New York Ruling Adds Transparency in California Workers’ Comp Market

For years, California policyholders have been battling workers’ compensation carriers over whether carriers can enforce arbitration clauses buried in unfiled side agreements and force coverage disputes to be resolved in other states such as Illinois, New York and Delaware.

These side agreements, typically sent to insureds well after policies have taken effect, allow carriers to introduce terms and conditions with little or no resistance. As a result, policyholders and their witnesses are required to travel to other states where California workers’ comp policies are subject to local laws and regulations, often making litigation prohibitively expensive.

However, the New York Appellate Court has changed the rules of the game. In a recent 5-2 decision, the court ruled these agreements — used by many large national carriers — are unenforceable.

In Monarch Consulting Inc. v. National Union Fire Insurance Co., a subsidiary of AIG, the New York court denied AIG’s petition to force Monarch to settle its dispute through arbitration in the carrier’s home state of New York, as stated in its side agreement.

Attempts by AIG and its subsidiaries to compel California businesses into arbitration in New York and under New York law, will not be allowed. And, for other national carriers, all similar side agreements with foreign jurisdiction may also not be enforceable.

Beyond mandatory arbitration, the decision also potentially renders financial terms in these side agreements unenforceable — terms covering add-on fees for medical bill review, nurse case managers and other cost containment services provided by the carrier as well as collateral requirement conditions and how claims are handled.

The consolidated appeal involved National Union’s workers’ comp agreements with California-based Monarch Consulting, Source One Staffing and Priority Business Services from 2003 to 2010. The ruling upheld a previous finding that the arbitration clause was unenforceable in a case filed by Source One and reversed two lower court rulings that would have enforced the arbitration provisions against Monarch and Priority Business.

In its decision, the New York court noted an unpublished California appellate ruling in Ceradyne v. Argonaut and a published California ruling in DMS Services, Inc. v. Superior Court (Zurich Services Corp.) It also noted the 2013 settlement between the California Department of Insurance and Zurich over out-of-state arbitration clauses, where Zurich agreed not to enforce contractual provisions requiring policyholders to arbitrate disputes in Illinois using New York law. The carrier said it would allow existing policyholders to arbitrate in California using California law and agreed to file all side agreements with the CDI and Workers’ Compensation Insurance Rating Bureau in the future.

What Happens in California, Stays in California

The New York Appellate Court ruling has a profound impact on the California employer community and the workers’ comp marketplace as a whole. First, it levels the playing field for California businesses, which are no longer required to litigate disputes under another state’s statutes and regulations.

Second, it eliminates the need for policyholders and carriers to dispute terms in agreements that, as a matter of law, are now unenforceable. This will most likely reduce the volume of litigation with respect to this issue.

It also helps restore regulatory and enforcement powers to California. The appellate court cited the McCarran-Ferguson Act, which gives states the authority to regulate insurance within their borders. Compelling other state courts to interpret California law or using other state’s laws for matters that take place in California would only multiply the number of inconsistent court decisions and create conflicts in the application of workers’ comp policies.

Lastly, the decision makes New York law consistent with California law by upholding CDI’s mandate that side agreements be filed with the appropriate regulatory agencies at the time policies are issued. In fact, the decision correctly concluded that enforcing agreements that were not filed with the CDI and WCIRB would “violate the strong policy under California law of regulating insurance carriers and their agreements with their insureds.”

California Insurance Commissioner Dave Jones, who has fought national carriers on this issue for years, applauded the New York appellate decision, stating: “Unfiled side agreements improperly alter the terms of a policy, and this decision reaffirms workers’ compensation insurers’ duty to comply with this essential filing requirement.” Jones emphasized the importance of CDI’s oversight in ensuring policy provisions are “fair and legally sound.”

From a public policy standpoint, it could not be clearer: national carriers that want to do business in California must file their policies and any modification to those policies with the appropriate governmental authorities if they are to be enforceable. This not only increases transparency in the marketplace, but more importantly, protects everyone involved, including carriers who know the terms in their workers’ comp side agreements have been vetted and approved by state regulators.