BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                       AB 1922|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
          |327-4478                          |                              |
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                                   THIRD READING 


          Bill No:  AB 1922
          Author:   Daly (D) 
          Amended:  8/16/16 in Senate
          Vote:     21 

           SENATE INSURANCE COMMITTEE:  6-0, 6/22/16
           AYES:  Roth, Gaines, Berryhill, Glazer, Hall, Hernandez
           NO VOTE RECORDED:  Liu, Mitchell, Wieckowski

           SENATE APPROPRIATIONS COMMITTEE:  7-0, 8/11/16
           AYES:  Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

           ASSEMBLY FLOOR:  67-0, 5/27/16 (Consent) - See last page for  
            vote

           SUBJECT:   Workers compensation policies:  ancillary agreements


          SOURCE:    American Insurance Association


          DIGEST:  This bill codifies a definition of ancillary agreement  
          for purposes of a workers' compensation insurance policy;  
          provides that the requirement to file ancillary agreements with  
          the Insurance Commissioner (IC) prior to issuance does 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 employer meets three out of four  
          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 agreements issued to a co-employment  








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          arrangement, as defined, or negotiated, managed or administered  
          in whole or in part by a managing general agent, as specified;  
          requires the insurer to provide the IC a copy of an exempt  
          ancillary agreement within 30 days of issuance; requires the  
          exempt ancillary agreement to include language stating that it  
          has not been filed with the rating organization or filed with,  
          or approved by the IC; requires insurers that intend to use  
          dispute resolution or arbitration agreements to resolve disputes  
          arising in California out of an ancillary agreement or  
          collateral and security agreement to disclose to the employer  
          that choice of law and choice of venue or forum may be a  
          jurisdiction other than California and that these terms are  
          negotiable; applies only to ancillary agreements issued or  
          renewed on or after January 1, 2017; and sunsets the changes  
          made by the bill on January 1, 2022.


          ANALYSIS:  


          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;  


          2) Establishes a rating organization (Workers' Compensation  
             Insurance Rating Bureau--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;


          3) 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;








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          4) 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 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; 


          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; 


          6) Provides that failure of an insurer to comply with 5) above  
             shall result in a default to California as to the choice of  
             law and forum for resolution of disputes arising in  
             California; 


          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;  



          8) Provides that deductible workers' compensation policies shall  
             not be terminated retroactively for nonpayment of deductible  
             amounts; 


          9) 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; 







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          10)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;


          11)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; and


          12)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.


          Existing regulations:


           1) Define a workers' compensation "policy form" and an  
             "endorsement" or "endorsement form" and require the forms to  
             be approved by the IC before use; 


           2) Define "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;


           3) Include several exclusions from the definition of ancillary  
             agreement including, if disclosed and negotiated  
             contemporaneously with the inception or renewal of a policy  







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             and mutually agreed to by the parties, the method for making  
             payments; the method for funding deductible amounts or other  
             policy-related charges due under a policy; the amount of  
             collateral or security the insured is required to maintain  
             for claims that do not exceed the deductible; payment due  
             dates; payment transmittal information; and the method of  
             selecting a claims administrator, provided that such claims  
             administrator may only administer claims that do not exceed  
             the deductible; and


           4) Provide 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. 


          This bill:


           1) Defines an ancillary agreement as an agreement that is a  
             supplementary writing or contract relating to a workers'  
             compensation policy or endorsement that adds to, subtracts  
             from, or is inconsistent with the obligations of either the  
             insured or the insurer under the policy or endorsement;


           2) Defines collateral and security agreement as 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, as specified;


           3) Exempts collateral and security agreements from the  
             definition of ancillary agreement that must be filed with the  
             WCIRB and IC;


           4) Provides that the requirement to file ancillary agreements  
             with the IC prior to issuance shall not apply to an ancillary  







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             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 three  
             out of four specified criteria:


              a)    Has a full time risk manager or is represented by  
                counsel in the evaluation of the ancillary agreement;


              b)    Has 500 or more employees;


              c)    Has annual nationwide payroll in excess of $20  
                million; or


              d)    Has workers' compensation manual standard premium in  
                excess of $1 million on a nationwide basis.


           5) Provides that the exemption from filing ancillary agreements  
             under 4) above does not apply to an ancillary agreement  
             between an insurer and a California employer that is issued  
             to a co-employment arrangement, as defined, or negotiated,  
             managed or administered in whole or in part by a managing  
             general agent, as specified;


           6) Provides that an ancillary agreement that is not required to  
             be filed under 4) above may not amend or revise the coverage  
             provided, or the benefits payable under the policy unless is  
             it filed and approved by the IC, or include charges or costs  
             as allocated loss adjustment expenses as defined in the  
             California Workers' Compensation Uniform Statistical  
             Reporting Plan;


           7) Specifies that the terms and conditions of a workers'  
             compensation policy and any endorsements shall take  
             precedence over the provisions in an ancillary agreement if  
             there is an inconsistency or conflict between the policy or  
             endorsement and the ancillary agreement;







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           8) Requires the insurer, contemporaneously with any written  
             quote to provide workers' compensation coverage, to 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, and a notice that the terms  
             of the ancillary agreement are negotiable between the insurer  
             and the employer;


           9) Requires the insurer to provide a copy of the ancillary  
             agreement to the IC within 30 days after the insurer issues  
             an agreement exempt from filing and prior approval under 4)  
             above;


           10)Requires the exempt ancillary agreement to include language  
             stating that it has not been filed with the rating  
             organization or filed with, or approved by the IC;


           11)Specifies that these changes apply to ancillary agreements  
             issued or renewed on or after January 1, 2017;


           12)Requires insurers that intend to use a dispute resolution or  
             arbitration agreements to resolve disputes arising in  
             California out of an ancillary agreement or collateral and  
             security agreement to disclose to the employer,  
             contemporaneously with any written quote that offers to  
             provide workers' compensation 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; and


           13)Sunsets the changes made by the bill on January 1, 2022.




          Background








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                                                                    Page  8



          The requirement to file all workers' compensation policies and  
          endorsements was enacted in 1995 after California moved to "open  
          rating" of workers' compensation policies.  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. 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, and are 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 claim that this "deemed approved after 30 days" process  
          is actually illusory because the California Department of  
          Insurance (CDI) will say they will disapprove the form if they  
          are not given more time for their review.  They assert that the  
          recent regulatory 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 agreements. In  
          addition, they argue 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.


          This disagreement between the CDI and insurers 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. 


          Recent amendments to the bill ensure that even if certain  
          ancillary agreements do not require filing and approval by the  
          IC, the insurer must still provide a copy of the agreement to  
          the IC within 30 days after issuance, and the IC retains  







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                                                                    Page  9


          authority to ensure the agreement does not violate statutory  
          requirements.  


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No


          According to the Senate Appropriations Committee:


           Potentially significant costs to the CDI  of $181,000 in  
            fiscal year 2016-17, $352,000 in fiscal year 2017-18, and  
            ongoing costs of $317,000 per year for analyzing filed  
            ancillary agreements, identifying policies exempt from filing,  
            and ensuring compliance. (Insurance Fund)


          SUPPORT:   (Verified8/15/16)


          American Insurance Association (source)
          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  


           OPPOSITION:   (Verified8/15/16)


          Asian Business Association
          California Applicants' Attorneys Association
          California Department of Insurance
          California Small Business Association
          Roxborough, Pomerance, Nye & Adreani


          ARGUMENTS IN SUPPORT:     The California Chamber of Commerce  
          supports AB 1922 because it will streamline the contracting  
          process for sophisticated parties in large, complex insurance  







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                                                                    Page  10


          contracts that include workers' compensation policies by  
          clarifying which ancillary documents must 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. The Independent Insurance Agents &  
          Brokers of California 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 transactions. The  
          National Association of Mutual Insurance Companies supports AB  
          1922 because it requires appropriate disclosures in a manner  
          that is meaningful, cost-effective, and consistent with  
          practical business realities. The employer-insurance clients  
          that will benefit 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.


          ARGUMENTS IN OPPOSITION:     The CDI 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. 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.  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.

          ASSEMBLY FLOOR:  67-0, 5/27/16
          AYES:  Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,  
            Bigelow, Bonilla, Bonta, Burke, Calderon, Campos, Chang, Chau,  







                                                                    AB 1922  
                                                                    Page  11


            Chávez, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Eggman,  
            Frazier, Beth Gaines, Gallagher, Cristina Garcia, Gatto,  
            Gipson, Gomez, Gonzalez, Gordon, Gray, Harper, Roger  
            Hernández, Holden, Irwin, Jones, Kim, Lackey, Levine, Linder,  
            Lopez, Maienschein, Mathis, Mayes, McCarty, Medina, Mullin,  
            Nazarian, Obernolte, Olsen, Patterson, Quirk, Ridley-Thomas,  
            Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond,  
            Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon
          NO VOTE RECORDED:  Bloom, Brough, Brown, Chiu, Dodd, Eduardo  
            Garcia, Grove, Hadley, Jones-Sawyer, Low, Melendez, O'Donnell,  
            Ting

          Prepared by:Erin Ryan / INS. / (916) 651-4110
          8/16/16 17:55:12


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