BILL ANALYSIS �
SB 684
Page 1
Date of Hearing: July 7, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 684 (Corbett) - As Amended: July 1, 2011
As Proposed to be Amended
SENATE VOTE : 23-13
SUBJECT : WORKERS' COMPENSATION DISPUTE RESOLUTION: CHOICE OF
LAW AND FORUM CLAUSES
KEY ISSUE : SHOULD WORKERS' COMPENSATION INSURERS NOTIFY
SPECIFIED EMPLOYERS THAT THE INSURER INTENDS TO REQUEST A CHOICE
OF LAW OR FORUM OTHER THAN CALIFORNIA IN A PROPOSED POLICY
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill, sponsored by the California Department of Insurance,
would regulate agreements concerning dispute resolution
regarding workers' compensation insurance held by California
employers. It would require an insurer that intends to use a
dispute resolution agreement to disclose to the employer,
contemporaneously with any written quote that offers to provide
insurance coverage, that choice of law and choice of venue or
forum may be a jurisdiction other than California and that these
terms are negotiable between the insurer and the employer.
After compliance with the disclosure requirement, a dispute
resolution or arbitration agreement may be freely and
voluntarily negotiated by the insurer and the employer before
any dispute arises. Failure by the insurer to make the required
disclosure would result in a default to California as the choice
of law and forum for resolution of disputes arising in
California. As recently amended, the bill has no known
opposition.
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 :
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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 or forum 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)
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)Codifies the established common-law principle that the courts
will not enforce an unconscionable contract. (Civil Code
section 1670.5.)
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2)Defines unconscionability as having both a "procedural" and a
"substantive" element, the former focusing on "oppression" or
"surprise" due to unequal bargaining power, the latter on
"overly harsh" or "one-sided" results. (Armendariz v.
Foundation Health Psychcare Services, Inc. (2000) 24 Cal. 4th
83, 114.)
3)Rejects forum selections clauses which "would substantially
diminish the rights of California residents in a way that
violates our state's public policy." (America Online, Inc. v.
Superior Court (2001) 90 Cal. App. 4th 1, 12.)
4)Provides for a comprehensive system of workers' compensation
benefits to be paid to employees who are injured on the job.
(Cal. Constitution Article 14, Section 4.)
*
5)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.
(Labor Code Section 3700.)
* *
6)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. (Ins. Code Section
11735(e).)
*
7)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. (Ins. Code
Section 11658.)
COMMENTS : The author explains that some workers' compensation
insurance carriers issue contracts that require resolution of
disputes according to the laws of a foreign jurisdiction, and
sometimes in that foreign jurisdiction or in a specified venue.
As a result, the laws of another state may apply to a California
employer whose employee was injured in a work-related incident
in California. The author states that this can be a major
hardship for California employers, especially small businesses
without the resources to travel outside the state, or without
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offices located in the state where the dispute resolution takes
place. This practice has become a major problem for businesses
and a financial burden.
The Insurance Commissioner writes in support of this sponsored
measure:
This bill provides another level of protection for
businesses by making workers' compensation policies more
transparent. This bill creates a much needed disclosure
for employers negotiating their workers' compensation
policies.
Currently, an employer receives a quote from an insurer
that may be based on certain portions of the policy being
negotiated. One of the most common aspects to be
negotiated is the dispute resolution agreement, which often
entails the employer having to agree to arbitrate out of
state. However, the employer often does not know that
there are conditions associated with the quote provided,
and only find out months later during negotiations and
after their coverage has taken affect.
SB 684 will require a disclosure to be provided with the
quote to inform employers that they are entitled to a
choice of law and forum in California. This is a very
important protection for employers and insurers alike.
Often, employers claim that they are unaware that the quote
they were given was predicated on the acceptance of these
side agreements. This disclosure will make them aware when
the quote is given, and by requiring a signature from the
employer that they recognize and are willing to negotiate,
will give the insurers an additional form of protection.
This bill is designed to ensure that businesses, small and
large, are protected as we continue to face an uncertain
economy. This disclosure will help to make the negotiation
process more transparent.
Additional Disclosure Requirement For Specific Contract Terms
Regarding The Law, Forum and Venue For Resolution of Disputes .
The bill requires a covered insurer to notify a covered employer
prior to entering into any form of dispute resolution agreement,
including alternative dispute resolution or arbitration, to
resolve workers' compensation insurance disputes arising in
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California that the agreement may specify a choice of law or
choice of venue or forum other than California, and to notify
the employer that these terms are negotiable between the insurer
and the employer. Choice of law refers to the law to be applied
to the interpretation or enforcement of the contract. Forum
refers to the jurisdiction - e.g., California, Delaware, etc.
Venue refers to specific site within a jurisdiction - e.g.,
Sacramento, Los Angeles, etc.
After this disclosure, the bill provides that a dispute
resolution agreement may be freely and voluntarily negotiated by
the insurer and the employer before any dispute arises. Any
failure by the insurer to observe the disclosure requirements
shall result in a default to California as the choice of law and
venue or forum for resolution of disputes arising in California.
By adding this disclosure requirement and default provision for
non-compliance, the bill supplements existing law recognizing
that choice of law, forum and venue may be enforceable under
otherwise applicable principles of law. (E.g., America Online,
Inc. v. Superior Court (2001) 90 Cal. App. 4th 1, 12.)
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.
This Bill Applies To Large Deductible Insurance Policies
Covering Sophisticated Employers . Some employers - as a
practical matter only those that are relatively large - believe
they can save workers' compensation expenses by retaining some
of the risk. According to the Assembly Insurance Committee,
employers are authorized to purchase policies that involve a
large deductible, sometimes as small as $100,000 or $250,000,
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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.
These policyholders are understood to be sophisticated, larger
businesses that have elected to assume a higher 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. This assessment
requires a cost-benefit analysis, which the bill seeks to
facilitate by providing employers important information at the
outset of the inquiry. It is expected that insurers who include
choice of law or forum-selection clauses that favor them will
offer employers rate reductions in exchange for these terms. A
sophisticated employer, armed with rate information and
knowledge of the insurer's intention to select a foreign law or
forum prior to entering into the agreement, will therefore be
empowered to knowingly make the insurance decision it feels is
most appropriate. 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."
In the context of this transaction where there is a meaningful
opportunity to bargain among sophisticated parties, typically
represented by counsel, the approach taken by this bill to
provide employers with the knowledge needed to ensure an
informed choice may be sensible, assuming there are alternatives
in the marketplace and no overriding public policy to the
contrary. This prudential model should help to promote
voluntary adherence to contract provisions, avoiding disputes
regarding contract formation or enforcement, without upsetting
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or displacing otherwise applicable principles of
unconscionability.
Author's Clarifying Amendments. To correct technical terms and
clarify the intent of the measure, the author properly proposes
the following helpful amendments.
SECTION 1. The Legislature finds and declares all of the
following:
(f) In an effort to save time and costs, and because of the
uncertainty of litigation, workers' compensation carriers and
employers may freely and voluntarily use types of dispute
resolution, including arbitration to resolve disputes.
(h) Employers and workers' compensation carriers should be
freely able to negotiate and voluntarily agree to the terms of
dispute resolution, including arbitration without undermining
the protections afforded to California employers under
California law.
SEC. 2. Section 11658.5 is added to the Insurance Code, to
read:
11658.5. (a) (1) An insurer that intends to use a dispute
resolution or arbitration agreement to resolve disputes arising
in California out of a workers' compensation insurance policy or
endorsement issued to a California employer shall disclose to
the employer, contemporaneously with any written quote that
offers to provide insurance coverage, that choice of law and
choice of venue or forum may be a jurisdiction other than
California and that these terms are negotiable between the
insurer and the employer. The disclosure shall be signed by the
employer as evidence of receipt where the employer accepts the
offer of coverage from that insurer.
(2) After compliance with paragraph (1), a dispute resolution
or arbitration agreement may be freely and voluntarily
negotiated by the insurer and the employer before any dispute
arises.
(b) Nothing in this section , is intended to interfere with
any authority granted to the Insurance Commissioner under
current law.
(c) Failure by the insurer to observe the requirements of
subdivision (a) shall result in a default to California as the
choice of law and forum for resolution of disputes arising in
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California.
(d) For purposes of this section, a "California employer"
means an employer whose principal place of business is in
California and whose California payroll constitutes the majority
of the employer's payroll for purposes of determining premium
under the policy.
(e) This section shall apply to workers' compensation
policies issued or renewed on or after July 1, 2012.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of Insurance (sponsor)
California Applicants' Attorneys Association
Ceradyne, inc.
Congress of California Seniors
Pacific Hospital of Long Beach
Liberty Mutual Insurance Company
4 individuals on behalf of their companies
Opposition (as amended)
None on file
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334