BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1922| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 AB 1922 Page 2 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; AB 1922 Page 3 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; AB 1922 Page 4 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 AB 1922 Page 5 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 AB 1922 Page 6 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; AB 1922 Page 7 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 AB 1922 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 AB 1922 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 AB 1922 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 **** END ****