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  








          AB 1922 (Daly)                                          Page 15  
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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   









          AB 1922 (Daly)                                          Page 16  
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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
                                      -- END --