Motion,Ex Parte: WARWICK AMUSEMENTS CORPORATION, ET AL VS. APPLIED UNDERWRITERS, INC., A NEBRASKA CORPORATION ET AL

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                                SPENCER Y. KOOK (SBN 205304)
skook@mail.hinshawlaw.com
HINSHAW & CULBERTSON LLP

633 West Sth Street, 47th Floor ELECTRONICALLY
Los Angeles, CA 90071-2043 FILED
Telephone: 213-680-2800 Superior Court of California,
Facsimile: 213-614-7399 Coun ft San arene
06/30/2016
TRAVIS WALL (SBN 191662) Clerk oe ule Court
twall@mail.hinshawlaw.com Deputy Clerk

PETER J. FELSENFELD (SBN 260433)
pfelsenfeld@mail.hinshawlaw.com
HINSHAW & CULBERTSON LLP
One California Street, 18th Floor

San Francisco, CA 94111

Telephone: 415-362-6000
Facsimile: 415-834-9070

Attorneys for Defendants APPLIED UNDERWRITERS, INC., APPLIED UNDERWRITERS

CAPTIVE RISK ASSURANCE COMPANY, INC., CALIFORNIA INSURANCE COMPANY,

CONTINENTAL INDEMNITY COMPANY and APPLIED RISK SERVICES, INC.
SUPERIOR COURT OF THE STATE OF CALIFORNIA.

FOR THE COUNTY OF SAN FRANCISCO.
UNLIMITED JURISDICTION

WARWICK AMUSEMENTS CORPORATION, a
Delaware corporation, WARWICK CALIFORNIA
CORPORATION, a California corporation,
WARWICK DENVER CORPORATION, a
Delaware corporation, WSF BEVERAGE
CORPORATION, a California corporation,
WARWICK MELROSE DALLAS
CORPORATION, a Delaware corporation,

Case No. CGC-16-551614

DEFENDANTS APPLIED
UNDERWRITERS, INC., APPLIED
UNDERWRITERS CAPTIVE RISK
ASSURANCE COMPANY, INC.,

CALIFORNIA INSURANCE
SILVER AUTUMN HOTEL (N.Y.) COMPANY, CONTINENTAL
CORPORATION, LTD., a Delaware corporation, INDEMNITY COMPANY AND

APPLIED RISK SERVICES, INC.’S
REQUEST FOR JUDICIAL NOT
IN SUPPORT OF MOTION TO STAY
BASED ON INCONVENIENT
FORUM

Plaintiffs,

VS.

APPLIED UNDERWRITERS, INC., a Nebraska
corporation, APPLIED UNDERWRITERS
CAPTIVE RISK ASSURANCE COMPANY,
INC., an Iowa corporation, CALIFORNIA
INSURANCE COMPANY, a California
corporation, CONTINENTAL INDEMNITY
COMPANY, an Iowa corporation, APPLIED RISK
SERVICES, INC., a New York corporation, and
DOES | through 50, inclusive,

Defendants.

First Amended Complaint Filed:
May 19, 2016

Date: July 27, 2016
Time: 9:30 a.m.
Department: 302
Reservation No. 06270727-18

Eee

DEFENDANTS' RJN ISO MOTION TO STAY BASED ON INCONVENIENT FORUM
Case No. CGC-16-551614REQUEST FOR JUDICIAL NOTICE
Pursuant to Evidence Code sections 450 and 452(a), (d), Defendant Applied Underwriters

Captive Risk Assurance Company, Inc. (“Defendant”) requests that the Court take judicial notice of
the following matters. A court may take judicial notice of the “statutory law of any state of the
United States.” Evid. Code § 452(a); Ross v. Creel Printing & Publishing Co., 100 Cal. App. 4th
736, 792 (2002) (court properly took judicial notice of Nevada Revised Statutes). In addition, a
court may take judicial notice of records of “any court of record of the United States.” Evid. Code §
452(d)(2); People v. Harbolt, 61 Cal. App. 4th 123, 126-7 (1997) (court properly took judicial notice
of sister court opinion).

1. Nebraska Revised Statutes §§ 25-201-914 (pre-trial procedure); §§ 25-1103-1315.03
(trial procedure) and §§ 25-1912-1937 (appellate procedure).
A. Legislative History Regarding Insurance Code § 11658.5

2. Attached as Exhibit A is a true and correct copy of the chaptered version of Senate
Bill No. 684, which was approved by the Governor on October 7, 2011 and filed with the Secretary
of State on October 7, 2011. In Section 1, subsection (g), the California legislature declares that
“California has a compelling state interest in ensuring that workers’ compensation policies and
endorsements are enforced under California law and not subject to interpretation by other
jurisdictions, and that any dispute resolution proceedings are conducted within its borders.” A copy
of this document may be located at the following website:

http://leginfo.legislature.ca. gov/faces/billTextClient.xhtml?bill_ id=201120120SB684.

3. Attached as Exhibit B is a true and correct copy of the chaptered version of Senate
Bill No. 684 redlined in comparison with the originally introduced, February 18, 2011, version of
Senate Bill No. 684. A copy of this document may be located at the following website:

http://leginfo.legislature.ca. gov/faces/bill VersionsCompareClient.xhtml?bill_id=201120120SB684&

cversion=20110SB68499INT.

4. Attached as Exhibit C is a true and correct copy of the Senate Judiciary Committee
report for Senate Bill No. 684 titled Workers’ Compensation Insurance: Dispute Resolution:
Arbitration Clauses for the hearing dated April 5, 2011. A copy of this document may be located at

2

DEFENDANTS' RJN ISO MOTION TO STAY BASED ON INCONVENIENT FORUM
Case No. CGC-16-551614the following website:

http://leginfo legislature.ca.gov/faces/bi

1AnalysisClient.xhtml?bill_id=201120120SB684#.

5. Attached as Exhibit D is

a true and correct copy of the May 3, 2011 Senate Floor

Analysis for Senate Bill No. 684. A copy of this document may be located at the following website:

http://leginfo.legislature.ca.gov/faces/bi

1AnalysisClient.xhtml?bill_id=201120120SB684#.

6. Attached as Exhibit E is
Insurance Analysis regarding Senate Bi
this document may be located at the fol

http://leginfo.legislature.ca.gov/faces/bi

a true and correct copy of the Assembly Committee on
1 No. 684 for the hearing dated June 22, 2011. A copy of
lowing website:

JAnalysisClient.xhtml?bill_ id=201120120SB684#.

7. Attached as Exhibit F is
Insurance Analysis regarding Senate Bi

this document may be located at the fol!

a true and correct copy of the Assembly Committee on
1 No. 684 for the hearing dated June 27, 2011. A copy of
lowing website:

1AnalysisClient.xhtml?bill_id=201120120SB684#.

http://leginfo.legislature.ca.gov/faces/bi
8. Attached as Exhibit G is

Insurance Analysis regarding Senate Bi

a true and correct copy of the Assembly Committee on

1 No. 684 for the hearing dated July 6, 2011. A copy of this

document may be located at the following website:

http://leginfo.legislature.ca. gov/faces/bi

1AnalysisClient.xhtml?bill_ id=201120120SB684#.

9. Attached as Exhibit H is

a true and correct copy of the Assembly Committee on

Insurance Analysis regarding Senate Bi

I No. 684 for the hearing dated July 7, 2011. A copy of this

document may be located at the following website:

http://leginfo legislature.ca.gov/faces/bil

NAnalysisClient.xhtml?bill_id=201120120SB684#.

10.

Attached as Exhibit I is a true and correct copy of the August 12, 2011 Assembly

Floor Analysis regarding Senate Bill No. 684. A copy of this document may be located at the

following website:

http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201120120SB684#.

11. Attached as Exhibit J is

a true and correct copy of the August 24, 2011 Assembly

Floor Analysis regarding Senate Bill No. 684. A copy of this document may be located at the

following website:

3

DEFENDANTS' RJN ISO MOTION TO STAY BASED ON INCONVENIENT FORUM

Case No. CGC-16-551614http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201120120SB684#.

12. Attached as Exhibit K is a true and correct copy of the August 31, 2011 Senate Floor
Analysis for Senate Bill No. 684. A copy of this document may be located at the following website:

http://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_ id=201120120SB684#.

B. Legislative History Regarding Insurance Code § 11737

13. Attached as Exhibit L is a true and correct copy of California Insurance Code Section
11737.

14. Attached as Exhibit M is a true and correct copy of excerpts that include Insurance
Code section 11737 in the chaptered version of Senate Bill No. 30 (07/28/1993), which added
several sections to the Insurance Code relating to workers’ compensation, including sections 11735
and 11737, but contains no reference to the creation of a private right of action.

15. Attached as Exhibit N is a true and correct copy of excerpts that include Insurance
Code section 11737 in the chaptered version of Assembly Bill No. 877 (09/29/97), which contains

no references whatsoever to the creation of a private right of action.

16. Attached as Exhibit O is a true and correct copy of excerpts that include Insurance
Code section 11737 in the introduced (but not finally adopted) version of Assembly Bill No. 1985
(02/14/02), in which the California Legislature proposed, among other changes, to add the following
subdivision (d): “If the commissioner disapproves rates or any supplementary rate information, the
commissioner shall immediately serve notice on the insurer of the disapproval. Upon the request of
an insurer whose rates have been disapproved, the commissioner shall hold a hearing within 60 days
of the notice of disapproval.”

17. Attached as Exhibit P is a true and correct copy of excerpts that include Insurance
Code section 11737 in the chaptered version of Assembly Bill No 1985 (09/26/02), in which the
California Legislature proposed, among other changes, to add the following subdivision (d): “If the
commissioner intends to disapprove rates pursuant to subdivision (a) or (b), the commissioner shall
serve notice on the insurer of the intent to disapprove and shall schedule a hearing to commence
within 60 days of the date of the notice.” The summary notes by the California Legislature of the
impact of this bill contains no reference to the creation of a private right of action.

4

DEFENDANTS' RJN ISO MOTION TO STAY BASED ON INCONVENIENT FORUM
Case No. CGC-16-551614Dated: June 30, 2016

By:

HINSHAW & CULBERTSON LLP

SPENCER Y. KOOK

TRAVIS WALL

PETER J. FELSENFELD

Attorneys for Defendants APPLIED
UNDERWRITERS, INC., APPLIED
UNDERWRITERS CAPTIVE RISK
ASSURANCE COMPANY, INC.,
CALIFORNIA INSURANCE COMPANY,
CONTINENTAL INDEMNITY COMPANY
and APPLIED RISK SERVICES, INC.

5

DEFENDANTS' RJN ISO MOTION TO STAY BASED ON INCONVENIENT FORUM
Case No. CGC-16-551614EXHIBIT “A”Bill Text - SB-684 Workers’ compensation insurance: dispute resolution: arbitration clauses.

http://leginfo.legislature.ca.gov/faces/billNavClient.xhtm|?bill_i

OP VUE,
LEGISLATIVE INFORMATION

SB-684 Workers’ compensation insurance: dispute resolution: arbitration clauses. (2011-2012)

Senate Bill No. 684

CHAPTER 566

An act to add Section 11658.5 to the Insurance Code, relating to workers’ compensation insurance.

{ Approved by Governor October 07, 2011. Filed with Secretary of State
October 07, 2011. ]

LEGISLATIVE COUNSEL'S DIGEST

SB 684, Corbett. Workers’ compensation insurance: dispute resolution: arbitration clauses.

Existing law requires that a workers’ compensation insurance policy or endorsement not be issued by an
insurer unless the insurer files a copy of the form or endorsement with a rating organization and 30 days have
expired from the date the form or endorsement is received by the Insurance Commissioner from the rating
organization without notice from the commissioner, unless the commissioner gives written approval of the form
or the endorsement prior to that time.

This bill would require 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, as defined, 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. The bill would
require that the employer sign the disclosure, as evidence of receipt, when the employer accepts the offer of
coverage. The bill would authorize the dispute resolution or arbitration agreement to be negotiated before any
dispute arises, These provisions would apply to workers’ compensation policies issued or renewed on or after
July 1, 2012.

Vote: majority Appropriation: no Fiscal Committee: no Local Program: no
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. The Legislature finds and declares all of the following:

(a) All California employers subject to the Workers’ Compensation Law are required by law to obtain insurance
for their employees.

(b) Workers’ compensation policies and endorsements are highly regulated and designed primarily to protect
the worker and ensure prompt payment of claims.

(c) The Legislature has authorized the Insurance Commissioner (commissioner) to oversee the form and
substance of all workers’ compensation insurance policies and endorsements.

(d) Insurance companies providing workers’ compensation policies and endorsements are required by law to
file the policies and endorsements with the rating organization for transfer to the commissioner.

(e) Disputes between employers and insurance companies regarding workers’ compensation plans can arise,

=201120120SB684

26/21/2016

Bill Text - SB-684 Workers’ compensation insurance: dispute resolution: arbitration clauses.

and resolution of these disputes through litigation can be expensive, uncertain, and time consuming.

(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.

(9) California has a compelling state interest in ensuring that workers’ compensation policies and
endorsements are enforced under California law and not subject to interpretation by other jurisdictions, and
that any dispute resolution proceedings are conducted within its borders.

(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 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 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.

http://leginfo.legislature.ca.gov/faces/billNavClient.xhtm|?bill_i

=201120120SB684

22EXHIBIT “B”Compare Versions

OF RUE,
LEGISLATIVE INFORMATION

SB-684 Workers’ compensation insurance: dispute resolution: arbitration clauses. (2011-2012)

Current Version: 10/07/11 - Chaptered Compared to Version: | 02/18/11 - introduced ¥| | Compare Versions | @

SECTION 1. The Legislature finds and declares all of the following:

(a) All California employers subject to the Workers’ Compensation Law are required by law to obtain insurance
for their employees.

(b) Workers’ compensation policies and endorsements are highly regulated and designed primarily to protect
the worker and ensure prompt payment of claims.

(c) The Legislature has authorized the Insurance Commissioner (commissioner) to oversee the form and
substance of all workers’ compensation insurance policies and endorsements.

(d) Insurance companies providing workers’ compensation policies and endorsements are required by law to
file the policies and endorsements with the rating organization for transfer to the commissioner.

(e) Disputes between employers and insurance companies regarding workers’ compensation plans can arise,
and resolution of these disputes through litigation can be expensive, uncertain, and time consuming.

(f) In an effort to save time and costs, and because of the uncertainty of litigation, workers’ compensation
carriers and employers use-arbitration- may freely and voluntarily use types of dispute resolution, including
arbitration, to resolve disputes.

(g) California has a compelling state interest in ensuring that workers’ compensation policies and
endorsements are enforced under California law and not subject to interpretation by other jurisdictions, and
that any dispute resolution proceedings are conducted within its borders.

(h) Employers and workers’ compensation carriers should be freely able to negotiate and voluntarily agree to
the terms of arbitration- 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) Any (1) -2¢ tether th: teh ‘ iving-2 particular dispute-bet
\ hi pk eb 1 d kers! i
ployer; Prineipal-pl 7 Ps ig
! disputes; including» timitedte; bitrat ' '@ 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 shat fe to-alt-of the foit ig: 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.

4) Tt shall be part efthe fi 4 £-Fled-with-the-rati izatt ant-te-Section +1658_and
sors Pi 7
hall-b ided-to-th ts by-weith: st te-that-offers-t idk
P P Ps iy ¥ 4 Pi

coverage:

2}-4t-shal-cont 4 4 that-identifi if Jaw-as-thetaw-te-b dt J

p ¥

dispute-that-arises-in-California:

(2) BReshall-eent ‘ P hat-ident Liforri he-prop fe y
pt ding-regarding dispute—that- tif + After compliance with paragraph (1), a dispute

http://leginfo.legislature.ca.gov/faces/bill Versions CompareClient.xhtm! ?bill_id=201120120SB684&cversion=20110SB68499INT

26/20/2016

Compare Versions

resolution or arbitration agreement may be negotiated by the insurer and the employer before any dispute
arises.

{4} (b) Notwithstanding_paragraphs 6-43};-prier-to-th ption-of the-policy,-emph d-workers!
fer free! iat ' teat 4
P 7 yneg a7-exp
A £4 ther than-Califernia: 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 this-section-shait-render-any-dispute-reselution
provision vei_and-tnenferceabte: subdivision (a) shall result in a default to California as the choice of law and
forum for resolution of disputes arising in 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.

http://leginfo.legislature.ca.gov/faces/bill Versions CompareClient.xhtm! ?bill_id=201120120SB684&cversion=20110SB68499INT

22EXHIBIT “C”SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session

SB 684 (Corbett)

As Amended March 25, 2011
Hearing Date: April 5, 2011
Fiscal: Yes

Urgency: No

TW

SUBJECT

Workers’ Compensation Insurance:
Dispute Resolution: Arbitration Clauses

DESCRIPTION

This bill, sponsored by the California Department of Insurance, would regulate
agreements concerning dispute resolution, other than settlement agreements resolving
particular disputes, made between an employer, whose principal place of business is in
California, and a workers’ compensation insurer by requiring choice of law and forum
selection provisions providing for California law. This bill would allow employers and
workers’ compensation insurers to negotiate and expressly agree to another state's
choice of forum selection provisions prior to the inception of the insurance policy. In
the event that a dispute must be resolved by a California state agency, this bill would
exempt from enforcement any alternative dispute resolution between the workers’
compensation insurer and employer.

This bill would require dispute resolution agreements to be provided in writing by the

workers’ compensation insurer to the emp
insurance quote. This bill would require d
to the rating organizationas part of the po

oyer contemporaneously with any written
ispute resolution agreements to be submitted
icy form or endorsement.

BACKGROUND

California employers are required to provi
employees. These benefits are used by emy
the-job injuries or illnesses. Although worl
the state does not pay employers for this p:

de workers’ compensation benefits to their
loyees for medical services related to on-
ers’ compensation is required by the state,
rogram; rather, employers typically maintain

insurance policies to cover workers’ compensation benefits. Workers’ compensation
insurance policies are highly regulated, and each policy must be submitted to the

California Insurance Commissioner for ap

proval before the policy can be issued.

Subsequent agreements regarding the insurance policy, referred to as insurance

(more)SB 684 (Corbett)
Page 2 of 7

program agreements (IPAs), may be reached between the insurer and employer; these
subsequent agreements routinely are not submitted to the Insurance Commissioner for
approval.

AB 2490 (Jones, 2010) would have regulated dispute resolution choice of law and forum
selection provisions between an employer whose principal place of business is in
California and worker’s compensation insurers in the same manner as provided in SB
684. AB 2490 passed both houses but was vetoed by Governor Schwarzenegger who
asserted that no evidence existed that demonstrated a problem with current choice of
law and forum selection provisions negotiated between employers and workers’
compensation insurers. (See Comment 6.) This bill is substantially similar to AB 2490.

This bill would regulate dispute resolution agreements between an employer, whose
principal place of business is in California, and workers’ compensation insurers to
include choice of law and forum selection provisions providing for California law, but
would allow the parties to freely negotiate for another state’s choice of forum
provisions prior to the inception of the insurance policy.

CHANGES TO EXISTING LAW

Existing law requires employers to maintain workers’ compensation insurance. (Lab.
Code Sec. 3700.)

Existing law requires that a workers’ compensation insurance policy or endorsement
proposed to be issued in California must be filed with the insurance rating
organization; the policy cannot be issued until either 30 days from receipt of the policy
or endorsement by the ratings organization and no notice has been issued by the
insurance commissioner or upon written approval of the form or endorsement issued
by the Insurance Commissioner. (Ins. Code Sec. 11658.)

Existing law provides that a limited workers’ compensation policy may be issued
insuring either in the whole or any part of the liability of any employer for
compensation, as long as the policy is previously approved as to substance and form by
the Insurance Commissioner; subject to these restrictions, the policy can restrict or limit
the insurance in any manner. (Ins. Code Sec. 11657.)

Existing law provides that a limited insurance policy cannot otherwise be limited unless
an endorsement is attached in a form prescribed by the Insurance Commissioner or in
accordance with rules adopted by the Insurance Commissioner. (Ins. Code Sec. 11659.)

This bill would require, as between an employer whose principal place of business is in
California and a worker's compensation insurer, any agreement concerning dispute
resolution, other than settlement agreements, to conform to the following:SB 684 (Corbett)
Page 3 of 7

1. be filed with the insurance rating organization and subject to approval by the
Insurance Commissioner and be disclosed in writing to the employer at the same
time as the written insurance quote;

2. contain a choice of law provision that identifies California as the law to be used
to resolve any disputes that arise in California; and

3. contain a forum selection clause identifying California as the proper venue for
any proceeding regarding a dispute that arises in California.

This bill would allow the employer and workers’ compensation insurance company to
negotiate for another state’s choice of forum clauses prior to the inception of the policy.

This bill would prohibit an alternative dispute resolution agreement regarding the
resolution of any dispute for which authority to resolve the dispute has been granted
to a California state agency.

This bill would declare dispute resolution agreements not in conformity with the
provisions of this bill to be void and unenforceable.

COMMENT
1. Stated need for the bill
The author writes:

Despite the requirement that workers’ compensation policies be filed with the
Insurance Commissioner, some workers’ compensation carriers issue unapproved
side agreements, separate from their policies which require arbitration of disputes
[to] occur ina state outside of California. As a result, the laws of another state apply
in the arbitration proceedings involving a California employer whose employee was
injured in a work-related incident in California.

This can be a major 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.

The California Department of Insurance, the sponsor of this bill, writes:

This bill should save businesses precious dollars as they will no longer be forced out
of state to arbitrate without their foreknowledge. Requiring insurers to inform
businesses and receive their consent to arbitrate out of state should not result in any
additional costs.SB 684 (Corbett)
Page 4 of 7

This bill is designed to ensure that businesses are protected as we face an uncertain
economy. Insurance practices that do not conform to state law must be discouraged.
This bill aims to address these issues.

2. California’s interest in workers’ compensation insurance contracts

This bill would restrict dispute resolution agreements between an employer and a
workers’ compensation insurer by requiring IPAs to be filed with the Insurance
Commissioner and providing for California forum selection and choice-of-law
provisions. The author cites to the case of Ceradyne, Inc. v. Argonaut Insurance Company
(2009) 74 Cal.Comp.Cas 702, which demonstrates the need for this bill. In Ceradyne, the
plaintiff/employer was a Delaware corporation doing business all over the world. The
plaintiff entered into four large deductible policies that covered workers’ compensation
claims made against it throughout the United States. (Id. at pg. 704.) Cases such as
Ceradyne illustrate that out-of-state insurers and out-of-state businesses enter into
contracts which directly concern California employees. Although both the employer
and insurer were out-of-state companies, the pivotal issue is that the original claims
giving rise to the dispute began in California.

The Legislature has, at times, enacted laws that restricted choice of law and forum
selection between contracting parties in order to protectits residents. (See AB 2781
(Leno, Ch. 797, Stats. 2006) child support collection choice of law agreements; SB 586
(Sher, Ch. 194, Stats. 1997) Uniform Interstate Family Support Act choice of law.) In
these cases, a sufficient nexus was drawn between California’s desire to protect its
citizens and the nature of the contract between the parties.

Similarly, California has a legitimate interest in protecting its citizens from
unconscionable contracts that would overly burden the resident by litigating a claim
arising in California but arbitrated in a different state. The court in America Online, Inc.
v. Superior Court (2001) 90 Cal.App.4" 1 addressed forum selection clauses and held that
“Tolur law favors forum selection agreements only so long as they are procured freely
and voluntarily, with the place chosen having some logical nexus to one of the parties
or the dispute, and so long as California consumers will not find their substantial legal
rights significantly impaired by their enforcement.” (Id. at pg. 21.)

The IPAs, the author argues, are not procured freely and voluntarily. In most instances,
employers are presented with the IPA from the insurer after the insurance policy has
been issued. The IPA contains material provisions of the insurance contract, in addition
to arbitration clauses, conflict of law provisions, and forum selection clauses. By the
time the employer receives the IPA, the employer has already paid money toward the
insurance policy. Further, as in Ceradyne, the IPA also may contain language suchas
“t]he terms of this policy may not be changed or waived except by endorsement issued
by us to part of this policy.” (Ceradyne, Inc. v. Argonaut Ins. Co., 74 Cal.Comp.Cas at pg.
705.) The author argues that employers entering into these side agreements do so based
on the belief that they are unable to negotiate the terms of these agreements since theSB 684 (Corbett)
Page 5 of 7

policy has already been issued and the side agreements indicate that they are non-
negotiable.

California has a substantial nexus to the dispute resolution agreements between an
employer and insurer providing workers’ compensation insurance to California
employees. First, from the experiences described by employers, the IPAs do not appear
to be procured freely and voluntarily. Second, since the initial worker's claim instigates
the subsequent dispute between the employer and insurer, using California law in these
disputes is logical. Lastly, because California requires its employers to provide
workers’ compensation to employees injured on the job, the initial policy is written by
the insurer because of state requirements and regulations.

3. Freedom of parties to contract

This bill would require a workers’ compensation insurance agreement issued for the
benefit of California employees to contain California choice of law and forum selection
provisions. The author argues that restricting the contract provisions between the
insurers and employers will protect California businesses, which are not in a position to
negotiate the choice of law and venue issues of these agreements. Further, arbitration
clauses in IPAs have been held invalid by California courts because they have not been
approved by the Insurance Commissioner. The author points to the case of Ceradyne, a
Delaware corporation doing business in California, which entered into an IPA
agreement containing an arbitration clause specifying Connecticut jurisdiction with a
determination on the final arbitration award to be decided by New York courts. (Id. at
pgs. 704-706.) Ceradyne, Inc. executed the IPA nine months after the initial policy,
submitted to and approved by the California Insurance Commissioner, was issued. (Id.
at pg. 705.) The IPA specified that it was retroactive to the effective date of the policy,
March 1, 2003. (Id.) The court held that the arbitration clause was void because the IPA
itself, an agreement containing material terms related to the insurance policy, had not
been approved by the Insurance Commissioner as required by California statute. (Id. at
p. 715.) This bill would codify this ruling by requiring the IPA to be filed with the
Insurance Commissioner, as is already required of the insurance policy under Insurance
Code Section 11658. Further, in order to provide for the freedom of parties to contract,
this bill would allow the parties to negotiate the terms of choice of forum selection
clauses, as long as the terms are agreed upon prior to the inception of the policy.

4, Federal Arbitration Act (FAA)

This bill would regulate arbitration agreements between contracting parties. The FAA,
9US.C. Sec. 2, provides that an arbitration agreement shall be valid, irrevocable, and
enforceable, except on such grounds as exist at law or in equity for the revocation of any
contract. The restrictions on arbitration agreements contained in this bill raise the
concern that these restrictions may be preempted by federal law. In Allied-Bruce
Terminix Companies, Inc., et al. v. Dobson (1995) 513 U.S. 265, the United States Supreme
Court discussed the issue of federal preemption over state regulation of arbitrationSB 684 (Corbett)
Page 6 of 7

contracts. The court stated that Section 2 of the FAA “gives States a method for
protecting consumers against unfair pressure to agree to a contract with an unwanted
arbitration provision. States may regulate contracts, including arbitration clauses,
under general contract law principles and they may invalidate an arbitration clause
‘upon such grounds as exist at law or in equity for the revocation of any contract.’ 9
U.S.C. [Sec.] 2.... What States may not do is decide that a contract is fair enough to
enforce all its basic terms (price, service, credit), but not fair enough to enforce its
arbitration clause. The Act makes any such state policy unlawful, for that kind of policy
would place arbitration clauses onan unequal ‘footing,’ directly contrary to the Act's
language and Congress’ intent.” (Id. at pg. 281.)

The sponsor argues that this bill would not contravene the court’s holding in Allied-
Bruce. Indeed, this bill would regulate arbitration agreements, as may be contained in
the IPA, in the same manner as existing law currently regulates the entire insurance
contract. Under existing law, the entire insurance policy must be submitted to the
Insurance Commissioner and is subject to approval. (Ins. Code Sec. 11658.) This bill
would clarify existing law that the IPA, which contains material terms relating to the
insurance policy, would have to be submitted to the Insurance Commissioner and
would be subject to approval. Accordingly, there isno FAA violation and arguably no
preemption problem. Further, California has established a public interest in providing
comprehensive regulation of workers’ compensation insurance. This bill would further
California’s interest in protecting consumers against unfair pressure to agree to a
contract with an unwanted arbitration provision.

5. This bill would not apply to out-of-state employers

This bill would apply only to workers’ compensation insurance policies issued to
employers whose principal place of business is in California for the protection of
California employees. The Legislature has recognized that employers who are so
engaged in interstate commerce as to not be subject to the legislative power of the state
would not be properly regulated under California’s Workers’ Compensation Act. (See
Lab. Code Sec, 3203.) The provisions in this bill would not conflict with this statute
since the application of this bill would be limited to disputes arising out of California
employee injury claims made to employers whose principal place of business is in
California.

6. Governor Schwarzenegger’s veto of AB 2490

This bill is substantially similar to AB 2490 (Jones, 2010). In vetoing AB 2490, Governor
Schwarzenegger stated:

This bill is unnecessary because there is no evidence to demonstrate that a problem
exists. In my view, the bill risks reducing the competitive market for workers’
compensation California now enjoys due to our reforms. The broad language in the
bill leaves open the potential for costly regulatory interpretation that will impact the
cost of workers’ compensation insurance. The high deductible contract negotiationsSB 684 (Corbett)
Page 7 of 7

the bill seeks to impact are conducted by sophisticated participants on both sides of
the table that are well versed in all aspects of workers’ compensation and other
insurance products. Therefore, | am not convinced the issue addressed by the bill
will result in keeping workers’ compensation costs down which is the most
significant concern to California employers.

In response, the author points to the Ceradyne case as evidence that a problem exists. In
Ceradyne (see Comments 2 and 3), the court concluded that side agreements with
arbitration clauses were invalid. The author argues that “It isa common industry
practice that these side agreements take place after the policy is issued, leaving the
employer to believe that there is no recourse as he has already entered into a policy
agreement.” Further, since the California Department of Insurance, the sponsor of this
bill, has handled numerous complaints regarding IPAs, the sponsor reports that there is
evidence of problems with IPAs.

With respect to the broad language, the author notes that Governor Schwarzenegger
did not elaborate or indicate which sections of AB 2490 were too broad, and for that
reason it is difficult to address this issue. Furthermore, the author argues that although
the Governor indicated that this bill would result in an increase in costs, there is no
evidence to support that statement. The author states that requiring that California
policies be held under California law, and requiring consent from both parties to move
the arbitration out of state should not result in an increase in costs.

Support: None Known
Opposition: None Known
HISTORY

Source: California Department of Insurance

Related Pending Legislation: None Known

Prior Legislation: See Background and Comment 2.

SREPEXHIBIT “D”SENATE RULES COMMITTEE SB 684
Office of Senate Floor Analyses

1020 N Street, Suite 524

(916) 651-1520 Fax: (916) 327-4478

THIRD READING

Bill No: SB 684
Author: Corbett (D)
Amended: 3/25/11
Vote: 21

SENATE JUDICIARY COMMITTEE: 3-2, 4/5/11
AYES: Evans, Corbett, Leno
NOES: Harman, Blakeslee

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

SUBJECT: Workers’ compensation insurance: dispute resolution:
arbitration clauses

SOURCE: Department of Insurance

DIGEST: This bill (1) regulates agreements concerning dispute
resolution, other than settlement agreements resolving particular disputes,
made between an employer, whose principal place of business is in
California, and a workers” compensation insurer by requiring choice of law
and forum selection provisions providing for California law, (2) allows
employers and workers’ compensation insurers to negotiate and expressly
agree to another state’s choice of forum selection provisions prior to the
inception of the insurance policy, (3) in the event that a dispute must be
resolved by a California state agency, exempts from enforcement any
alternative dispute resolution between the workers’ compensation insurer
and employer, (4) requires dispute resolution agreements to be provided in
writing by the workers’ compensation insurer to the employer
contemporaneously with any written insurance quote, and (5) requires
dispute resolution agreements to be submitted to the rating organization as
part of the policy form or endorsement.

CONTINUEDSB 684
Page 2

ANALYSIS: Existing law requires employers to maintain workers’
compensation insurance. (Labor Code Section 3700)

Existing law requires that a workers’ compensation insurance policy or
endorsement proposed to be issued in California must be filed with the
insurance rating organization; the policy cannot be issued until either 30
days from receipt of the policy or endorsement by the ratings organization
and no notice has been issued by the insurance commissioner or upon
written approval of the form or endorsement issued by the Insurance
Commissioner. (Insurance Code Section 11658)

Existing law provides that a limited workers’ compensation policy may be
issued insuring either in the whole or any part of the liability of any
employer for compensation, as long as the policy is previously approved as
to substance and form by the Insurance Commissioner; subject to these
restrictions, the policy can restrict or limit the insurance in any manner.
(Insurance Code Section 11657)

Existing law provides that a limited insurance policy cannot otherwise be
limited unless an endorsement is attached in a form prescribed by the
Insurance Commissioner or in accordance with rules adopted by the
Insurance Commissioner. (Insurance Code Section 11659)

This bill requires, as between an employer whose principal place of business
is in California and a worker’s compensation insurer, any agreement
concerning dispute resolution, other than settlement agreements, to conform
to the following:

¢ Be filed with the insurance rating organization and subject to approval by
the Insurance Commissioner and be disclosed in writing to the employer
at the same time as the written insurance quote;

e Contain a choice of law provision that identifies California as the law to
be used to resolve any disputes that arise in California; and

e Contain a forum selection clause identifying California as the proper
venue for any proceeding regarding a dispute that arises in California.

CONTINUEDSB 684
Page 3

This bill allows the employer and workers’ compensation insurance
company to negotiate for another state’s choice of forum clauses prior to the
inception of the policy.

This bill prohibits an alternative dispute resolution agreement regarding the
resolution of any dispute for which authority to resolve the dispute has been
granted to a California state agency.

This bill declares dispute resolution agreements not in conformity with the
provisions of this bill to be void and unenforceable.

Prior legislation. This bill is substantially similar to AB 2490 (Jones) which
passed the Senate (23-13) on August 30, 2010, but was vetoed by the
Governor. In his veto message, Governor Schwarzenegger stated:

“This bill is unnecessary because there is no evidence to demonstrate that
a problem exists. In my view, the bill risks reducing the competitive
market for workers’ compensation California now enjoys due to our
reforms. The broad language in the bill leaves open the potential for
costly regulatory interpretation that will impact the cost of workers’
compensation insurance. The high deductible contract negotiations the
bill seeks to impact are conducted by sophisticated participants on both
sides of the table that are well versed in all aspects of workers’
compensation and other insurance products. Therefore, I am not
convinced the issue addressed by the bill will result in keeping workers’
compensation costs down which is the most significant concern to
California employers.”

FISCALEFFECT: Appropriation: No FiscalCom.: Yes Local: No
SUPPORT: (Verified 5/3/11)

Department of Insurance (source)

AO Reed and Company

California Applicant Attorneys Association
Ceradyne, Inc.

Pacific Hospital of Long Beach
Roxborough, Pomerance, Nye and Adreani

CONTINUEDSB 684
Page 4

OPPOSITION: (Verified 5/3/11)

American Insurance Association

Association of California Insurance Companies
California Chamber of Commerce

Civil Justice Association of California

ARGUMENTS INSUPPORT: According to the author’s office,

“Despite the requirement that workers’ compensation policies be filed
with the Insurance Commissioner, some workers’ compensation carriers
issue unapproved side agreements, separate from their policies which
require arbitration of disputes [to] occur in a state outside of California.
As a result, the laws of another state apply in the arbitration proceedings
involving a California employer whose employee was injured in a work-
related incident in California.

“This can be a major 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.”

The Department of Insurance, the bill’s sponsor, writes:

“This bill should save businesses precious dollars as they will no longer
be forced out of state to arbitrate without their foreknowledge. Requiring
insurers to inform businesses and receive their consent to arbitrate out of
state should not result in any additional costs.

“This bill is designed to ensure that businesses are protected as we face
an uncertain economy. Insurance practices that do not conform to state
law must be discouraged. This bill aims to address these issues.”

ARGUMENTS IN OPPOSITION: The California Chamber of
Commerce states:

“As introduced, the bill was identical to the final version of AB 2490
(Jones) from last year, which we believe struck the appropriate balance
between protecting California employers from unfair contract terms and
preserving their right to freely negotiate the terms of their contracts. The

CONTINUEDSB 684
Page 5

current version of SB 684, however, eliminates the right of these parties
to negotiate the choice of law that will govern their contracts, and as
such, we believe it goes too far.

“SB 684 provides a number of protections for California employers that
make this latest amendment unnecessary. First, it requires that
agreements between a California employer and its worker’s
compensation carrier must be filed with the rating organization, such that
the terms will be reviewed for fairness by a third party. Second, any
terms related to arbitration or other means of resolving disputes must be
presented to an employer in writing and contemporaneously with any
written quote, eliminating the scenario where an arbitration provision is
introduced unknowingly to an employer months after it has begun
working with the insurance carrier and has lost much of its bargaining
strength. Third, it establishes a default, wherein the choice of law and
choice of forum that automatically apply will be California’s, unless the
parties freely negotiate and expressly agree otherwise.

“Given these ample protections, it is unclear what additional benefit
employers will receive from the recent amendment eliminating their right
to negotiate a different choice of law provision in exchange for some
other benefit. Instead, it appears to only take away their right to negotiate
a term to a contract that they have been made aware of in writing at the
outset of the negotiations, when they are free to walk away and seek a
better deal.

“The contracts governed by SB 684 do not directly involve the rights of
California employees, and as such, there is no clear public policy basis
for disallowing the contracting parties to negotiate a choice of law
provision. Disputes involving California employees will continue to be
governed by California law, but there are many legitimate reasons a
California employer might agree to a different choice of law besides
California’s. We believe the parties to the contract, and not the
legislature, are in the best position to make such a determination.”

RJG:mw 5/3/11 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
KKK END RREKEXHIBIT “E”SB 684
Page 1

Date of Hearing: June 22, 2011

ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 684 (Corbett) — As Amended: March 25, 2011

SENATE VOTE: 23-13

SUBJECT: Workers' compensation: arbitration clauses

SUMMARY: Requires dispute resolution clauses entered into between an employer and a
workers' compensation insurer to specify that California law applies and the venue is to be in
California. Specifically, this _bill:

1)

2

3)

4)

5)

Provides that any agreement between an employer whose principal place of business is in
California and a workers' compensation insurer concerning dispute resolution, other than a
settlement agreement resolving a particular dispute, including an arbitration clause, shall:

a) Contain a choice of law provision that selects California law as the law to be applied to
any dispute;

b) Contain a forum selection clause that identifies California as the proper venue for any
proceedings arising out of a dispute;

c) Be part of the policy form filing that is required of workers' compensation insurers for
workers' compensation policies; and

d) Be disclosed to the employer in writing atthe time a quote or offer of insurance is made
to the employer.

Provides that, notwithstanding the requirement that the forum for dispute resolution be
California, employers and workers' compensation imsurers may expressly agree, after freely
negotiating, on a forum outside of California.

Specifies that a failure to comply with the above requirements renders the dispute resolution
agreement void and unenforceable.

Provides that, notwithstanding the bills provisions, any dispute for which authority to resolve
has been granted to a California state agency shall not be subject to dispute resolution
between an employer and insurer.

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:2)

3)

4)