BILL ANALYSIS �
SB 684
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Date of Hearing: June 27, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 684 (Corbett) - As Amended: June 23, 2011
SENATE VOTE : 23-13
SUBJECT : Workers' compensation: arbitration clauses
SUMMARY : Requires dispute resolution clauses entered into
between an employer and a workers' compensation insurer to
specify that California law applies and the venue is to be in
California, except as specified. Specifically, this bill :
1)Provides that any agreement between an employer and a workers'
compensation insurer concerning dispute resolution, other than
a settlement agreement resolving a particular dispute,
including an arbitration clause, shall:
a) Contain a choice of law provision that selects
California law as the law to be applied to any dispute;
b) Contain a forum selection clause that identifies
California as the proper venue for any proceedings arising
out of a dispute; and
c) Be disclosed to the employer in writing at the time a
quote or offer of insurance is made to the employer.
2)Defines "employer" to be an employer whose California payroll
constitutes the majority of the employer's payroll.
3)Provides that, notwithstanding the requirement that the forum
for dispute resolution and the choice of law be California,
employers and workers' compensation insurers may expressly
agree, after freely negotiating, on a forum and choice of law
other than California.
4)Specifies that a failure to comply with the above requirements
renders the dispute resolution agreement void and
unenforceable.
5)Provides that, notwithstanding the bill's provisions, any
dispute between the employer and the workers' compensation
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insurer regarding rates, classification, experience rating, or
other insurance issues for which authority to resolve the
dispute has been granted to the Insurance Commissioner (IC)
shall not be subject to alternative dispute resolution between
the employer and insurer.
6)Contains legislative findings and declarations to the effect
that requiring California employers to be subject to the law
of other states, and to conduct dispute resolution proceedings
in other states, is a burden on these employers.
EXISTING LAW :
1)Provides for a comprehensive system of workers' compensation
benefits to be paid to employees who are injured on the job.
2)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 obtain a certificate
of self-insurance from the Department of Industrial Relations.
3)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 benefits.
4)Prohibits a workers' compensation insurer from using a policy
form or endorsement unless it is filed with the IC's
designated statistical agent and either approved by the IC, or
30 days have passed from the filing with the IC.
FISCAL EFFECT : The Senate Appropriations Committee referred
this bill to the Senate Floor pursuant to Senate Rule 28.8,
indicating that state costs, if any, are insignificant.
COMMENTS :
1)Purpose . According to the author, the use of unfiled side
agreements to workers' compensation policies "can be a
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
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place. This practice has become a major problem for
businesses and a financial burden."
2)Large deductible policies . Employers -- as a practical matter
only larger employers -- that believe they can save workers'
compensation expenses by retaining some of the risk are
authorized to purchase policies that involve a large
deductible - sometimes as small as $100,000 or $250,000, but
for much larger companies, often $5 to $10 million. As
between the employer and insurer, this retained risk under the
deductible is the employer's obligation. However, the law
requires the insurer to provide the benefits to the injured
worker in the first instance. As a result, the insurer and
employer have to enter into an agreement concerning how the
employer will repay the insurer for fronting the employer's
contractual obligation. These agreements range from very
simple arbitration and choice of law and forum agreements, to
complex agreements that define in great detail how the risks
and financial relationship between the insurer and employer
will be structured, including how disputes will be resolved.
These are the agreements that are the subject of the bill.
3)Case law . Committee staff has been presented with a number of
unpublished court decisions that deal with the issue of
whether the so-called side agreements that are the subject of
this bill are required to be filed with the Insurance
Commissioner. One case, an unpublished Court of Appeal
decision, Ceradyne, Inc. v. Argonaut Insurance Company, 4th
Dist., Div. 3, case no. G039873 , held that arbitration clauses
relating to workers' compensation insurance policies that have
not been submitted to the IC for approval are unenforceable.
Other cases have come to the opposite conclusion, and ordered
the disputes to be arbitrated as provided in the agreements.
4)Sophisticated policyholders . The primary objection to the
bill is that the policyholders who are "protected" by the
bill's provisions are sophisticated, larger-sized businesses
that have chosen to assume a certain level of risk by choosing
to enter into a large deductible workers' compensation policy
with an insurer. Presumably, these businesses have concluded
that they can save money by managing a portion of their
workers' compensation risks on their own. There is a
cost-benefit analysis that must go into this decision, and
choice of law and choice of venue for dispute resolution
should problems arise between the insurer and employer over
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the splitting of the various risks are a part of that
analysis. As one insurer has phrased it, "We are happy to
negotiate a different venue and choice of law, but the
policyholder understands that it may increase its costs to do
so, and the policyholder may value the tangible lower costs
more than the uncertain value of different venue and choice of
law benefits." It can be argued that an employer that lacks
the sophistication to engage in this analysis ought not be
purchasing a large deductible policy in the first place, and
if it chooses to enter into a risky arrangement that it is
unsuited to handle, it should not be bailed out by
legislation.
5)Support . Pacific Hospital of Long Beach writes in support
because, with respect to its workers' compensation policies,
it was not aware of arbitration clauses until after disputes
arose. In Pacific Hospital's matters, side agreements
required reliance on New York law to resolve a purely
California dispute. 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 cases, sometimes the employer prevails, and
sometimes not, but always at great expense to the employer.
The supporters argue that the employer at that point in time
has little choice but to accept the agreement. The bill seeks
to address this problem by rendering the agreement void and
unenforceable if disclosure of the agreement was not presented
to the employer, in writing, contemporaneously with a written
quote that offers to provide insurance.
6)Opposition . Workers compensation insurers argue that these
agreements are between insurers and large, sophisticated
employers, and the bill impedes the right to freely contract
for provisions that are beneficial to both sides.
Specifically, they argue that large, often multi-state
employers that are assuming risk are capable of negotiating
terms that may be more favorable or less favorable, and more
expensive or less expensive. There are valid business reasons
why an employer might want broader freedom to negotiate the
issues covered by the bill than is allowed. In this regard,
the insurers point out that the current workers' compensation
insurance market is competitive, and if an employer does not
like the conditions being offered by an insurer, it has market
alternatives. With respect to the Ceradyne case, the American
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Insurance Association suggests that it was an unusual
situation where the employer was unaware of the "agreement"
until a substantial period of time after the policy was
purchased.
In addition, the insurers argue that these side agreements are
not standard form contracts like the insurance policy itself.
They are agreements negotiated between two sophisticated
parties, and the form changes from party to party, making it
impractical to have been previously filed by the insurer when
each agreement is reached with an employer.
7)Recent amendments . In response to the analysis of the bill
for the June 22 hearing, the author proposed two amendments.
The first amendment added choice of law to the provision
allowing negotiation between the parties. The second
amendment clarified the scope of governmental authority that
may not be subject to dispute resolution as between the
parties. At the hearing, the author proposed a third
amendment, eliminating the form filing provisions that had
been in the bill. The effect of this last amendment would be
to leave existing law on form filing intact, and eliminate the
implication in the bill that a technical filing violation
would have the effect of voiding a contractual provision that
an employer had freely entered into. The Committee opted to
have the bill put over in order to see these amendments in
print, and the bill before the Committee on June 27 reflects
these amendments.
8)Ongoing discussions . Representatives of the IC, the author,
insurers, and Committee staff have engaged in continuing
discussions with respect to policy as well as drafting. It
appears that there is the prospect for further refinements
relating to the definition of "employer," the scope of
disputes subject to the bill's provisions, the form of the
disclosure requirements, and the savings clause relating to
the Insurance Commissioner's authority. However, the drafting
and vetting among the various parties' principals is not
expected to occur prior to the June 27 hearing of this bill.
Rather, it is anticipated that these issues will be finalized
by the time the bill is heard in the Judiciary Committee.
Despite these refinements moving the parties closer, it is not
clear that the anticipated further amendments will result in a
full agreement among all parties.
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9)Prior legislation . AB 2490 (Jones) of 2010 contained
provisions similar to the recently amended version of this
bill. It was vetoed by the Governor. In his veto message,
former 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.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of Insurance (Sponsor)
California Applicants' Attorneys Association
Ceradyne, inc.
Congress of California Seniors
A.O. Reed & Co.
Pacific Hospital of Long Beach
Nick Roxborough, Esq., Roxborough, Pomerance, Nye, & Adriani,
counsel for Ceradyne
Opposition
California Chamber of Commerce
Association of California Insurance Companies
American Insurance Association (AIA)
Civil Justice Association of California
Liberty Mutual Insurance Company
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
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