BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 2490 (Jones)
As Amended May 20, 2010
Hearing Date: June 29, 2010
Fiscal: Yes
Urgency: No
TW:jd
SUBJECT
Workers' Compensation Insurance: Dispute Resolution:
Arbitration Clauses
DESCRIPTION
This bill would regulate agreements concerning dispute
resolution, other than settlement agreements resolving
particular disputes, made between an employer and a workers'
compensation insurer by requiring choice of law and forum
selection provisions providing for California law.
BACKGROUND
California employers are required to provide workers'
compensation benefits to their employees. These benefits are
used by employees for medical services related to on-the-job
injuries or illnesses. Although workers' compensation is
required by the state, the state does not pay employers for this
program; rather, employers typically maintain insurance policies
to cover workers' compensation benefits. Workers' compensation
insurance policies are highly regulated, and each policy must be
submitted to the California Insurance Commissioner for approval
before the policy can be issued. Subsequent agreements
regarding the insurance policy, referred to as insurance program
agreements (IPAs), may be reached between the insurer and
employer; these agreements are not required to be submitted to
the Insurance Commissioner for approval.
This bill would require a dispute resolution agreement, other
than a settlement agreement resolving a particular dispute,
between an employer and insurer related to workers' compensation
(more)
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insurance to include choice of law and forum selection
provisions providing for California law.
CHANGES TO EXISTING LAW
Existing law requires employers to maintain workers'
compensation insurance. (Lab. Code Sec. 3700.)
Existing law requires that a workers' compensation insurance
policy or endorsement proposed to be issued in California must
be filed with the insurance rating organization; the policy
cannot be issued until either 30 days from receipt of the policy
or endorsement by the ratings organization and no notice has
been issued by the insurance commissioner or upon written
approval of the form or endorsement issued by the insurance
commissioner. (Ins. Code Sec. 11658.)
Existing law provides that a limited workers' compensation
policy may be issued insuring either in the whole or any part of
the liability of any employer for compensation, as long as the
policy is previously approved as to substance and form by the
insurance commissioner; subject to these restrictions, the
policy can restrict or limit the insurance in any manner. (Ins.
Code Sec. 11657.)
Existing law provides that a limited insurance policy cannot
otherwise be limited unless an endorsement is attached in a form
prescribed by the insurance commissioner or in accordance with
rules adopted by the insurance commissioner. (Ins. Code Sec.
11659.)
This bill would require, as between an employer and a worker's
compensation insurer, any agreement concerning dispute
resolution, other than settlement agreements, to conform to the
following:
1. be filed with the insurance rating organization and
subject to approval by the insurance commissioner;
2. contain a choice of law provision that identifies
California as the law to be used to resolve any disputes
that arise in California; and
3. contain a forum selection clause identifying California
as the proper venue for any proceeding regarding a dispute
that arises in California.
COMMENT
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1.Stated need for the bill
The author writes:
Despite the requirement that the commissioner approve the form
and substance of all workers' compensation plans, some
workers' compensation carriers issue unapproved separate or
side agreements, sometimes called Insurance Program Agreements
(IPAs) that require arbitration of any disputes between the
employer and the carrier concerning the approved workers'
compensation plan. These IPAs are not provided to the
employer until after the policy or plan is accepted, and lack
the approval of the commissioner.
These IPAs, which are unapproved, often choose a foreign
jurisdiction's law to interpret the plan and resolve disputes,
and choose a state other than California as the location or
venue to conduct arbitrations. This subjects Californians to
another state's laws and forces them to travel outside this
state to conduct dispute resolution proceedings, resulting in
significant cost burdens. Over time, these arbitration
clauses have become complex and expensive, and have diminished
the rights of the parties in the arbitration proceedings.
Because these IPAs have not been approved by the Insurance
Commissioner, Courts have held that the IPA, at least with
respect to the arbitration clause, to be invalid. [Citation
omitted.] Even so, California employers should not have to
bring litigation to invalidate a side-agreement that should
have been submitted to the Insurance Commissioner for
approval. Additionally, California businesses are not in a
position to negotiate the choice of law and venue issues of
these agreements, particularly when they circumvent Department
of Insurance oversight.
Moreover, California has a compelling state interest in
ensuring that workers' compensation policies and plans are
enforced under California law and not subject to
interpretation by other jurisdictions, and that any dispute
resolution proceedings are conducted within its borders.
2.California's interest in workers' compensation insurance
contracts
This bill would restrict dispute resolution agreements between
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an employer and a workers' compensation insurer by requiring
IPAs to be filed with the Insurance Commissioner and providing
for California forum selection and choice-of-law provisions.
The California Chamber of Commerce, an opponent of the bill,
argues that "AB 2490 (Jones) governs secondary contractual
relationships between very sophisticated parties, large
employers and their insurance companies, who have many sound
business reasons for choosing forums and legal jurisdictions
outside of California for resolving their disputes. There is no
justification for interfering with the right of two such parties
to contract freely, as their selections have no impact on
California employees."
The author cites to the case of Ceradyne, Inc. v. Argonaut
Insurance Company (2009) 74 Cal.Comp.Cas 702, which demonstrates
the need for this bill. In Ceradyne, the plaintiff/employer was
a Delaware corporation doing business all over the world. The
plaintiff entered into four large deductible policies that
covered workers' compensation claims made against it throughout
the United States. (Id. at pg. 704.) Cases such as Ceradyne
illustrate that out-of-state insurers and out-of-state
businesses enter into contracts which directly concern
California employees. Although both the employer and insurer
were out-of-state companies, the pivotal issue is that the
original claims giving rise to the dispute began in California.
The Legislature has, at times, enacted laws that restricted
choice of law and forum selection between contracting parties in
order to protect its residents. (See AB 2781 (Leno, Ch. 797,
Stats. 2006) child support collection choice of law agreements;
SB 586 (Sher, Ch. 194, Stats. 1997) Uniform Interstate Family
Support Act choice of law.) In these cases, a sufficient nexus
was drawn between California's desire to protect its citizens
and the nature of the contract between the parties.
Similarly, California has a legitimate interest in protecting
its citizens from unconscionable contracts that would overly
burden the resident by litigating a claim arising in California
but arbitrated in a different state. The court in America
Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1 addressed
forum selection clauses and held that "[o]ur law favors forum
selection agreements only so long as they are procured freely
and voluntarily, with the place chosen having some logical nexus
to one of the parties or the dispute, and so long as California
consumers will not find their substantial legal rights
significantly impaired by their enforcement." (Id. at pg. 21.)
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The IPAs, the author argues, are not procured freely and
voluntarily. In most instances, employers are presented with
the IPA from the insurer after the insurance policy has been
issued. The IPA contains material provisions of the insurance
contract, in addition to arbitration clauses, conflict of law
provisions, and forum selection clauses. By the time the
employer receives the IPA, the employer has already paid money
toward the insurance policy. Further, as in Ceradyne, the IPA
also may contain language such as "[t]he terms of this policy
may not be changed or waived except by endorsement issued by us
to part of this policy." (Ceradyne, Inc. v. Argonaut Ins. Co.,
74 Cal.Comp.Cas at pg. 705.) The author argues that employers
entering into these side agreements do so based on the belief
that they are unable to negotiate the terms of these agreements
since the policy has already been issued and the side agreements
indicate that they are non-negotiable.
California has a substantial nexus to the dispute resolution
agreements between an employer and insurer providing workers'
compensation insurance to California employees. First, from the
experiences described by employers, the IPAs do not appear to be
procured freely and voluntarily. Second, since the initial
worker's claim instigates the subsequent dispute between the
employer and insurer, using California law in these disputes is
logical. Lastly, California requires its employers to provide
workers' compensation to employees injured on the job, so the
initial policy is written by the insurer because of state
requirements and regulations.
3.Freedom of parties to contract
This bill would require a workers' compensation insurance
agreement issued for the benefit of California employees to
contain California choice of law and forum selection provisions.
The author argues that restricting the contract provisions
between the insurers and employers will protect California
businesses, which "are not in a position to negotiate the choice
of law and venue issues of these agreements." On the other
hand, the Civil Justice Association of California (CJAC), an
opponent of the bill, argues that "[c]ontractual relationships
tend to differ from situation to situation, and certain
situations may be best served by a choice of law other than
California's. This bill would affect employers and workers'
compensation insurers, both relatively sophisticated parties who
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may have good reasons for negotiating specific provisions in a
contract."
The author argues that arbitration clauses in IPAs have been
held invalid by California courts because they have not been
approved by the Insurance Commissioner. The author points to
the case of Ceradyne, a Delaware corporation doing business in
California, which entered into an IPA agreement containing an
arbitration clause specifying Connecticut jurisdiction with a
determination on the final arbitration award to be decided by
New York courts. (Id. at pgs. 704-706.) Ceradyne, Inc.
executed the IPA nine months after the initial policy, submitted
to and approved by the California Insurance Commissioner, was
issued. (Id at pg. 705.) The IPA specified that it was
retroactive to the effective date of the policy, March 1, 2003.
(Id.) The court held that the arbitration clause was void
because the IPA itself, an agreement containing material terms
related to the insurance policy, had not been approved by the
Insurance Commissioner as required by California statute. (Id.
at p. 37.) This bill would codify this ruling by requiring the
IPA to be filed with the Insurance Commissioner, as is already
required of the insurance policy under Insurance Code Section
11658.
4.Federal Arbitration Act (FAA)
This bill would regulate arbitration agreements between
contracting parties. The FAA, 9 U.S.C. Sec. 2, provides that an
arbitration agreement shall be valid, irrevocable, and
enforceable, except on such grounds as exist at law or in equity
for the revocation of any contract. The restrictions on
arbitration agreements contained in this bill raise the concern
that these restrictions may be preempted by federal law. In
Allied-Bruce Terminix Companies, Inc., et al. v. Dobson (1995)
513 U.S. 265, the United States Supreme Court discussed the
issue of federal preemption over state regulation of arbitration
contracts. The court stated that Section 2 of the FAA "gives
States a method for protecting consumers against unfair pressure
to agree to a contract with an unwanted arbitration provision.
States may regulate contracts, including arbitration clauses,
under general contract law principles and they may invalidate an
arbitration clause 'upon such grounds as exist at law or in
equity for the revocation of any contract.' 9 U.S.C. [Sec.] 2
? . What States may not do is decide that a contract is fair
enough to enforce all its basic terms (price, service, credit),
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but not fair enough to enforce its arbitration clause. The Act
makes any such state policy unlawful, for that kind of policy
would place arbitration clauses on an unequal 'footing,'
directly contrary to the Act's language and Congress' intent."
(Id. at pg. 281.)
This bill would regulate arbitration agreements, as may be
contained in the IPA, the same as existing law currently
regulates the insurance contract. Under existing law, the
insurance policy must be submitted to the Insurance Commissioner
and is subject to approval. Under this bill, the IPA, which
contains material terms relating to the insurance policy, also
would have to be submitted to the Insurance Commissioner and
would be subject to approval. California has established a
public interest in providing comprehensive regulation of
workers' compensation insurance. This bill would further
California's interest in protecting consumers against unfair
pressure to agree to a contract with an unwanted arbitration
provision.
5.Application to out-of-state companies
This bill would apply to all workers' compensation insurance
policies issued for the protection of California employees. As
such, this bill would regulate not only California employers and
California insurers but also out-of-state employers with
California employees and out-of-state insurers. The Legislature
has recognized that only employers who are so engaged in
interstate commerce as to not be subject to the legislative
power of the state would not be properly regulated under
California's Workers' Compensation Act. (See Lab. Code Sec.
3203.) However, the provisions in this bill would not conflict
with this statute since the application of this bill would be
limited to disputes arising out of California employee injury
claims.
Support : Altman Plants, Inc.; Ceradyne, Inc.; Pacific Hospital
of Long Beach; Roxborough, Pomerance, Nye & Adreani
Opposition : American Insurance Association; California Chamber
of Commerce; Civil Justice Association of California
HISTORY
Source : An Individual
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Related Pending Legislation : None Known
Prior Legislation : See Background and Comment 3.
Prior Vote :
Assembly Insurance Committee (Ayes 8, Noes 4)
Assembly Appropriations Committee (Ayes 11, Noes 5)
Assembly Floor (Ayes 41, Noes 28)
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