Carriers Attack CDI Side Agreement Rules

By: Brad Cain

Workers’ comp carriers remain opposed to the positive direction the California Department of Insurance is going with its update of regulations for policy forms, endorsements, and other ancillary or side agreements to workers’ comp policies. The Department launched the effort nearly a year ago to make it clearer that these documents must be filed to be enforceable after numerous disputes broke out between carriers and employers over the terms of agreements that have never been filed with the Department.

The Department, whose responsibility is to protect consumers, wants carriers to provide clear and unambiguous contracts to consumers, be they personal or commercial lines buyers. Filed and approved agreements also provide safety for brokers who are getting sued in ever increasing numbers for selling unfiled and unapproved side agreements.

The side or ancillary agreements sometimes called collateral agreements frequently modify the policy terms, control what and when an employer pays for coverage and can modify where and how a dispute can be adjudicated.

Numerous, well-publicized disputes – including many concerning Applied Underwriters’ EquityComp program, documented in these pages and elsewhere – highlight the costly nature of the litigation that is occurring.

The department maintains that side agreements were required to be filed and that the updated regulations will only make this clearer.

“We have endeavored over the past nine months of the Department’s most recent regulatory proceeding to explain the flaws in the Department’s misadventure, to no avail” –– AIA vice president Bruce Wood.

“Under existing law, insurers must file collateral/ancillary agreements. It is unlawful for an insurer to use any unfiled policy or endorsement form, including a collateral/ancillary agreement, that modifies the obligations of the parties,” according to CDI attorney Patricia Hein who is overseeing the update of the regulations.

Department officials have confirmed to Workers’ Comp Executive that the document at the center of the disputes between Applied Underwriters and employers that bought its EquityComp program – Applied’s reinsurance participation agreement (RPA) – has never been filed nor approved by the Department.

The industry opposition was submitted in response to the Department’s third draft of the regulation and CDI is now circulating a fourth and possibly final draft that is unlikely to assuage its harshest carrier critics.

The fourth draft maintains the department’s stance that ancillary/side/collateral agreements must be filed and approved to be enforceable.

The proposed regulations define ancillary agreement “as an agreement that is a supplementary writing or contract relating to a policy or endorsement form that adds to, subtracts from, or revises the obligations of either the insured or the insurer regarding any terms of an insurance policy including but not limited to, dispute resolution agreements, policy premium amounts or rates, expense or tax reimbursement or allocation, deductible amounts, policy duration, cancellation or claims administration.”

The definition of ancillary agreements would exclude those agreements “that only set forth (1) the method for making payments, (2) the method for funding deductible amounts or other policy-related charges due under a policy, (3) the collateral or security amounts within the deductible, (4) the payment due dates, (5) the payment transmittal information, or (6) the method of selecting a claims administrator for claims within the deductible only.”

Push Back

The American Insurance Association, representing its members, had the harshest criticism of the third draft of the regulations and the Department’s repeated rejection of its suggested amendments. The fourth draft also rejects them.

“We have endeavored over the past nine months of the Department’s most recent regulatory proceeding to explain the flaws in the Department’s misadventure, to no avail. We have provided, repeatedly, recommended language, as well as pointing out the flaws in the Department’s text, to no avail. We have recommended, repeatedly, that the Department include an unambiguous effective date, so as to avoid potential dispute and litigation over pre-promulgation side agreements, but the Department again ignores this reasonable request,” says AIA vice president Bruce Wood. “[The Department] has thereby abdicated its responsibility to fairly and equitably inform the regulated community of the intended scope of its rules.”

AIA maintains that the filing and usage requirements are overly broad and would draw in documents that it says are unrelated to the underlying workers’ comp policy. It warns that the regulations will disrupt the large deductible and retrospectively rated workers’ comp policy market.

Estimates are that large deductible policies account for an estimated 30% of the California workers’ comp premium. AIA maintains that these policies are negotiated and purchased by “sophisticated parties with the ability to bargain as equals, and the proposed rules would needlessly interfere with this segment of the workers’ compensation market.”

The Department wants a level playing field.

AIA has also been demanding language stating that the proposed filing regulations are “prospective only.” Throughout the process, however, CDI officials have maintained that the current regulations require these documents to be filed to be enforceable and that the proposed regulations will not alter that fact.

The courts increasingly are coming to the same conclusion based on existing law.

What AIA appears to be trying to do is to help its member carriers avoid responsibility for past failures to file and obtain approval of these side agreements presently in use. By so doing carriers could escape responsibility for skirting or attempting to skirt the requirements.

Dispute Years In The Making

What initially launched the Department’s look into these documents were a growing number of disputes between large California employers and carriers over the terms of side agreements to large deductible policies. When disputes arose, employers were shocked to find out that they would often have to submit to arbitration in Illinois or New York and that the dispute would be resolved by another state’s laws.

The issue came to a head in early 2011 when CDI notified carriers that the documents must be filed for approval before they can be enforced. A year later it took enforcement action against Zurich and the carrier ultimately settled agreeing not to require compliance with the terms of the side agreements and the Department allowing employers to adhere voluntarily to them.

Now we see Applied Underwriters’ again sue California employers in collection disputes in states like Nebraska, even though the Nebraska Supreme Court has ruled that Nebraska is an inconveniencing forum for the dispute because all of the insured’s witnesses are in California.