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Nicholas P. Roxborough, Esq. (SBN 113540)
Joseph C. Gjonola, Esq. (SBN 241955)
Ryan R. Salsig, Esq. (SBN 250830)
Jaclyn D. Grossman (SBN 234992)
ROXBOROUGH, POMERANCE, NYE & ADREANI, LLP
5820 Canoga Avenue, Suite 250
Woodland Hills, California 91367
Telephone: (818) 992-9999 | Facsimile: (818) 992-9991
Larry J. Lichtenegger, Esq. (SBN 48206)
THE LICHTENEGGER LAW OFFICE
3850 Rio Road, #58
Carmel, California 93923
ELECTRONICALLY
FILED
Superior Court of California,
County of San Francisco
03/10/2017
Clerk of the Court
BY-SANDRA SCHIRO.
Deputy Clerk
Telephone: (831) 626-2801 | Facsimile: (831) 886-1639
Attorneys for Plaintiffs
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SAN FRANCISCO
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;
SILVER AUTUMN HOTEL (N.Y.)
CORPORATION, LTD., a Delaware
corporation,
Plaintiffs,
Vv.
APPLIED UNDERWRITERS, INC., a
Nebraska corporation; APPLIED
UNDERWRITERS CAPTIVE
RISK ASSURANCE COMPANY, INC., an
Towa corporation; CALIFORNIA
INSURANCE COMPANY, a California
corporation; CONTINENTAL INDEMNITY
COMPANY, an Iowa corporation; APPLIED
RISK SERVICES, INC., a New York
corporation; WILLIS OF NEW YORK, INC.,
a New York corporation; and DOES | through
50, inclusive,
Defendants.
Case No. CGC-16-551614
PLAINTIFFS’ MEMORANDUM OF
POINTS AND AUTHORITIES IN
OPPOSITION TO MOTION BY
DEFENDANTS TO STRIKE
Date: March 23, 2017
Time: 9:30 a.m.
Department: 302
Reservation: 00190216-06
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEINTRODUCTION
Defendants Applied Underwriters, Inc., Applied Underwriters Captive Risk Assurance
Company and California Insurance Company’s Motion to Strike addresses one issue involving
seven of plaintiffs’ Causes of Action, claiming they are all based on those code sections within
Division 2, Part 3, Chapter 3, Article 2 of the California Insurance Code dealing with “State Rate
Supervision”, as that Article is so named, claiming that some of the allegations in the complaint
do not support such a breach [Motion, p. 3, Il. 4-8].
The Defendants’ principal contention underlying all of its attacks on these causes of
action is that only the California Insurance Commissioner can disapprove a rate, that an unfiled
rate is not unlawful, and that a rate can only be disapproved prospectively. All of these claims
are based on Division 2, Part 3, Chapter 3, Article 2 of the California Insurance Code dealing
with “State Rate Supervision”. In spite of plaintiffs incessant pre-Motion statements to
defendants that they mis-appreciate the nature of plaintiff's claims, they have filed this Motion
anyway and it should be denied.
Plaintiff's claims are not based on rate supervision, but is based solely on California
Insurance Code § 11658, a section contained within Division 2, Part 3, Chapter 2, Article 2 of
the California Insurance Code dealing with “Policy Provisions”, as that Article is so named. Ins.
Code § 11658, entitled “Commissioner's approval of form or endorsement”, provides in pertinent
part:
“(a) A workers' compensation insurance policy or endorsement shall not be issued by an
insurer to any person in this state unless the insurer files a copy of the form or
endorsement with the rating organization pursuant to subdivision (e) of Section 11750.3
and 30 days have expired from the date the form or endorsement is received by the
commissioner from the rating organization without notice from the commissioner, unless
the commissioner gives written approval of the form or endorsement prior to that time.
(b) If the commissioner notifies the insurer that the filed form or endorsement does not
comply with the requirements of law, specifying the reasons for his or her opinion, it is
unlawjil for the insurer to issue any policy or endorsement in that form.” [Emphasis
added}
As distinct from the Article on Rate Filing which delegates solely to the
Commissioner the right to allow or disallow a rate, Ins. Code § 11658 specifically makes it
unlawful for an insurer to sell a policy for which the form has not been filed and approved.
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MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEoS oD we ID
Further, 10 California Code of Regulations § 2268, issued by the Commissioner, states in
pertinent part that “[n]o collateral agreements modifying the obligation of either the
insured or the insurer shall be made unless attached to and made a part of the policy.” An
“endorsement” is “an amendment or modification of an existing policy that alters or varies
any term or condition of the policy.” (See, Adams v. Explorer Ins, Co., 107 Cal. App. 4th 438,
450-51 (2003);
"Endorsements are modifications to the basic insuring forms in the policy. Endorsements
may alter or vary any term or condition of the policy." (Croskey et al., Cal. Practice
Guide: Insurance Litigation (The Rutter Group 2002) § 3:188, p. 3-50.)
Thus, an endorsement is an amendment to or modification of an existing policy of
insurance. It is not a separate contract of insurance. Standing alone, an endorsement
means nothing. "Endorsements on an insurance policy form a part of the insurance
contract [citation], and the policy of insurance with the endorsements and riders thereon
must be construed together as a whole [citation]." ( Narver v. California State Life Ins.
Co. (1930) 211 Cal. 176, 181 [294 P. 393].) "Conditions stated in the policy as such
apply to the endorsement." ( Ohio Farmers Indem. Co. v. Interinsurance Exchange (1968)
266 Cal. App. 2d 772, 777 [72 Cal. Rptr. 269].)”
In combination, that means that when an insurer intends to sell an insurance program, like
EquityComp, it must attach ALL of the contract documents to the filed policy in order to legally
sell it. When ALL of the contract documents are not filed, § 11658(b) makes the sale of that
insurance program unlawful.
The effect of such unlawfulness is found in the Civil Code, which provides that where a
contract is unlawful, then it is also unenforceable: “A party to a contract may rescind the contract
in the following cases: . . . If the contract is unlawful for causes which do not appear in its terms
or conditions, and the parties are not equally at fault.” Civil Code § 1689(b)(5) (emphasis
added); see also Civil Code § 1598 (“Where a contract has but a single object, and such object is
unlawful, whether in whole or in part, ... the entire contract is void.”), See also, Lewis v. Epic
‘Systems Corporation (Tt Cir. May 26, 2016) 823 F.3d 1147 [*To immunize an arbitration
agreement from judicial challenge on a traditional ground such as illegality would be to elevate it
over other forms of contract — a situation inconsistent with the [FAA’s] saving clause” (applying
the same principle to fraud in the inducement)”
it
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MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE.SO em I HH B®
Such illegality makes the unapproved policy “void and unenforceable” under existing
statutory and case law. Because it is void and unenforceable, courts are forbidden to enforce
unfiled and unapproved policies, as well as endorsements and collateral agreements that have not
been filed and approved, even when private litigants are involved in issues surrounding its
enforcement. Consequently, Defendants’ arguments here are misplaced in their entirety and are
disingenuous.
A. The Difference Between Form Filing and Rate Filing
As distinguished from form filing, everything that relates to how rates are calculated is a
rate filing under Ins. Code § 11735, subject to the review and the dispute process in Ins. Code §
11737. Ins, Code § 11735(a) provides:
“Every insurer shall file with the commissioner all rates and supplementary rate
information that are to be used in this state. The rates and supplementary rate information
shall be filed not later than 30 days prior to the effective date.”
The Insurance Code then goes on to define what it means by “rates” in the context of the
rate-filing requirement:
“Rate” means the cost of insurance per exposure base unit, prior to any application of
individual risk variations based on loss or expenses considerations and does not include
minimum premiums. [Insurance Code Sec. 11730(g)]
“Pure premium rate” means that portion of the rate which represents the loss cost per unit
of exposure, including loss adjustment expense. [Insurance Code Sec. 11737(f)]
Attached hereto as RJN; Exhibit A is the California Department of Insurance “Worker’s
Compensation Rate, Plan and Form Filing Instructions”. As can be seen, rates and rating plans
are filed in different places and with different requirements. Rate filings lay out the information
that must be provided in developing rates for insurers. The application of rates and rating plans
through the underwriting process and mandatory application of an experience modification
produces the premium charged to the insured. These rates, as defined by Insurance Code §
11730(g), supra, must be approved and are subject to regulation by the Commissioner under Ins.
Code § 11730, et. seq.
By contrast, everything that is evidence of insurance coverage is in a form filed under
Ins, Code § 11658. The Department regulations define what is encompassed within the filing
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MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKErequirements of §11658, which includes endorsements and ancillary agreements. See, 10
California Code of Regulations § 2268 [“[n]o collateral agreements modifying the obligation of
either the insured or the insurer shall be made unless attached to and made a part of the policy.”].
Attached as RIN; Exhibit B is the WCIRB Bulletin describing the types of forms which
need to be filed with the Bureau. These include the various endorsements that dictate the policy
itself, and not the underlying justifications for the rates that are part of a rate filing.
There is a distinct difference between these two statutory schemes, as there are in many of the
Codes involving government agency oversight. Although involving a different statute, Samura v.
Kaiser Foundation Health Plan, Inc. (1993) 17 Cal.App.4th 1284 is on point. In Samura, the
defendants argued, as to defendants here, that the provisions that they were alleged to have violated
merely define the regulatory powers of the DOC. They alleged those violations do not constitute
"unlawful" conduct under the UCL, they reason, because the judicial enforcement of those
regulations would improperly usurp the DOC's regulatory authority.
Samura’s importance here is not the result of the case, but that it distinguishes between a
statute that "defines an unlawful act that may be enjoined as unfair competition under the Business
and Professions Code" (Smnaura, supra, p. 1300) and statutes that merely "pertain to the exercise of
{an agency's] regulatory power" (ibid.) or govern the agency in the exercise of its regulatory powers
(id. at p. 1301). Samura’s illustrations of that distinction demonstrate that the statutes that the
defendants there were alleged to have violated fall into the former rather than the latter category.
Samura identifies the following language from Health and Safety Code section 1360 as a statute
defining an unlawful act: "No plan, solicitor, solicitor firm, or representative shall use or permit the
use of any advertising or solicitation which is untrue or misleading, or any form of evidence of
coverage which is deceptive." (/d. at p. 1300)
As a definition of unlawful conduct, that statutory prohibition is indistinguishable from Ins.
Code § 11658, which prohibit insurers from engaging in certain conduct unless specified conditions
are met.
As well, Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 606, fn. 11, holds that Samura
supports the use of the UCL to enjoion violations of Ins. Code § 1631 [prohibiting the sale of
5
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEBw NH
insurance by anyone not licensed by the DOI to do so].)”
Last, the Commissioner appears to also recognize the this distinction (as well as the right of a
private party to rely on §11658 to invalidate an unfiled collateral agreement). See, Amicus Curiae
Brief filed by the Commissioner in a Second District Court of Appeal for California, Case No.
B235819 [RJN; Exhibit C], reported as DMS Services, LLC v. Superior Court, 205 Cal. App. 4th
1346, 140 Cal. Rptr. 3d 896 (2012)]. While the issue raised in the brief was eventually resolved by a
settlement agreement between the parties, the point is that the Commissioner’ brief leads credence
to this distinction and a private right of action to declare an unfiled collateral agreement
unenforceable.
In their complaint, plaintiffs allege that the defendants did not file with the CDI and the
Bureau the Reinsurance Participation Agreement as an endorsement or collateral agreement to the
policies sold to plaintiff. If those endorsements or collateral agreements were never filed, they could
not have been approved by the CDI. Accordingly, plaintiff has alleged acts and omissions by the
defendants that violated these statutory and regulatory provisions.
We should be able to stop right here in defending against this motion. Applied has raised no
issue that a private person cannot seek to have an illegal contract voided, whether as a sword or a
shield under Ins. Code § 11658.
B. The Right of Private Parties to Raise the Issue of Non-Compliance with § 11658.
Why defendants are attempting to push this into an enforcement action under Ins. Code
§ 11737 is obvious - because it cannot seriously contend that a private right of action to enforce
Ins, Code § 11658 does not exist. That is because it can’t. While there is not a reported case which
specifically deals with this issue,! there are a number of cases which permit such an action
without commenting on this aspect of the issue. See, e.g. Key System Transit Lines v. Pacific
‘in spite of the restraints of Rule 8.1115, Robinson v. SSW, Inc., 209 Cal. App. 4th 588, 596 n.7,
147 Cal. Rptr. 3d 230, 237 (2012) does allow a party to refer to a case, not to provide precedent,
but to “describe the current state of the law with respect to the scope of” a statute. In that regard,
we refer this court to the analysis contained in Bristol Hotels & Resorts v. National Council on
Compensation Ins., 2002 Cal. App. Unpub. LEXIS 3152 (Cal. App. 4th Dist., 2002) [RIN;
Exhibit F] for an analysis of the interplay between Ins. Code §11658 and §11735. See, also,
Ceradyne v. Argonaut Ins. Co., No, G039873, 2009 WL 1526071 LEXIS 4375 (Cal. Ct. App.
June 2, 2009) review denied, California Supreme Court, 2009 Cal. LEXIS 9519 (Cal. Sept. 9,
2009) [RJN; Exhibit G].
6
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE- BON
Employers Ins, Co. (1959) 52 Cal.2d 800; Monarch Consulting, Inc. y. National Union Fire
Insurance Co. (2014) 123 A.D. 3d 51, reversed on other grounds in Monarch Consulting, Inc. v.
National Union Fire Insurance Company of Pittsburgh (NY February 18, 2016 WL 633946]
[RIN; Exhibit D]; and American Zurich Insurance Company, et. al. vy. Country Villa Service
Corp., United States District Court, Central District of California, Case No. 2:14-cv-03779-
RSWL-AS, decided July 9, 2015 [RJN; Exhibit E].
In not one of these contested cases has the contention of the Applied Defendants been
approved. This is because it has always been the rule of law that an illegal contract is void and
unenforceable between the contracting parties. See, Civil Code § 1598 [“Where a contract has
but a single object, and such object is unlawful, whether in whole or in part, or wholly impossible
of performance, or so vaguely expressed as to be wholly unascertainable, the entire contract is
void.” (emphasis added)]; Kremer v, Earl, 91 Cal. 112, 117 (Cal. 1891) [stating that “[i]t is not
necessary that the act itself... declare in express words” that a contract in violation of the act is
“void”, and found that the court itself was bound to deny enforcement of the illegal contract even
when the parties do not raise the issue]; Wread v. Coffey-Murray, Inc. (1941) 42 Cal. App. 2d
783 [a case involving the issuance of stock not authorized by the Corporations Commissioner,
where the court held that a purported agreement in direct violation of the terms of the express
prohibitions contained in a statute is void].
Cc. The Shasta Linen Decision by the Commissioner.
Applied’s contentions regarding the Commissioner’s Decision in Shasta Linen is
irrelevant here. Applied is contesting that Decision on the basis that the Commissioner did not
have the authority to declare the RPA void and unenforceable, just as it is here saying this court
does not have the authority either. This is almost a humorous contention, since if successful,
Applied contends that no one can stop it from selling this apparently illegal product.
In any event, if relevant, Applied’s contentions regarding any judicial deferent to the
Decision is misplaced. Applied’s reliance on Jnterinsurance Exch. of Auto. Club v, Sup. Ct., 148
Cal. App. 4th 1218, 1236 (2007) is flawed. There, the court was dealing with the CDI’s
interpretation of a statute that the CDI had never previously opined on as well as opining on a
7
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEstatute that had no regulation interpreting it. (Id. 1235-1238]. There, the Commissioner went
about giving a judicial interpretation of a statute, basically usurping the role of the courts. The
court there decided that the statute in question was not a statute that the Commissioner had any
special expertise in, and the court decided that it should give no weight to the Commissioner’s
decision and make an independent finding on its own.
Applied ignores the seminal case of Yamaha Corp. of America v. State Bd. of
Equalization (1998) 19 Cal.4in 960. There, the Supreme Court never said that a decision (here a
non-quasi legislative decision) of administrative agencies are to be ignored, but are subject to
some degree of judicial scrutiny. The Yamaha case sets out the parameters of that scrutiny, but
never says that a court cannot take what the administrative agency says under consideration,
applying those factors of judicial scrutiny when doing so.
And then there is the recent case of Asyociation of California Ins. Companies v. Jones
(2017) 2 Cal.5" 376, giving deference to the power of the Commissioner to regulate the
insurance industry.
D. The Merits of the Claim.
It is not the purpose of this Opposition to prove that plaintiff's claim that the RPA is
illegal, void and unenforceable, as that is not the function of a Motion to Strike. Even if it were
necessary in this Opposition to do so, plaintiff incorporates the legal analysis completed in its
previous Opposition to the Motion to Stay filed with this court on in this case on July 28, 2016.
Based on that analysis, it is clear that the rights and obligations of the insured called for
under the RPA are different from the rights and obligations of the insured called for in the CIC
policies, and if anything, it is only the RPA that is determinative of Plaintiffs’ rights and
obligations. Plaintiffs’ claims here are justified and supported by legal authority.
CONCLUSION
The filing of forms, as opposed to rates is an entirely different matter and produces, for
an insured, an entirely different access to a remedy for its violation. Plaintiffs would never had
entered into the agreements had it known the Reinsurance Participation Agreement had not been
properly filed nor approved, something that every California employer would have naturally
8
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEexpected before entering into an agreement with any insurance carrier. The difficulties Plaintiffs
now have with AUCRA could not possibly have occurred had this collateral agreement which
controls the payments by Plaintiffs been properly filed and examined by the CDI to provide the
protections to California business consumers anticipated by the Insurance Code. That protection
would have assured Plaintiffs that what AUCRA was selling was a complete, unambiguous and
legal insurance program.
As noted in American Zurich and other cases, the provisions of 11658 are mandatory and
thus make the policy void. The provisions of § 11737 address what happens if unfiled or
improper rates are applied to coverage provided to a California business, but those rates exist
only as to a form that evidences that coverage, and thus if there is no approved policy, the rates,
whether filed or not, are not relevant. For example, if a carrier decides that it will get the
authority to write United States Longshore and Harbor Workers Act (USL&H) coverage and
makes a rate filing (this is part of a very arcane process involving the Feds) but then decides not
to issue USL&H policies then the rate filing is meaningless. If, conversely, the carrier gets the
authority to write USL&H and files rates, it cannot write a policy until it files the appropriate
endorsements that would bind coverage.
For all the forgoing reasons, this Motion to Strike should be denied.
DATED: March 10, 2017 ROXBORQUGH, POMERANCE, NYE & ADREANI, LLP
fay. Se aac ela
LAS P. Roxon er)
7 1 C, GIONOLA
. SALSIG
TAL YN D. GROSSMAN
and LARRY J. LICHTENEGGER
Attorneys for Plaintiffs
9
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE,oe YN DH PB Bw Ye
°
11
PROOF OF SERVICE
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
I. am employed in the county of Los Angeles, State of California. I am over the age of 18
and not a party to the within action. My business address is 5820 Canoga Avenue, Suite 250,
Woodland Hills, California 91367.
On March 10, 2017, I served the foregoing document described as PLAINTIFFS’
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION BY
DEFENDANTS TO STRIKE on the interested party(ies) in this action by placing true copies
thereof enclosed in sealed envelopes addressed as follows:
See Attached Service List
& BY ELECTRONIC SERVICE: Pursuant to SFSC Local Rule 2.10(Q), California Rule
of Court §2.253(b)(2) and CCP §1010.6, I caused the documents to be served by
electronic transmission via Nationwide Legal Inc., deemed to be served on this day if e-
served by the close of business day for this Court on the party indicated below.
STATE: I declare under penalty of perjury and under the laws of the State of California
that the foregoing is true and correct.
Executed on March 10, 2017, at Woodland Hills, California.
WAL WOU Gy
Lucy Rbdr guey. f
f “-
10
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKETravis Wall
HINSHAW & CULBERTSON LLP
One California Street, 18th Floor
San Francisco, CA 94111
Spencer Y. Kook
HINSHAW & CULBERTSON LLP
633 West 5" Street, 47" Floor
Los Angeles, CA 90071-2043
Jodi S. Cohen.
Jennifer Porter
Keesal, Young & Logan
450 Pacific Avenue
San Francisco, CA 94133
Larry Lichtenegger, Esq.
Attorney at Law
3850 Rio Road, #58
Carmel, CA 93923
SERVICE LIST
Attorneys for Defendants
APPLIED UNDERWRITERS, INC.;
APPLIED UNDERWRITERS CAPTIVE
RISK ASSURANCE COMPANY, INC.;
CALIFORNIA INSURANCE COMPANY;
CONTINENTAL INDEMNITY COMPANY;
APPLIED RISK SERVICES, INC.
Tel: (415) 743-3738 | (213) 680-2800
Fax: (415) 434-2533 | (213) 614-7399
E-Mail: twall@mail.hinshawlaw.com
skook@mail.hinshawlaw.com
Attorneys for Defendant
WILLIS OF NEW YORK, INC.
Tel: (562) 436-2000
Fax: (562) 436-7416
E-Mail: jodi.cohen@kyl.com
Jennifer.Porter@kyl.com
Attorneys for Plaintiffs
Tele: (831) 626-2801
Fax: (831) 886-1639
E-Mail: lawyer@mbay.net
ll
MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE
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Nicholas P. Roxborough, Esq. (SBN 113540) Joseph C. Gjonola, Esq. (SBN 241955) Ryan R. Salsig, Esq. (SBN 250830) Jaclyn D. Grossman (SBN 234992) ROXBOROUGH, POMERANCE, NYE & ADREANI, LLP 5820 Canoga Avenue, Suite 250 Woodland Hills, California 91367 Telephone: (818) 992-9999 | Facsimile: (818) 992-9991 Larry J. Lichtenegger, Esq. (SBN 48206) THE LICHTENEGGER LAW OFFICE 3850 Rio Road, #58 Carmel, California 93923 ELECTRONICALLY FILED Superior Court of California, County of San Francisco 03/10/2017 Clerk of the Court BY-SANDRA SCHIRO. Deputy Clerk Telephone: (831) 626-2801 | Facsimile: (831) 886-1639 Attorneys for Plaintiffs SUPERIOR COURT OF THE STATE OF CALIFORNIA COUNTY OF SAN FRANCISCO 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; SILVER AUTUMN HOTEL (N.Y.) CORPORATION, LTD., a Delaware corporation, Plaintiffs, Vv. APPLIED UNDERWRITERS, INC., a Nebraska corporation; APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., an Towa corporation; CALIFORNIA INSURANCE COMPANY, a California corporation; CONTINENTAL INDEMNITY COMPANY, an Iowa corporation; APPLIED RISK SERVICES, INC., a New York corporation; WILLIS OF NEW YORK, INC., a New York corporation; and DOES | through 50, inclusive, Defendants. Case No. CGC-16-551614 PLAINTIFFS’ MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION BY DEFENDANTS TO STRIKE Date: March 23, 2017 Time: 9:30 a.m. Department: 302 Reservation: 00190216-06 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEINTRODUCTION Defendants Applied Underwriters, Inc., Applied Underwriters Captive Risk Assurance Company and California Insurance Company’s Motion to Strike addresses one issue involving seven of plaintiffs’ Causes of Action, claiming they are all based on those code sections within Division 2, Part 3, Chapter 3, Article 2 of the California Insurance Code dealing with “State Rate Supervision”, as that Article is so named, claiming that some of the allegations in the complaint do not support such a breach [Motion, p. 3, Il. 4-8]. The Defendants’ principal contention underlying all of its attacks on these causes of action is that only the California Insurance Commissioner can disapprove a rate, that an unfiled rate is not unlawful, and that a rate can only be disapproved prospectively. All of these claims are based on Division 2, Part 3, Chapter 3, Article 2 of the California Insurance Code dealing with “State Rate Supervision”. In spite of plaintiffs incessant pre-Motion statements to defendants that they mis-appreciate the nature of plaintiff's claims, they have filed this Motion anyway and it should be denied. Plaintiff's claims are not based on rate supervision, but is based solely on California Insurance Code § 11658, a section contained within Division 2, Part 3, Chapter 2, Article 2 of the California Insurance Code dealing with “Policy Provisions”, as that Article is so named. Ins. Code § 11658, entitled “Commissioner's approval of form or endorsement”, provides in pertinent part: “(a) A workers' compensation insurance policy or endorsement shall not be issued by an insurer to any person in this state unless the insurer files a copy of the form or endorsement with the rating organization pursuant to subdivision (e) of Section 11750.3 and 30 days have expired from the date the form or endorsement is received by the commissioner from the rating organization without notice from the commissioner, unless the commissioner gives written approval of the form or endorsement prior to that time. (b) If the commissioner notifies the insurer that the filed form or endorsement does not comply with the requirements of law, specifying the reasons for his or her opinion, it is unlawjil for the insurer to issue any policy or endorsement in that form.” [Emphasis added} As distinct from the Article on Rate Filing which delegates solely to the Commissioner the right to allow or disallow a rate, Ins. Code § 11658 specifically makes it unlawful for an insurer to sell a policy for which the form has not been filed and approved. 2 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEoS oD we ID Further, 10 California Code of Regulations § 2268, issued by the Commissioner, states in pertinent part that “[n]o collateral agreements modifying the obligation of either the insured or the insurer shall be made unless attached to and made a part of the policy.” An “endorsement” is “an amendment or modification of an existing policy that alters or varies any term or condition of the policy.” (See, Adams v. Explorer Ins, Co., 107 Cal. App. 4th 438, 450-51 (2003); "Endorsements are modifications to the basic insuring forms in the policy. Endorsements may alter or vary any term or condition of the policy." (Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2002) § 3:188, p. 3-50.) Thus, an endorsement is an amendment to or modification of an existing policy of insurance. It is not a separate contract of insurance. Standing alone, an endorsement means nothing. "Endorsements on an insurance policy form a part of the insurance contract [citation], and the policy of insurance with the endorsements and riders thereon must be construed together as a whole [citation]." ( Narver v. California State Life Ins. Co. (1930) 211 Cal. 176, 181 [294 P. 393].) "Conditions stated in the policy as such apply to the endorsement." ( Ohio Farmers Indem. Co. v. Interinsurance Exchange (1968) 266 Cal. App. 2d 772, 777 [72 Cal. Rptr. 269].)” In combination, that means that when an insurer intends to sell an insurance program, like EquityComp, it must attach ALL of the contract documents to the filed policy in order to legally sell it. When ALL of the contract documents are not filed, § 11658(b) makes the sale of that insurance program unlawful. The effect of such unlawfulness is found in the Civil Code, which provides that where a contract is unlawful, then it is also unenforceable: “A party to a contract may rescind the contract in the following cases: . . . If the contract is unlawful for causes which do not appear in its terms or conditions, and the parties are not equally at fault.” Civil Code § 1689(b)(5) (emphasis added); see also Civil Code § 1598 (“Where a contract has but a single object, and such object is unlawful, whether in whole or in part, ... the entire contract is void.”), See also, Lewis v. Epic ‘Systems Corporation (Tt Cir. May 26, 2016) 823 F.3d 1147 [*To immunize an arbitration agreement from judicial challenge on a traditional ground such as illegality would be to elevate it over other forms of contract — a situation inconsistent with the [FAA’s] saving clause” (applying the same principle to fraud in the inducement)” it 3 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE.SO em I HH B® Such illegality makes the unapproved policy “void and unenforceable” under existing statutory and case law. Because it is void and unenforceable, courts are forbidden to enforce unfiled and unapproved policies, as well as endorsements and collateral agreements that have not been filed and approved, even when private litigants are involved in issues surrounding its enforcement. Consequently, Defendants’ arguments here are misplaced in their entirety and are disingenuous. A. The Difference Between Form Filing and Rate Filing As distinguished from form filing, everything that relates to how rates are calculated is a rate filing under Ins. Code § 11735, subject to the review and the dispute process in Ins. Code § 11737. Ins, Code § 11735(a) provides: “Every insurer shall file with the commissioner all rates and supplementary rate information that are to be used in this state. The rates and supplementary rate information shall be filed not later than 30 days prior to the effective date.” The Insurance Code then goes on to define what it means by “rates” in the context of the rate-filing requirement: “Rate” means the cost of insurance per exposure base unit, prior to any application of individual risk variations based on loss or expenses considerations and does not include minimum premiums. [Insurance Code Sec. 11730(g)] “Pure premium rate” means that portion of the rate which represents the loss cost per unit of exposure, including loss adjustment expense. [Insurance Code Sec. 11737(f)] Attached hereto as RJN; Exhibit A is the California Department of Insurance “Worker’s Compensation Rate, Plan and Form Filing Instructions”. As can be seen, rates and rating plans are filed in different places and with different requirements. Rate filings lay out the information that must be provided in developing rates for insurers. The application of rates and rating plans through the underwriting process and mandatory application of an experience modification produces the premium charged to the insured. These rates, as defined by Insurance Code § 11730(g), supra, must be approved and are subject to regulation by the Commissioner under Ins. Code § 11730, et. seq. By contrast, everything that is evidence of insurance coverage is in a form filed under Ins, Code § 11658. The Department regulations define what is encompassed within the filing 4 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKErequirements of §11658, which includes endorsements and ancillary agreements. See, 10 California Code of Regulations § 2268 [“[n]o collateral agreements modifying the obligation of either the insured or the insurer shall be made unless attached to and made a part of the policy.”]. Attached as RIN; Exhibit B is the WCIRB Bulletin describing the types of forms which need to be filed with the Bureau. These include the various endorsements that dictate the policy itself, and not the underlying justifications for the rates that are part of a rate filing. There is a distinct difference between these two statutory schemes, as there are in many of the Codes involving government agency oversight. Although involving a different statute, Samura v. Kaiser Foundation Health Plan, Inc. (1993) 17 Cal.App.4th 1284 is on point. In Samura, the defendants argued, as to defendants here, that the provisions that they were alleged to have violated merely define the regulatory powers of the DOC. They alleged those violations do not constitute "unlawful" conduct under the UCL, they reason, because the judicial enforcement of those regulations would improperly usurp the DOC's regulatory authority. Samura’s importance here is not the result of the case, but that it distinguishes between a statute that "defines an unlawful act that may be enjoined as unfair competition under the Business and Professions Code" (Smnaura, supra, p. 1300) and statutes that merely "pertain to the exercise of {an agency's] regulatory power" (ibid.) or govern the agency in the exercise of its regulatory powers (id. at p. 1301). Samura’s illustrations of that distinction demonstrate that the statutes that the defendants there were alleged to have violated fall into the former rather than the latter category. Samura identifies the following language from Health and Safety Code section 1360 as a statute defining an unlawful act: "No plan, solicitor, solicitor firm, or representative shall use or permit the use of any advertising or solicitation which is untrue or misleading, or any form of evidence of coverage which is deceptive." (/d. at p. 1300) As a definition of unlawful conduct, that statutory prohibition is indistinguishable from Ins. Code § 11658, which prohibit insurers from engaging in certain conduct unless specified conditions are met. As well, Stevens v. Superior Court (1999) 75 Cal.App.4th 594, 606, fn. 11, holds that Samura supports the use of the UCL to enjoion violations of Ins. Code § 1631 [prohibiting the sale of 5 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEBw NH insurance by anyone not licensed by the DOI to do so].)” Last, the Commissioner appears to also recognize the this distinction (as well as the right of a private party to rely on §11658 to invalidate an unfiled collateral agreement). See, Amicus Curiae Brief filed by the Commissioner in a Second District Court of Appeal for California, Case No. B235819 [RJN; Exhibit C], reported as DMS Services, LLC v. Superior Court, 205 Cal. App. 4th 1346, 140 Cal. Rptr. 3d 896 (2012)]. While the issue raised in the brief was eventually resolved by a settlement agreement between the parties, the point is that the Commissioner’ brief leads credence to this distinction and a private right of action to declare an unfiled collateral agreement unenforceable. In their complaint, plaintiffs allege that the defendants did not file with the CDI and the Bureau the Reinsurance Participation Agreement as an endorsement or collateral agreement to the policies sold to plaintiff. If those endorsements or collateral agreements were never filed, they could not have been approved by the CDI. Accordingly, plaintiff has alleged acts and omissions by the defendants that violated these statutory and regulatory provisions. We should be able to stop right here in defending against this motion. Applied has raised no issue that a private person cannot seek to have an illegal contract voided, whether as a sword or a shield under Ins. Code § 11658. B. The Right of Private Parties to Raise the Issue of Non-Compliance with § 11658. Why defendants are attempting to push this into an enforcement action under Ins. Code § 11737 is obvious - because it cannot seriously contend that a private right of action to enforce Ins, Code § 11658 does not exist. That is because it can’t. While there is not a reported case which specifically deals with this issue,! there are a number of cases which permit such an action without commenting on this aspect of the issue. See, e.g. Key System Transit Lines v. Pacific ‘in spite of the restraints of Rule 8.1115, Robinson v. SSW, Inc., 209 Cal. App. 4th 588, 596 n.7, 147 Cal. Rptr. 3d 230, 237 (2012) does allow a party to refer to a case, not to provide precedent, but to “describe the current state of the law with respect to the scope of” a statute. In that regard, we refer this court to the analysis contained in Bristol Hotels & Resorts v. National Council on Compensation Ins., 2002 Cal. App. Unpub. LEXIS 3152 (Cal. App. 4th Dist., 2002) [RIN; Exhibit F] for an analysis of the interplay between Ins. Code §11658 and §11735. See, also, Ceradyne v. Argonaut Ins. Co., No, G039873, 2009 WL 1526071 LEXIS 4375 (Cal. Ct. App. June 2, 2009) review denied, California Supreme Court, 2009 Cal. LEXIS 9519 (Cal. Sept. 9, 2009) [RJN; Exhibit G]. 6 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE- BON Employers Ins, Co. (1959) 52 Cal.2d 800; Monarch Consulting, Inc. y. National Union Fire Insurance Co. (2014) 123 A.D. 3d 51, reversed on other grounds in Monarch Consulting, Inc. v. National Union Fire Insurance Company of Pittsburgh (NY February 18, 2016 WL 633946] [RIN; Exhibit D]; and American Zurich Insurance Company, et. al. vy. Country Villa Service Corp., United States District Court, Central District of California, Case No. 2:14-cv-03779- RSWL-AS, decided July 9, 2015 [RJN; Exhibit E]. In not one of these contested cases has the contention of the Applied Defendants been approved. This is because it has always been the rule of law that an illegal contract is void and unenforceable between the contracting parties. See, Civil Code § 1598 [“Where a contract has but a single object, and such object is unlawful, whether in whole or in part, or wholly impossible of performance, or so vaguely expressed as to be wholly unascertainable, the entire contract is void.” (emphasis added)]; Kremer v, Earl, 91 Cal. 112, 117 (Cal. 1891) [stating that “[i]t is not necessary that the act itself... declare in express words” that a contract in violation of the act is “void”, and found that the court itself was bound to deny enforcement of the illegal contract even when the parties do not raise the issue]; Wread v. Coffey-Murray, Inc. (1941) 42 Cal. App. 2d 783 [a case involving the issuance of stock not authorized by the Corporations Commissioner, where the court held that a purported agreement in direct violation of the terms of the express prohibitions contained in a statute is void]. Cc. The Shasta Linen Decision by the Commissioner. Applied’s contentions regarding the Commissioner’s Decision in Shasta Linen is irrelevant here. Applied is contesting that Decision on the basis that the Commissioner did not have the authority to declare the RPA void and unenforceable, just as it is here saying this court does not have the authority either. This is almost a humorous contention, since if successful, Applied contends that no one can stop it from selling this apparently illegal product. In any event, if relevant, Applied’s contentions regarding any judicial deferent to the Decision is misplaced. Applied’s reliance on Jnterinsurance Exch. of Auto. Club v, Sup. Ct., 148 Cal. App. 4th 1218, 1236 (2007) is flawed. There, the court was dealing with the CDI’s interpretation of a statute that the CDI had never previously opined on as well as opining on a 7 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEstatute that had no regulation interpreting it. (Id. 1235-1238]. There, the Commissioner went about giving a judicial interpretation of a statute, basically usurping the role of the courts. The court there decided that the statute in question was not a statute that the Commissioner had any special expertise in, and the court decided that it should give no weight to the Commissioner’s decision and make an independent finding on its own. Applied ignores the seminal case of Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4in 960. There, the Supreme Court never said that a decision (here a non-quasi legislative decision) of administrative agencies are to be ignored, but are subject to some degree of judicial scrutiny. The Yamaha case sets out the parameters of that scrutiny, but never says that a court cannot take what the administrative agency says under consideration, applying those factors of judicial scrutiny when doing so. And then there is the recent case of Asyociation of California Ins. Companies v. Jones (2017) 2 Cal.5" 376, giving deference to the power of the Commissioner to regulate the insurance industry. D. The Merits of the Claim. It is not the purpose of this Opposition to prove that plaintiff's claim that the RPA is illegal, void and unenforceable, as that is not the function of a Motion to Strike. Even if it were necessary in this Opposition to do so, plaintiff incorporates the legal analysis completed in its previous Opposition to the Motion to Stay filed with this court on in this case on July 28, 2016. Based on that analysis, it is clear that the rights and obligations of the insured called for under the RPA are different from the rights and obligations of the insured called for in the CIC policies, and if anything, it is only the RPA that is determinative of Plaintiffs’ rights and obligations. Plaintiffs’ claims here are justified and supported by legal authority. CONCLUSION The filing of forms, as opposed to rates is an entirely different matter and produces, for an insured, an entirely different access to a remedy for its violation. Plaintiffs would never had entered into the agreements had it known the Reinsurance Participation Agreement had not been properly filed nor approved, something that every California employer would have naturally 8 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKEexpected before entering into an agreement with any insurance carrier. The difficulties Plaintiffs now have with AUCRA could not possibly have occurred had this collateral agreement which controls the payments by Plaintiffs been properly filed and examined by the CDI to provide the protections to California business consumers anticipated by the Insurance Code. That protection would have assured Plaintiffs that what AUCRA was selling was a complete, unambiguous and legal insurance program. As noted in American Zurich and other cases, the provisions of 11658 are mandatory and thus make the policy void. The provisions of § 11737 address what happens if unfiled or improper rates are applied to coverage provided to a California business, but those rates exist only as to a form that evidences that coverage, and thus if there is no approved policy, the rates, whether filed or not, are not relevant. For example, if a carrier decides that it will get the authority to write United States Longshore and Harbor Workers Act (USL&H) coverage and makes a rate filing (this is part of a very arcane process involving the Feds) but then decides not to issue USL&H policies then the rate filing is meaningless. If, conversely, the carrier gets the authority to write USL&H and files rates, it cannot write a policy until it files the appropriate endorsements that would bind coverage. For all the forgoing reasons, this Motion to Strike should be denied. DATED: March 10, 2017 ROXBORQUGH, POMERANCE, NYE & ADREANI, LLP fay. Se aac ela LAS P. Roxon er) 7 1 C, GIONOLA . SALSIG TAL YN D. GROSSMAN and LARRY J. LICHTENEGGER Attorneys for Plaintiffs 9 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE,oe YN DH PB Bw Ye ° 11 PROOF OF SERVICE STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) I. am employed in the county of Los Angeles, State of California. I am over the age of 18 and not a party to the within action. My business address is 5820 Canoga Avenue, Suite 250, Woodland Hills, California 91367. On March 10, 2017, I served the foregoing document described as PLAINTIFFS’ MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION BY DEFENDANTS TO STRIKE on the interested party(ies) in this action by placing true copies thereof enclosed in sealed envelopes addressed as follows: See Attached Service List & BY ELECTRONIC SERVICE: Pursuant to SFSC Local Rule 2.10(Q), California Rule of Court §2.253(b)(2) and CCP §1010.6, I caused the documents to be served by electronic transmission via Nationwide Legal Inc., deemed to be served on this day if e- served by the close of business day for this Court on the party indicated below. STATE: I declare under penalty of perjury and under the laws of the State of California that the foregoing is true and correct. Executed on March 10, 2017, at Woodland Hills, California. WAL WOU Gy Lucy Rbdr guey. f f “- 10 MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKETravis Wall HINSHAW & CULBERTSON LLP One California Street, 18th Floor San Francisco, CA 94111 Spencer Y. Kook HINSHAW & CULBERTSON LLP 633 West 5" Street, 47" Floor Los Angeles, CA 90071-2043 Jodi S. Cohen. Jennifer Porter Keesal, Young & Logan 450 Pacific Avenue San Francisco, CA 94133 Larry Lichtenegger, Esq. Attorney at Law 3850 Rio Road, #58 Carmel, CA 93923 SERVICE LIST Attorneys for Defendants APPLIED UNDERWRITERS, INC.; APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC.; CALIFORNIA INSURANCE COMPANY; CONTINENTAL INDEMNITY COMPANY; APPLIED RISK SERVICES, INC. Tel: (415) 743-3738 | (213) 680-2800 Fax: (415) 434-2533 | (213) 614-7399 E-Mail: twall@mail.hinshawlaw.com skook@mail.hinshawlaw.com Attorneys for Defendant WILLIS OF NEW YORK, INC. Tel: (562) 436-2000 Fax: (562) 436-7416 E-Mail: jodi.cohen@kyl.com Jennifer.Porter@kyl.com Attorneys for Plaintiffs Tele: (831) 626-2801 Fax: (831) 886-1639 E-Mail: lawyer@mbay.net ll MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO MOTION TO STRIKE