BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 2490 (Jones) Hearing Date: June 16, 2010
As Amended: May 20, 2010
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor(05/24/10)41-28/Pass
Asm. Appr. (05/12/10)11-05/Pass
Asm. Ins. (04/21/10)08-04/Pass
SUMMARY Would require dispute resolution clauses applicable to
disputes between an employer and its insurer under workers'
compensation insurance policies to be submitted to the Insurance
Commissioner in the policy form filing process and requires such
policies to specify California law applies to such disputes and
the venue for resolving them is to be in California.
DIGEST
Existing law
1. Defines insurance as a contract whereby one undertakes to
indemnify another against loss, damage or liability arising
from a contingent or unknown event. California case law
indicates insurance necessarily involves two elements: a
risk of loss to which one party is subject, and a shifting
or transfer of that risk to another party and distribution
of that risk among similarly situated persons. (See
Metropolitan Life Ins. Co. v. State Bd. Of Equalization
(1982) 32 Cal. 3d 649, 654 186 Cal. Rptr. 578, 652 P. 2d
426);
2. Provides for a comprehensive system of workers'
compensation benefits to be paid by employers to employees
who are injured on the job;
3. 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 to obtain a
AB 2490 (Jones), Page 2
certificate of self-insurance from the Department of
Industrial Relations;
4. Specifies no workers' compensation insurance policy or
endorsement shall be issued by an insurer to any person in
this state unless 1) the insurer has filed a copy with the
rating organization pursuant to law, 2) 30 days have expired
from the date the form or endorsement was received by the
Insurance Commissioner from the rating organization, and 3)
no notice regarding the policy or endorsement has been
received from the Insurance Commissioner. The filed policy
forms establish the terms of the proposed risk transfer;
5. Authorizes employers to purchase "high-deductible" workers'
compensation insurance policies, subject to certain
conditions, whereby the employer is effectively self-insured
below the deductible, but the insurer, by means of the
negotiated transfer of risk for which it has received
compensation, is responsible to guarantee payment of
benefits;
6. Insurance Program Agreements (IPA's), commonly referred to
as side agreements, can materially affect the terms on which
the transfer to an insurer of an employer's workers
compensation liabilities occurs, but are not specifically
required to be part of a policy form filing with the
California Department of Insurance.
This bill
1.Would require any agreement, other than an agreement settling
a specific dispute, between an employer and a workers'
compensation insurer which pertains to dispute resolution,
including but not limited to an arbitration clause arising out
of a workers' compensation policy or endorsement, shall
conform to all of the following:
a. It shall be part of the form or endorsement filed
with the rating organization and subject to approval by
the commissioner pursuant to Section 11658;
b. It shall contain a choice of law provision that
AB 2490 (Jones), Page 3
identifies California law as the law to be used to
resolve any dispute that arises in California;
c. It shall contain a forum selection provision that
identifies California as the proper venue for any
proceeding regarding a dispute that arises in California;
2.Would provide that a failure to meet the above requirements
renders the dispute resolution agreement void and
unenforceable;
3.Would state legislative findings and declarations concerning
the burden upon employers of insurer side agreements that
specify the law of jurisdictions other than California if
disputes concerning their intended scope and meaning arise.
COMMENTS
1.Purpose of the bill To ensure that California workers
compensation policies fully disclose the material terms of the
policy, including the rules applicable to dispute resolution,
and to require that any dispute resolution proceedings are
subject to resolution under California law and are conducted
in California.
2.Background All California employers subject to the state's
Workers' Compensation law are required to obtain such
insurance for their employees. The plans are highly
regulated. They are designed to protect the worker and
provide prompt payment of claims. Current law requires a
workers' compensation policy or endorsement to be filed with
the rating organization. Current law also provides a new
policy or endorsement cannot be used by the insurer until 30
days have elapsed from the date the Insurance Commissioner
receives the form or endorsement.
3.According to the author and the experience of the bill's
supporters, despite the requirement that the commissioner
approve the form and substance of all workers' compensation
plans, some workers' compensation insurers issue unapproved
separate side agreements, (also termed Insurance Program
Agreements (IPAs)) that require arbitration of any disputes
AB 2490 (Jones), Page 4
that arise between the employer and the carrier under the
filed policy or endorsement. According to the author and the
statements of the bill's supporters, these IPAs are not
generally provided to the employer until after the policy or
plan is accepted and the IPAs are neither reviewed nor
approved by the Insurance Commissioner. These unapproved IPAs
frequently subject any disputes that arise between the
employer and the insurer to resolution under the laws of
another jurisdiction, in proceedings conducted outside of
California, before persons whom are not necessarily impartial.
The author notes such IPA terms subject employers, without the
guarantee of advance notice at the time the insurance purchase
is being negotiated, to significant cost burdens arising from
the need for travel, the retaining of special counsel, etc.
The author has provided the committee with an Unpublished
Court of Appeal decision ( Ceradyne, Inc. v. Argonaut Insurance
Company, 4th Dist., Div. 3, case No. G039873 ), in which the
court holds that arbitration clauses relating to workers'
compensation insurance policies that have not been submitted
to the Insurance Commissioner for approval are void
unenforceable. The author, however, argues it is expensive and
unfair to California employers to force them to litigate this
issue. Instead, the rules should be clear that these
agreements ought to be part of the policy form filed with the
Insurance Commissioner, and that California law and California
venue ought to be the rule for resolving disputes that arise
in California concerning California employers.
4.Support Pacific Hospital of Long Beach writes in support
because, with respect to its workers' compensation policies,
it states it was not aware of arbitration clauses until after
disputes arose. In Pacific Hospital's matters, it was advised
that side agreements required reliance on New York law to
resolve a purely California dispute.
Ceradyne, Inc. states it supports AB 2490 as it was unaware of
any arbitration clause in their workers compensation policies
until after a dispute arose with their insurance carrier.
Roxborough, Pomerance, Nye, & Adriani, an employer's rights
law firm that handles many cases like Ceradyne and the Pacific
Hospital situation, writes that the late delivery of these
side agreements is increasingly common. In litigating the
AB 2490 (Jones), Page 5
cases, they win some and lose some, but always at great
expense to the employer.
5.Opposition The Civil Justice Association of California
(CJAC) is opposed to this bill as impairing the rights of
sophisticated parties to freely contract as they wish. CJAC
states the bill 1) is unnecessary as California law already
protects our residents from unreasonable contract terms and
choice of law provisions, 2) will hinder the discretion of
judges to balance factors in specific cases to determine if a
choice of law clause is appropriate, and 3) sets a dangerous
precedent for prohibiting other choice of law provisions.
The American Insurance Association (AIA) and the California
Chamber of Commerce opposes this bill, stating it needlessly
interferes with the right of employers and workers
compensation carriers right to contract and choose arbitration
and legal jurisdictions. The AIA states the agreements at
issue in this bill occur in transactions that involve large
commercial accounts, the negotiation of which involve risk
managers, brokers and often legal counsel and there are often
acceptable business reasons benefiting both parties for
choosing another venue state or choice of law. The Chamber
notes California law already protects the right of employees,
in a dispute with their employer regarding a workers'
compensation claim to have it resolved in California pursuant
to California law. The Chamber believes SB 2490's focus upon
a contractual relationship between highly sophisticated
parties makes it such that there is no justification in
interfering with their right to contract.
6.Questions The support and opposition statements indicate
differing views as to how much about the IPA's and the other
issues employers in fact know when they enter into the
insurance relationships that are at issue in this bill. Given
that an insurance purchase involves a transfer of risk from
one party to another, for legal consideration, do side
agreements or IPAs, if undisclosed (as asserted by the
supporters of this bill), constitute mechanisms that
re-transfer back to the buyer some of the risks associated
with policy administration in a way that frustrates the
ability of the employer to gain the full "benefit of the
bargain" they anticipated? To ensure that all parties, even
sophisticated parties, fully understand the terms and
limitations on the transfer of risk when a workers'
compensation policy is purchased in California, should
AB 2490 (Jones), Page 6
applicable side agreements or IPAs be a part of the policy as
filed with the Commissioner as subdivision (a)(1) of Section
11658.5 proposes?
7.Opponents of the bill question the mandatory choice of law and
forum selection provisions which appear in subdivision (a) (1)
and (a)(2). The substantive policy implications of those
objections are within the special expertise of the Senate
Judiciary Committee to which the Senate Rules Committee has
directed this committee to convey this bill if it is to
proceed from this committee.
8.Suggested Amendments None
9.Prior and Related Legislation None
POSITIONS
Support
Ceradyne, Inc.
Pacific Hospital of Long Beach
Altman Plants Inc.
AO Reed & Co.
Electronic Waveform Lab, Inc.
Gary Levine, Levine & Associates
Roxborough, Pomerance, Nye & Adreani
Oppose
American Insurance Association (AIA)
Civil Justice Association of California (CJAC)
California Chamber of Commerce
Consultant: Kenneth Cooley (916) 651-4102