BILL ANALYSIS Ó SENATE COMMITTEE ON INSURANCE Senator Richard Roth, Chair 2015 - 2016 Regular Bill No: AB 1922 Hearing Date: June 22, 2016 ----------------------------------------------------------------- |Author: |Daly | |-----------+-----------------------------------------------------| |Version: |June 13, 2016 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Erin Ryan | | | | ----------------------------------------------------------------- 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) AB 1922 (Daly) Page 2 of ? 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 AB 1922 (Daly) Page 3 of ? 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. AB 1922 (Daly) Page 4 of ? 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 AB 1922 (Daly) Page 5 of ? 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 AB 1922 (Daly) Page 6 of ? 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 AB 1922 (Daly) Page 7 of ? 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 AB 1922 (Daly) Page 8 of ? 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. AB 1922 (Daly) Page 9 of ? 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 AB 1922 (Daly) Page 10 of ? 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 AB 1922 (Daly) Page 11 of ? 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. AB 1922 (Daly) Page 12 of ? 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. AB 1922 (Daly) Page 13 of ? 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 AB 1922 (Daly) Page 14 of ? 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 of ? 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 of ? 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 of ? 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 of ? 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 of ? 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 of ? 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 of ? 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,orendorsement, 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 of ? 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 --