BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 684 (Corbett)
As Amended March 25, 2011
Hearing Date: April 5, 2011
Fiscal: Yes
Urgency: No
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SUBJECT
Workers' Compensation Insurance:
Dispute Resolution: Arbitration Clauses
DESCRIPTION
This bill, sponsored by the California Department of Insurance,
would regulate agreements concerning dispute resolution, other
than settlement agreements resolving particular disputes, made
between an employer, whose principal place of business is in
California, and a workers' compensation insurer by requiring
choice of law and forum selection provisions providing for
California law. This bill would allow employers and workers'
compensation insurers to negotiate and expressly agree to
another state's choice of forum selection provisions prior to
the inception of the insurance policy. In the event that a
dispute must be resolved by a California state agency, this bill
would exempt from enforcement any alternative dispute resolution
between the workers' compensation insurer and employer.
This bill would require dispute resolution agreements to be
provided in writing by the workers' compensation insurer to the
employer contemporaneously with any written insurance quote.
This bill would require dispute resolution agreements to be
submitted to the rating organization as part of the policy form
or endorsement.
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
(more)
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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 subsequent agreements routinely are not
submitted to the Insurance Commissioner for approval.
AB 2490 (Jones, 2010) would have regulated dispute resolution
choice of law and forum selection provisions between an employer
whose principal place of business is in California and worker's
compensation insurers in the same manner as provided in SB 684.
AB 2490 passed both houses but was vetoed by Governor
Schwarzenegger who asserted that no evidence existed that
demonstrated a problem with current choice of law and forum
selection provisions negotiated between employers and workers'
compensation insurers. (See Comment 6.) This bill is
substantially similar to AB 2490.
This bill would regulate dispute resolution agreements between
an employer, whose principal place of business is in California,
and workers' compensation insurers to include choice of law and
forum selection provisions providing for California law, but
would allow the parties to freely negotiate for another state's
choice of forum provisions prior to the inception of the
insurance policy.
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
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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 whose principal
place of business is in California 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 and be
disclosed in writing to the employer at the same time as
the written insurance quote;
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.
This bill would allow the employer and workers' compensation
insurance company to negotiate for another state's choice of
forum clauses prior to the inception of the policy.
This bill would prohibit an alternative dispute resolution
agreement regarding the resolution of any dispute for which
authority to resolve the dispute has been granted to a
California state agency.
This bill would declare dispute resolution agreements not in
conformity with the provisions of this bill to be void and
unenforceable.
COMMENT
1.Stated need for the bill
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The author writes:
Despite the requirement that workers' compensation policies be
filed with the Insurance Commissioner, some workers'
compensation carriers issue unapproved side agreements,
separate from their policies which require arbitration of
disputes �to] occur in a state outside of California. As a
result, the laws of another state apply in the arbitration
proceedings involving a California employer whose employee was
injured in a work-related incident in California.
This can be a major hardship for California employers,
especially small businesses without the resources to travel
outside the state, or without offices located in the state
where the arbitration takes place. This practice has become a
major problem for businesses and a financial burden.
The California Department of Insurance, the sponsor of this
bill, writes:
This bill should save businesses precious dollars as they will
no longer be forced out of state to arbitrate without their
foreknowledge. Requiring insurers to inform businesses and
receive their consent to arbitrate out of state should not
result in any additional costs.
This bill is designed to ensure that businesses are protected
as we face an uncertain economy. Insurance practices that do
not conform to state law must be discouraged. This bill aims
to address these issues.
2.California's interest in workers' compensation insurance
contracts
This bill would restrict dispute resolution agreements between
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 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
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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.)
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'
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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, because California requires its employers to
provide workers' compensation to employees injured on the job,
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. Further,
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.
715.) 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. Further, in order to provide for the freedom of parties
to contract, this bill would allow the parties to negotiate the
terms of choice of forum selection clauses, as long as the terms
are agreed upon prior to the inception of the policy.
4.Federal Arbitration Act (FAA)
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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),
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.)
The sponsor argues that this bill would not contravene the
court's holding in Allied-Bruce. Indeed, this bill would
regulate arbitration agreements, as may be contained in the IPA,
in the same manner as existing law currently regulates the
entire insurance contract. Under existing law, the entire
insurance policy must be submitted to the Insurance Commissioner
and is subject to approval. (Ins. Code Sec. 11658.) This bill
would clarify existing law that the IPA, which contains material
terms relating to the insurance policy, would have to be
submitted to the Insurance Commissioner and would be subject to
approval. Accordingly, there is no FAA violation and arguably
no preemption problem. Further, 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.This bill would not apply to out-of-state employers
This bill would apply only to workers' compensation insurance
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policies issued to employers whose principal place of business
is in California for the protection of California employees.
The Legislature has recognized that 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.) 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 made
to employers whose principal place of business is in California.
6.Governor Schwarzenegger's veto of AB 2490
This bill is substantially similar to AB 2490 (Jones, 2010). In
vetoing AB 2490, Governor Schwarzenegger stated:
This bill is unnecessary because there is no evidence to
demonstrate that a problem exists. In my view, the bill risks
reducing the competitive market for workers' compensation
California now enjoys due to our reforms. The broad language
in the bill leaves open the potential for costly regulatory
interpretation that will impact the cost of workers'
compensation insurance. The high deductible contract
negotiations the bill seeks to impact are conducted by
sophisticated participants on both sides of the table that are
well versed in all aspects of workers' compensation and other
insurance products. Therefore, I am not convinced the issue
addressed by the bill will result in keeping workers'
compensation costs down which is the most significant concern
to California employers.
In response, the author points to the Ceradyne case as evidence
that a problem exists. In Ceradyne (see Comments 2 and 3), the
court concluded that side agreements with arbitration clauses
were invalid. The author argues that "It is a common industry
practice that these side agreements take place after the policy
is issued, leaving the employer to believe that there is no
recourse as he has already entered into a policy agreement."
Further, since the California Department of Insurance, the
sponsor of this bill, has handled numerous complaints regarding
IPAs, the sponsor reports that there is evidence of problems
with IPAs.
With respect to the broad language, the author notes that
Governor Schwarzenegger did not elaborate or indicate which
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sections of AB 2490 were too broad, and for that reason it is
difficult to address this issue. Furthermore, the author argues
that although the Governor indicated that this bill would result
in an increase in costs, there is no evidence to support that
statement. The author states that requiring that California
policies be held under California law, and requiring consent
from both parties to move the arbitration out of state should
not result in an increase in costs.
Support : None Known
Opposition : None Known
HISTORY
Source : California Department of Insurance
Related Pending Legislation : None Known
Prior Legislation : See Background and Comment 2.
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