with this section. This provision will
protect the integrity of loss data of California
employers reported to the WCIRB by insurers and that
AB 1922 (Daly) Page 18
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any charges for reimbursement required pursuant to an
ancillary agreement are consistent with the definitions
and categories of permissible charges under the Uniform
Rating Plan.
f. Almost all workers' compensation policies are
negotiated by a broker on behalf of the employer.
Should the insurer be required to provide the broker,
at the time of policy quote, any ancillary agreement
the insurer reasonably expects to require the employer
to sign so that the broker can adequately represent and
advise the employer?
g. SB 684 (Corbett Chapter 566, Statutes of 2011)
prohibited insurers from including mandatory
arbitration provisions in workers' compensation
policies or endorsements unless the employer has been
given notice of its right to negotiate these terms, and
the employer has signed a receipt of notice of the
disclosure. This bill is specifically defining another
form of document connected to the workers' compensation
policy, and exempts collateral and security agreements
from the definition of ancillary agreement. Should
ancillary agreements and collateral and security
agreements be added to Insurance Code §11658.5 in
addition to workers' compensation policies and
endorsements?
h. Should an ancillary agreement that is not
required to be filed with the CDI contain a disclosure
that it has not been submitted to or approved by the
CDI?
i. The proponents of the bill argue that filing of
these documents is not required because the CDI can
request any documents at any time, and in any event
routinely audits insurance companies. The argument
could be made that while the CDI is able to request
such an agreement, this is moot if it does not know the
agreement exists. Should the insurer be required to at
least notify the CDI that there is ancillary agreement
to a workers' compensation policy, without the
requirement that the agreement be subject to IC
approval? Would this raise red flags with the CDI,
AB 1922 (Daly) Page 19
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leading it to have to engage in additional audits to
determine if these insurers are abiding by all aspects
of the law?
j. Should collateral and security agreements be
excluded from the definition of ancillary agreement,
and the need to file with the CDI or rating
organization?
1. Suggested Amendments The following are the major amendments
agreed to by the proponents and proposed to be adopted by
the committee. Other smaller or more minor amendments are
reflected in the mock-up provided, also agreed to by the
proponents.
a. On page 3, line 9, replace "retention
obligation" with "retrospectively rated loss
limitation;
b. On page 3, lines 10-19, revise the criteria
for the large employer exception to the filing of
ancillary agreements to reflect the employer must
meet 3 out of the following 4 criteria:
i. The employer is represented by a
broker for purposes of negotiating the ancillary
agreement and has either a full time risk manager
involved in the evaluation of the ancillary
agreement or is represented by counsel during
negotiations regarding the ancillary agreement;
ii. The employer has 500 or more
employees;
iii. The employer has annual nationwide
payroll in excess of $20 million; or
iv. Has a workers' compensation manual
standard premium on a countrywide basis in excess
of $1 million.
c. On page 4, line 2, add subsection "(ii)
Include charges or costs as Allocated Loss Adjustment
Expense which are not defined as Allocated Loss
Adjustment Expense in the California Workers'
Compensation Uniform Statistical Reporting Plan -
1995, Title 10 CCR 2318.6, and any subsequent
AB 1922 (Daly) Page 20
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revisions, unless such ancillary agreement is filed in
accordance with this section."
d. On page 4, line 6, add "(6) Contemporaneously
with any written quote to provide workers'
compensation coverage to a California employer, the
insurer shall provide to the insurance agent or broker
for the employer a draft of any ancillary agreement
that the insurer reasonably expects to require the
employer to sign, together with a notice that the
terms of the ancillary agreement are negotiable
between the insurer and the employer."
(7) Within 30 days after execution of an ancillary
agreement subject to subdivision (b)(2), the insurer
shall notify the insurance commissioner of the
agreement; such ancillary agreement shall not be
subject to filing with the commissioner or rating
organization, or approval by the commissioner.
(8)An ancillary agreement subject to (b)(2) shall
include language stating that the ancillary agreement
has not been filed with or approved by the
commissioner or rating organization.
e. On page 5, on line 25, add "or is inconsistent
with" and delete the current definition of ancillary
agreement from lines 27-40 and lines 1-7 on page 6.
Exempt "collateral and security agreements" from the
definition of ancillary agreement.
f. On page 6, after line 26 add the following
definition of "collateral and security agreements":
i. (1) For purposes of this section,
"collateral and security agreements" means an
agreement between a California employer and an
insurer under a large deductible program, large
risk rating program, or retrospectively rated
program that relates to payments and
reimbursements that the insured is contractually
obligated to make to the insurer that includes
some or all of the following terms or provisions:
1. The timing, method and
conditions for making payments to the
insurer for amounts imposed by any state or
regulatory taxing authority that are made on
AB 1922 (Daly) Page 21
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the insured's behalf;
2. The timing method and
conditions for funding, paying or
reimbursing deductible or retrospectively
rated amounts or other policy related
charges due under a policy;
3. The type and amount of
collateral the insured is required to post
as security for such obligations;
4. Payment due dates and
transmittal information;
5. Claims administration
including the method for selecting a claims
administrator.
6. Termination and dispute
resolution provisions applicable to the
collateral and security agreement.
7. Terms of default under the
collateral and security agreement.
ii. The terms and provisions of such
collateral and security agreements shall be
negotiated contemporaneously with the inception
or renewal of the underlying policy, and any
revisions or additions to such terms subsequent
to the inception or renewal shall be mutually
agreed to by the parties.
g. Add a new section to the bill amending
Insurance Code §11658.5:
11658.5
(a)(1) An insurer that intends to use a dispute
resolution or arbitration agreement to resolve
disputes arising in California out of a workers'
compensation insurance policy, or endorsement,
ancillary agreement, or collateral and security
agreement as defined in Section 11658(i)(1)
issued to a California employer shall disclose to
the employer, contemporaneously with any written
quote that offers to provide insurance coverage,
that choice of law and choice of venue or forum
may be a jurisdiction other than California and
that these terms are negotiable between the
insurer and the employer. The disclosure shall be
signed by the employer as evidence of receipt
AB 1922 (Daly) Page 22
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where the employer accepts the offer of coverage
from the insurer.
2. Prior and Related Legislation SB 684 (Corbett Chapter 566,
Statutes of 2011) requires an insurer that intends to use a
dispute resolution or arbitration agreement to resolve
disputes arising in California out of a workers'
compensation insurance policy or endorsement issued to a
California employer to disclose to the employer,
contemporaneously with any written quote that offers to
provide insurance coverage, that choice of law and choice of
venue or forum may be a jurisdiction other than California
and that these terms are negotiable between the insurer and
the employer.
POSITIONS
Support
American Insurance Association (sponsor)
California Chamber of Commerce
California Manufacturers & Technology Association
Hartford Financial Services Group
Independent Insurance Agents & Brokers of California
Liberty Mutual Insurance
National Association of Mutual Insurance Companies
Zenith Insurance
Oppose
Asian Business Association
California Applicants' Attorneys Association
California Department of Insurance
California Small Business Association
Roxborough, Pomerance, Nye & Adreani
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