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Expert Advice

Jun. 2, 2015

Workers' Comp Side Agreements Called Into Question

A recent New York decision voids out-of-state arbitration clauses in California.

Arbitration clauses contained in side agreements to workers' compensation policies have been a hotbed of controversy for several years - especially when they dictate that the proceeding be filed in a foreign jurisdiction and that it will be governed by another state's law. Recently, a case from New York called this practice into question.

The Context

California law requires carriers to file their workers' compensation insurance policies and endorsement forms with the Workers' Compensation Insurance Rating Bureau - the data collection and rating organization. Once approved, the WCIRB submits the forms to the California Department of Insurance (CDI) for final action and approval or dismissal. Ratified policy and endorsement forms cannot be changed or altered without subsequent approval. (See Cal. Ins. Code § 11658; Cal. Code Regs., tit. 10, §§ 2218, 2268.) This process is designed to ensure transparency and compliance with all laws; failure to comply with the process renders a policy void.

Despite this highly regulated process, many national workers' comp carriers have buried arbitration clauses in separate "side agreements" outside their filed insurance policies. By doing so, the carriers have circumvented review and approval by California state regulatory agencies such as the CDI. Then, when disputes arise, California employers have been forced to arbitrate the matters in another state - and under that state's laws - often in the very state where their WC carrier is headquartered. Not only is this process costly to the policyholder, but it stacks the deck in favor of insurers.

New York Decision

Last year, a New York appellate court ruled that these side agreements - used by many large national carriers - are unenforceable. (Monarch Consulting, Inc. v. National Union Fire Ins. Co., 993 N.Y. S. 2d 257 (App. Div. 2014).). In a 3-2 decision, the court denied a petition to force policyholders to arbitrate claims in New York, which the side agreement in question required. As a result, there is a compelling argument that carriers can no longer force California businesses into arbitration in New York and under that state's law. Though the Monarch case involved particular employers and insurance companies (the petitioning carrier was AIG), the decision jeopardizes every side agreement in a California workers' comp policy.

California Law

The Monarch court provided a thorough review of the California law that governs workers' comp coverage. The decision specifically referenced CDI enforcement proceedings against Zurich American Insurance Company and a settlement involving Zurich's out-of-state arbitration clauses. In that settlement, Zurich agreed not to enforce contractual provisions requiring policyholders to arbitrate disputes in Illinois using New York law. The court pointed out that the Zurich settlement makes clear "that the CDI does, in fact, believe that side agreements are subject to regulatory statutes, and therefore, that those agreements are void if insurers fail to file them." (Monarch, 993 N.Y. S. 2d at 287.) Indeed, CDI held regulatory hearings in February on this very subject.

Future Impact

The Monarch ruling may profoundly affect California employers who were issued workers' compensation policies with unfiled side agreements. For one thing, it potentially levels the playing field: California businesses are no longer required to litigate policy disputes in another state. It also upholds the CDI's mandate that side agreements be filed with regulatory agencies when policies are issued. The decision correctly concluded that enforcing unfiled agreements would "violate the strong policy under California law of regulating insurance carriers and their agreements with their insureds." (Monarch, 993 N.Y. S. 2d at 279.)

However, it should be noted that the ruling is still contested; AIG has appealed Monarch to the highest court in New York state. In the meantime, policyholders should be aware of the legal infirmity of unfiled side agreements. Indeed, the ruling - which cited California's legal, administrative, and legislative history on the issue -may well spur a California appellate tribunal to publish an opinion along the same line. Until then, California practitioners - particularly those whose clients hold workers' compensation policies with side agreements - should keep an eye on AIG's appeal.

Nicholas P. Roxborough, co-managing partner of Roxborough, Pomerance, Nye & Adreani in Woodland Hills, represents clients in a variety of complex business and employment matters. He is among the counsel of record in the Monarch case.

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Donna Mallard

Daily Journal Staff Writer

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