BILL ANALYSIS �
SB 684
Page 1
SENATE THIRD READING
SB 684 (Corbett)
As Amended August 22, 2011
Majority vote
SENATE VOTE :23-13
INSURANCE 10-1 JUDICIARY 10-0
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|Ayes:|Solorio, Hagman, Carter, |Ayes:|Feuer, Wagner, Atkins, |
| |Feuer, Hayashi, Miller, | |Dickinson, Beth Gaines, |
| |Olsen, Skinner, Torres, | |Huber, Huffman, Jones, |
| |Wieckowski | |Monning, Wieckowski |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Grove | | |
| | | | |
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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 or forum 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 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 freely and
voluntarily 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
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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, 2012.
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, but that in
order to save time and costs, insurers and employers may
freely and voluntarily use types of dispute resolution,
including arbitration, and that these parties should be free
to voluntarily agree to the terms of dispute resolution.
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
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this bill to the Senate Floor pursuant to Senate Rule 28.8,
indicating that state costs, if any, are insignificant. The
current version of the bill, which deleted a duty imposed on the
Insurance Commissioner, is no longer identified as fiscal.
COMMENTS :
1)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."
2)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. 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)Insurance 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)The primary objection to the bill is that the policyholders
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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 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)Subsequent to the June 27, 2011 special hearing of the
Assembly Insurance Committee, where the bill failed passage,
stakeholders met and came to agreement on new language for the
bill. The July 1, 2011, version of the bill involved timely
disclosure to defined employers, with specified consequences
for a failure to comply. Most insurers agreed with these
changes, and removed opposition. The remaining insurers went
to a support position. Based on this agreement on language,
and the change in position by opponents, the bill passed the
Assembly Insurance Committee. Subsequent to the Assembly
Insurance Committee's three hearings of the bill, it was heard
in the Assembly Judiciary Committee, due to a double referral.
The Assembly Judiciary Committee added language intended to
be technical and clarifying amendments, consistent with the
intent of the bill as a whole and not intended to negate
application of general principles of contract formation or
enforcement.
6)AB 2490 (Jones) of 2010 contained provisions similar to the
earlier versions of this bill. It was vetoed by the Governor.
In his veto message, former Governor Schwarzenegger asserted
that the bill was unnecessary.
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Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
FN: 0002033