BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1922|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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THIRD READING
Bill No: AB 1922
Author: Daly (D)
Amended: 8/22/16 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.
Senate Floor Amendments of 8/22/16 limit further the allowable
content of an ancillary agreement exempt from filing with the IC
under this bill, prohibiting inclusion of any cancellation
provision, any dispute resolution agreement, any premium or
other costs.
ANALYSIS:
Existing law:
1) 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;
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;
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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 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;
4) 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;
5) 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;
6) 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;
7) 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;
8) 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
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policy, and establishment of reserves and recognition of
receivables;
9) 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 charged 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
10) 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
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
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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 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
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three out of four criteria, as specified;
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, the benefits payable under the policy,
any cancellation provision, any dispute resolution
agreement, any premium or other costs 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;
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
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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
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
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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 further narrow the scope of
ancillary agreements exempt from filing and approval and 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.
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: (Verified8/22/16)
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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: (Verified8/22/16)
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
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
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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,
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
8/23/16 19:58:17
**** END ****
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