BILL ANALYSIS Ó AB 1922 Page 1 GOVERNOR'S VETO AB 1922 (Daly) As Enrolled September 8, 2016 2/3 vote -------------------------------------------------------------------- |ASSEMBLY: |67-0 |(May 27, 2016) |SENATE: |35-0 |(August 25, | | | | | | |2016) | | | | | | | | | | | | | | | -------------------------------------------------------------------- -------------------------------------------------------------------- |ASSEMBLY: |79-0 |(August 30, | | | | | | |2016) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: INS. SUMMARY: Establishes exceptions from workers' compensation insurance policy filing requirements for large employers that purchase high deductible policies. AB 1922 Page 2 The Senate amendments: 1)Recast and clarify the definition of the ancillary agreements that would not be subject to the filing and approval requirements of current law. 2)Increase the criteria that define the large employers whose large deductible workers' compensation policy ancillary agreements are not subject to the filing and prior approval requirements of current law. 3)Add a requirement that these exempted ancillary agreements be filed with the Insurance Commissioner within 30 days after execution, but specify that these filings are not subject to approval by the commissioner. EXISTING LAW: 1)Requires every employer to provide workers' compensation benefits to its employees who are injured or suffer conditions that arise out of or occur in the course of employment. 2)Allows employers to satisfy this obligation by either purchasing a workers' compensation insurance policy, or obtaining a certificate of self-insurance from the Department of Industrial Relations (DIR). 3)Authorizes workers' compensation insurance policies to be either standard, guaranteed premium policies, or deductible policies. AB 1922 Page 3 4)Provides that the Workers' Compensation Insurance Rating Bureau (WCIRB) is the commissioner's designated statistical agent for workers' compensation purposes, and specifies a range of functions the WCIRB performs on behalf of and with the approval of the commissioner. 5)Requires insurers to file workers' compensation insurance policies and endorsements with the WCIRB, and prohibits the use of the policy or endorsement until 30 days have passed, or the commissioner has approved the filing. 6)States that it is unlawful for an insurer to use an ancillary agreement if the commissioner notifies the insurer that the agreement does not comply with the law. 7)States that it is unlawful for an insurer to use a policy or endorsement if the commissioner notifies the insurer that the agreement does not comply with the law. 8)Does not define "policy" or "endorsement" in statute, but the commissioner has interpreted these terms in recently adopted regulations that define "ancillary agreement" as within the filing requirement, and "limiting and restricting documents" and "customized limiting and restricting documents" as not within the filing requirement. 9)Requires an insurer that uses an ancillary agreement that addresses choice of law or choice of venue to disclose to the policyholder, contemporaneously with a quote for the policy, that the choice of law or choice of venue provisions are negotiable. AB 1922 Page 4 10)Requires, even in cases of deductible workers' compensation insurance policies where the benefits are within the deductible amount retained by the employer, the insurer to pay the benefits to the injured employee, and thereafter recover those benefits payments from the responsible employer. FISCAL EFFECT: According to the Assembly Appropriations Committee, minor, absorbable costs to the Department of Insurance. COMMENTS: 1)Purpose. According to the author, AB 1922 is necessary because current law does not allow the Department of Insurance (DOI) sufficient discretion to adopt a regulation that is commercially reasonable. DOI plays an important role in providing consumer protection to insurance policyholders who are not sufficiently sophisticated to protect their own interests against large insurers that hold market power. However, with respect to large, sophisticated employers, the so-called consumer protection role of the DOI is worse than unnecessary - it is counter-productive. 2)Policy and endorsement filing requirements. Existing statute mandates that workers' compensation insurers file policies and endorsements. The statutes do not specify what contractual arrangements constitute a "policy" or an "endorsement." There is substantial debate over the scope of this filing requirement. In an effort to provide certainty on this issue, the DOI adopted regulations earlier this year defining which "ancillary" documents are covered by the statutory mandate. A case can be made that the DOI's regulations are too broad, and sweep into the "mandatory filing" category documents that are neither a "policy" nor an "endorsement." Nonetheless, the bill adopts the definitions of "ancillary agreement" (that AB 1922 Page 5 must be filed) and "limiting and restricting documents" and "customized limiting and restricting documents" (that need not be filed). Except for "large, sophisticated employers," the bill does not attempt to overrule the recently adopted regulations. The filing requirements are not, and never have been, intended to be a case-by-case rule. Rather, standard forms that will be marketed to a large number of prospective policyholders are filed, and upon approval or the deemer period expiring, the policy forms may be sold in the marketplace. One of the primary issues raised by the bill is that many high deductible policies sold to large employers involve employer-specific negotiations and contractual terms. This sort of contractual relationship has never been of the class of document intended for filing under the statute. 3)Large, sophisticated employers. The bill provides, in essence, that specialized contractual arrangements negotiated between an insurer and a large employer are by definition reasonable commercial transactions, and there is no reason to require DOI oversight to protect this class of "consumer." Indeed representatives of large employers argue that DOI has nothing to offer them, and the process of DOI filing and review is an actual hindrance to executing necessary commercial contractual arrangements. Assuming this to be correct, the question becomes whether or not the bill's definition of the class of employer for which filing requirements do not apply is sound. The definition of large, sophisticated employer contained in the bill is designed to create two classes of employer - on one hand, the small to medium-sized employer for which DOI's consumer protection functions make sense, and on the other hand, large, sophisticated employers who do not need or want that "protection." AB 1922 Page 6 4)Duty of insurer to pay. The premise of a large deductible workers' compensation insurance policy is that the policyholder wishes to be partially, but not completely, self-insured. However, even a partially self-insured employer is on the face of the contract assuming a degree of risk. At the time these arrangements were authorized by the Legislature, the law mandated that the insurer be directly responsible for paying benefits to injured workers. That mandate was not changed. Thus, even though the employer is obligated to provide the benefits to the injured worker up to the amount of the deductible, the law mandates that the insurer be responsible for paying those benefits. As a result, it is necessary for the two parties to enter into an ancillary agreement that details how repayments will be made, what duties the two parties owe to each other, how disputes will be resolved, and related matters. These are the bulk of the agreements that the DOI regulations mandate be filed, and that both large employers and workers' compensation insurers argue should not have to be filed. 5)Choice of law and venue. When parties with operations in multiple states contract, it is common practice that they agree on where and how disputes will be resolved. Whether this is an arbitration clause, a provision that specifies which state's laws will apply, or a clause that specifies where court proceedings or arbitrations will occur, these provisions are normal parts of contracts between sophisticated parties entering into substantial contracts. Out of an abundance of caution, the Legislature added a specific disclosure requirement to ensure that parties to large deductible workers compensation insurance policies understand that these issues are negotiable. SB 684 (Corbett), Statutes 2011, Chapter 566 - requires the insurer to make this disclosure contemporaneously with any quote provided to a prospective policyholder if a choice of law/venue contract may be chosen. AB 1922 Page 7 Litigation. As with any class of contract involving substantial amounts of money, disputes have arisen between insurers and policyholders who have entered into large deductible workers' compensation insurance policies. The results of the various cases that have been litigated have been mixed. Courts have split on the question of whether these ancillary documents constitute "policies" or "endorsements" that must be filed, and they have split on the effect of an insurer not filing the documents. Some courts declared that the non-filed documents are void; others have not reached that far. But it should be noted that there is usually an underlying dispute that generates the litigation, and the validity of the ancillary agreements are actually ancillary to that underlying dispute. In this regard, both the DOI regulation, and the filing exemptions contained in this bill, should clarify many issues and reduce the risk of litigation. GOVERNOR'S VETO MESSAGE: I am returning Assembly Bill 1922 without my signature. This bill exempts large employers who purchase high deductible policies from workers' compensation insurance policy filing requirements. I am supportive of efforts to increase the ability of insurance carriers to efficiently conduct their business. This bill, however, reverses Department of Insurance regulations that have been in effect less than six months. These regulations are designed to promote consumer protection and transparency. Let's allow time for them to work. AB 1922 Page 8 Analysis Prepared by: Mark Rakich / INS. / (916) 319-2086 FN: 0005117