BILL ANALYSIS �
SB 684
Page 1
Date of Hearing: July 6, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 684 (Corbett) - As Amended: July 1, 2011
SENATE VOTE : 23-13
SUBJECT : Workers' compensation: arbitration clauses
SUMMARY : Requires a workers' compensation insurer to disclose
to a California employer, at the time an offer of insurance is
made, that a dispute resolution or arbitration clause that may
involve law and venue other than California may be a part of the
offer. Specifically, this bill :
1)Provides that a workers' compensation insurer that intends to
use a dispute resolution or arbitration agreement to resolve
disputes arising in California shall disclose to the employer,
contemporaneously with a written quote that offers to provide
insurance, that choice of law and choice of venue may be a
jurisdiction other than California.
2)Requires the disclosure to include a statement that these
terms are negotiable.
3)Requires the disclosure to be signed by the employer as
evidence of receipt of the disclosure where the employer
accepts the offer of coverage from that insurer.
4)Provides that, once the disclosure is made, a dispute
resolution or arbitration agreement may be negotiated between
the insurer and employer at any time prior to a dispute
arising.
5)Defines "employer" to be an employer whose principal place of
business is California, and whose California payroll
constitutes the majority of the employer's payroll.
6)Specifies that a failure to comply with the disclosure
requirements results in a default to California law and venue
in the event of a dispute.
7)Provides that nothing in the bill is intended to interfere
with any authority granted to the Insurance Commissioner (IC)
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pursuant to existing law.
8)Provides that the bill applies to workers' compensation
policies issued or renewed on or after July 1, 2011.
9)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
place. This practice has become a major problem for
businesses and a financial burden."
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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
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
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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 requiring disclosure,
contemporaneously with a written quote that offers to provide
insurance, that non-California venue and law may be part of
the agreement.
6)Recent amendments . Subsequent to the June 27, 2011 special
hearing of the Insurance Committee, stakeholders have met and
come to agreement on new language for the bill, reflected in
this analysis. The approach now contained in the bill
involves timely disclosure to defined employers, with
specified consequences for a failure to comply. At the
writing of this analysis, the amendments appear to resolve the
issues that have been raised by various workers' compensation
insurers. Whether this is universal, or whether a small level
of residual opposition remains, is not clear.
7)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
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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
Liberty Mutual Insurance Company
Nick Roxborough, Esq., Roxborough, Pomerance, Nye, & Adriani,
counsel for Ceradyne
Opposition
California Chamber of Commerce
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086