To be argued by
STEPHEN LEW ·
Time Requested: 15 mins.
APL 2014-00271
New York County Clerk's Index Nos. 10218711 1, 651960/11, 652366/10
Otnurt uf ~pp£ala
~fate of N.ew turk
In the Matter of the Application of
MONARCH CONSULTING, INC., ELITE MANAGEMENT, IN<;:., BRENTWOOD TELEVISION
FUNNIES, INC., PROFESSIONAL EMPLOYER OPTIONS, INC., RECURRENT SOFTWARE
SOLUTIONS, AHILL, INC., THE ACCOl.JNTING GROUP, LLC and PBS PAYROLL, IA, INC.,
Respondents,
For an Order and Judgment Staying the Arbitration Commenced by
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, on behalf of itself
and each of the related insurers that provided insurance coverage to Petitioners,
Appellant.
Index No. 102187/11
(Caption Continued on Reverse Side of Cover)
BRIEF OF AMICUS CURIAE DA VE JONES,
CALIFORNIA INSURANCE COMMISSIONER
KAMALA D. HARRIS
Attorney General of California .
EDWARD C. DUMONT
Solicitor General
KATHLEEN A.KENEALY
Chief Assistant Attorney General
PAULO. GIFFORD
Senior Assistant Attorney General
JOSHUA A. KLEIN
Deputy Solicitor General
STEPHEN LEW
Supervising Deputy Attorney General
300 South Spring Street, Suite 1702
Los Angeles, CA 90013
Telephone: (213) 897-8526
Fax: (213) 897-5775
Attorneys for Amicus Curiae Dave Jones,
Insurance Commissioner of California
In the Matter of the Arbitration Between
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
on behalf of itself and each of the related insurers that provided
insurance coverage to Respondents,
Appellant,
- against-
PRIORITY BUSINESS SERVICES, INC., f/k/a INLAND VALLEY STAFFING
SERVICES, f/k/a MAINTENANCE MATCH, INC., d/b/a PRIORITY STAFFING,
Respondent.
Index No. 151960/11
In the Matter of the Application of
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, on behalf
of itself and each of the related insurers that provided insurance coverage to
Respondent,
Appellant,
-against-
SOURCE ONE STAFFING, LLC,
Respondent.
Index No. 652366/10
In the Matter of the Application of
MONARCH CONSULTING, INC., ELITE MANAGEMENT, INC., BRENTWOOD
TELEVISION FUNNIES, INC., PROFESSIONAL EMPLOYER OPTIONS, INC.,
RECURRENT SOFTWARE SOLUTIONS, AHILL, INC., THE ACCOUNTING
GROUP, LLC AND PBS PAYROLL, IA, INC.,
Respondents
For an Order and Judgment Staying the Arbitration Commenced by
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, on
behalf of itself and each of the related insurers that provided insurance
coverage to Petitioners,
Appellant.
Index No. 102187/11
TABLE OF CONTENTS
Page
Introduction ............................................................................................................... 1
Issues Presented ......................................................................................................... 2
Background ................................................................................................................ 3
A. Worker's Compensation Insurance Under
the California Constitution and Insurance Code .................................................. 3
B. Insurance Commissioner's Oversight of Policy
Forms and Endorsements ..................................................................................... 5
C. California's Open Rating System and
Statutory Filing Requirements for Deductible
Arrangements ....................................................................................................... 6
Argument ................................................................................................................... 8
I. Because the Payment Agreements Modified
the Parties' Policy Obligations, National Union
Could Not Issue the Agreements in California
Without Satisfying the Prefiling Requirements
of California Law ................................................................................................. 8
A. The Payment Agreements Substantially
Modified the Parties' Rights and Obligations
Under the Insurance Contract ......................................................................... 8
B. The Payment Agreements Should Have
Been Submitted for Commissioner Review .................................................. 12
. C. The Ceradyne and Country Villa Decisions
Explain Why National Union Was Required to
Pre file the Payment Agreements ................................................................... 14
1
Page
D. National Union's Counterarguments
Are Unavailing .............................................................................................. 18
E. Under California Law, National Union Cannot
Unilaterally Enforce its Untiled Side Agreements .......................... : ............ 24
II. The McCarran-Ferguson Act Requires
General Arbitration Principles to Give Way
in Favor of the State's Special, Congressionally
Recognized Power to Regulate Insurance .......................................................... 25
A. Congress Did Not Intend General Federal
Arbitration Law to Take Precedence Over
California's Insurance-Specific Prefiling Requirement.. .............................. 25
B. McCarran-Ferguson Allows California
to Enforce its Insurance Regulations on
Prefiling Regardless of Whether California
Approves or Disapproves of Insurance-Related
Arbitration as a General Matter ................................ : ................................... 29
Conclusion ............................................................................................................... 31
11
TABLE OF AUTHORITIES
Page(s)
CASES
Adams v. Explorer Ins. Co.,
107 Cal App 4th 438, 132 Cal Rptr 2d 24 (2d Dist 2003) ...................................... 6
AO Reed & Co. v. St. Paul Fire & Marine Ins. Co.,
No. 07-cv-04106-AHS (CD Cal Apr. 21, 2008) ............................................. 20, 22
Am. Zurich Ins. Co. v. Country Villa Serv. Corp.,
2015 WL 4163008, 2015 US Dist LEXIS 89452
(CD Cal July 9, 2015) .................................................... , ........................... 16, 17, 22
Autry v. Northwest Premium Services,
144 F3d 1037 (7th Cir 1998) ..................................................................... 25, 26, 27
Barrera v. State Farm Mut. Automobile Ins. Co.,
71 Cal 2d 659, 456 P2d 674 (1969) ........................................................................ 4
Ca/farm Ins. Co. v. Deukmejian,
48 Cal 3d 805, 771 P2d 1247 (1989) ...................................................................... 4
Ceradyne, Inc. v. Argonaut Ins. Co.,
2009 WL 1526071, 2009 Cal App Unpub LEXIS 4375 ·
(4th Dist June 2, 2009) .......................................... 14, 15, 16, 17, 20, 21, 22, 23, 24
DMS Servs., LLC v. Superior Court,
205 Cal App 4th 1346, 140 Cal Rptr 3rd 896 (2d Dist 2012) ................... 18, 20, 21
DMS Servs., LLC v. Zurich Am. Ins. Co.,
No. EC 055245 (Cal Super Ct Aug. 5, 2011) ............................................ 20, 21, 22
Employers Ins. ofWassau v. Granite State Ins. Co.,
3 3 0 F3d 1214 (9th Cir 2003) ................................................................................. 14
Group Life and Health Ins. Co. v. Royal Drug,
440 us 205 ( 1979) .............................. "" .. "" ........................................................ 28
lll
Grove Lumber & Building Supply, Inc. v. Argonaut Ins. Co.,
(2008 WL 2705169, 2008 US Dist LEXIS 51752
Page(s)
( CD Cal 2008) ........................................................................................... 20, 21, 22
Healthsmart Pacific Inc. v. Zurich Am. Ins. Co.
No. 08-01207 (CD Cal Feb. 20, 2009) ............................................................ 20, 22
Humana Inc. v. Forsyth,
525 us 299 (1999) .................................................................................... 28, 29, 30
In re Arbitration Between National Union Fire Ins. Co.
v. Personnel Plus, Inc.,·
954 F Supp 2d 239 (SD NY 2013) .................................................................. 30, 31
Larkin v. Workers' Comp. Appeals Bd.,
Cal 4th , P 3d , 2015 WL 6446499, - -- -
2015 Cal LEXIS 8129 (Oct. 26, 2015) .................................................................. 13
Matter of Monarch Consulting, Inc. v.
Nat 'l Union Fire Ins. Co. of Pittsburgh, PA,
123 AD3d 51 (2014) .......................................................................... 1, 9, 10, 14, 23
Merchants Home Delivery Service, Inc. v.
Frank B. Hall & Co., Inc.,
50 F3 d 1486 (9th Cir 1995) ................................................................................... 26
Miles v. Workers' Comp. Appeals Bd.,
67 Cal App 3d 243, 136 Cal Rptr 508 (3rd Dist 1977) ......................................... 24
Mutual Reinsurance Bureau v. Great Plains
Mutual Ins. Co., Inc.,
969 F2d 931 (2d Cir 1992) ...................... , ............................................................. 29
New York City Council v. City of New York,
4 AD3d 85 (1st Dept 2004) ................................................................................... 13
St. Paul Fire & Marine Ins. Co. v. Courtney Enter.
2 70 F3 d 621 (8th Cir 2001) ................................................................................... 31
lV
Page(s)
Sec. and Exch. Commn. v. Natl. Sec., Inc.,
393 us 453 (1969) .................................................................................... 26, 27, 28
SEC v. Waltzer & Assoc.,
122 F3d 1057, 1997 WL 561062,
1997 US App LEXIS 23830 (2d Cir 1997) ........................................................... 26
State Compensation Ins. Fund v. Workers' Comp. Appeals Bd.,
88 Cal App 3d 43, 152 Cal Rptr 153 (4th Dist 1979) ........................................... 24
State Farm Mut. Ins. Co. v. Quackenbush,
77 Cal App 4th 65, 91 Cal Rptr 2d 381 (1st Dist 1999) ........................................ 13
Stephens v. American Intern. Ins. Co.,
66 F3d 41 (2d Cir 1995) ........................................................................................ 27
Washburn v. Corcoran,
643 F Supp 554 (SD NY 1986) ............................................................................. 27
Washington v. California City Correctional Ctr.,
871 F Supp 2d 1010 (ED Cal 2012) ...................................................................... 14
Yamaha Corp. v. State Bd. of Equalization,
19 Cal 4th 1, 960 P2d 1031 (1998) ....................................................................... 13
CONSTITUTIONAL PROVISION AND STATUTES
Cal. Const., art. XIV,§ 4 ........................................................................................... 4
Federal Arbitration Act, 9 U.S.C. §§ 1 et seq ............................... 2, 3, 25, 27, 29, 31
McCarran-Ferguson Act, 9 U.S.C. § 1012
§ 1012 ..................................................................... 2, 3, 25, 26, 27, 28, 29, 30, 31
§ 1012(b) ............................................................................................................ 25
v
Page(s)
California Insurance Code
§ 676.8 .................................................................................................................. 4
§ 676.8(b)(l) ....................................................................................................... 10
§§ 11650 et seq ..................................................................................................... 4
§ 11658 ......................................................... 5, 6, 7, 11, 12, 15, 16, 19, 21, 28, 29
§ l 1658(a) ........................................ ; .................................................................... 5
§ 11658(b) ............ ; ............................................................................................... 5
§ l 1664 ................................................................................................................. 4
§§ 11690 et seq ..................................................................................................... 4
§§ 11730 et seq ................................................................................................. 4, 6
§ 1173 5 ........................................................................................................... 7, 28
§ l l 735(e) ....................................................................................................... 7, 12
§ l l 735(e)(3) ...................................................................................................... 10
§ l l 735(e)(7) ...................................................................................................... 10
§§ 11750etseq ..................................................................................................... 4
§ 11750.3( e ) .............................................................................................. 5, 12, 13
§ 11751 .................................................................... · ............................................. 5
§ 11751.4 .............................................................................................................. 5
§ 11751.5 .............................................................................................................. 5
VI
Page(s)
§ 11760 ................................................................................................................. 4
§ 11760.1 .............................................................................................................. 4
§ 12900 .................................................................................................................. 5
§ 12921(a) ............................................................................................................. 5
California Labor Code§ 3700 ................................................................................... 4
Cal Statutes 1935, ch 145 .......................................................................................... 5
REGULATIONS AND COURT RULES
California Code of Regulations, title 10
§2218 ............................................................................................................. 5,28
§ 2218(a) ............................................................................................................. 15
§ 2268 ................................................................................. 6, 7, 12, 16, 17, 20, 28
Former Cal Code Regs, tit 10, § 1265 ....................................................................... 6
California Rules of Court Rule 8.1115 .................................................................... 14
OTHER AUTHORITIES
Black's Law Dictionary (6th ed. 1996) ................................................................... 29
91 Cong Rec (Senate) 481 (Jan. 25, 1945) .............................................................. 27
Vil
Dave Jones, in his capacity as the duly elected Insurance Commissioner of
the State of California, submits this brief amicus curiae in support of the
respondents in these appeals, and in support of affirming the Appellate Division,
First Department's decision in Matter of Monarch Consulting, Inc. v. Natl. Union
Fire Ins. Co. of Pittsburgh, PA, 123 AD3d 51 (2014).
INTRODUCTION
The Commissioner appears in this case in order to defend a critical aspect of
his powers to enforce California's insurance laws. To protect consumers and
safeguard the insurance markets on which California's residents and businesses
depend, California, like other states, imposes substantive requirements on
insurance policies issued to customers within its borders. To enforce those
requirements, California's Legislature has conferred upon the Commissioner and
the Department of Insurance the power to grant or deny approval of insurance
policies and endorsements proposed for issuance within the State. California
accordingly prohibits insurers from issuing policies and endorsements unless the
insurer first files those policies and endorsements with the Commissioner and then
either receives the Commissioner's approval or receives no objection within a
specified time.
Appellant National Union Fire Insurance Company of Pittsburgh, PA failed
to comply with these aspects of California law. Although National Union filed
1
policies for approval, it later modified the terms of those policies in side
agreements that were not filed with the Commissioner. The arbitration clauses on
which National Union now relies were in those unfiled side agreements, which
National Union misleadingly called Payment Agreements. Although California
insurance law barred National Union from issuing its unfiled, unreviewed side
agreements, National Union claims the benefit of those agreements, in that it wants
those agreements' arbitration clauses to govern disputes about the agreements'
validity. To allow National Union to enforce that provision would severely
undercut California's regulation of insurance. Although National Union argues
that such an outcome is required under the Federal Arbitration Act, in fact
Congress has prohibited that result in the McCarran-Ferguson Act, which
presumptively exempts state laws regulating insurance from displacement by other
federal laws.
ISSUES PRESENTED
The Commissioner appears as amicus to discuss two questions on which his
institutional expertise will especially benefit the Court:
1. Was National Union barred by California law from issuing side
agreements that modified its approved policy documents and were not submitted to
the Commissioner for approval?
2
Yes. The additional agreements on which National Union now relies were
ones that modified the insurance company's and insured's substantial rights and
obligations under insurance policies issued to California businesses; California law
therefore prohibited National Union from entering into those agreements unless
National Union first submitted them for the Commissioner's review aµd approval.
2. Under the McCarran-Ferguson Act, does California's law barring the
enforcement of the unapproved agreements take precedence over any contrary
application of the Federal Arbitration Act (FAA)?
Yes. The FAA is a federal statute that does not expressly regulate insurance,
and California's prefiling rule is a state law that does specifically regulate
insurance; as a result, the reverse-preemption provisions of the McCarran-
Ferguson Act bar any application of the FAA that would impair, invalidate, or
supersede California's prefiling requirement, as is the case here.
BACKGROUND
To assist the Court, the Commissioner begins with an overview of pertinent
aspects of California's insurance laws and regulations.
A. Worker's <;::ompensation Insurance Under the California
Constitution and Insurance Code
The California Constitution "expressly declare[s]" that workers'
compensation is "the social public policy of this State," and grants the Legislature
3
plenary authority to establish "full provision for regulating such insurance
coverage in all its aspects." (Cal Const, art XIV, § 4.)
California's Legislature has implemented this constitutional mandate by
requiring that employers in California purchase worker's compensation insurance
(Cal Labor Code§ 3700), .and by extensive regulation of subjects such as policy
terms (Ins Code §§ 11650 et seq.), rate regulation (Ins Code §§ 11730 et seq.), how
policies may be canceled or nonrenewed (Ins Code§§ 676,8, 11664), penalties for
misrepresentation (Ins Code §§ 11760, 11760.1 }, rating organizations and data
collection (Ins Code§§ 11750 et seq.), and insurer deposits (Ins Code§§ 11690 et
seq.).
California courts recognize that insurance is a highly regulated industry.
(Calfarm Ins. Co. v. Deukmejian, 48 Cal 3d 805, 771 P2d 1247 [1989].) This
regulation reflects the particular context of the insurance business. California law
has long recognized the unequal bargaining strength in insurance agreements and
the vulnerability of insureds. (See e.g. Barrera v. State Farm Mut. Automobile Ins.
Co., 71 Cal 2d 659, 669, 456 P2d 674, 682 [1969].) Under California law, statutes
applicable to insurance contracts are interpreted in light of applicable public policy
to protect the insured and the general public. (Id., 71 Cal 2d at 672, 456 P2d at
683-684.)
4
B. Insurance Commissioner's Oversight of Policy Forms and
Endorsements
The Commissioner of Insurance is elected by California's voters to carry out
the mandates set forth in the Insurance Code. (Ins Code§§ 12900, 12921[a].)
Since 1935, Insurance Code§ 11658 has required insurers to obtain the
Commissioner's approval before issuing a workers' compensation policy or
endorsement in California. (Cal Statutes 1935, ch 145.) In its current form,
§ 11658(a) requires insurers to file policies and endorsements with the "rating
organization" specified under state law. That rating organization, the Workers'
Compensation Insurance Rating Bureau of California (WCIRB), conducts a
"preliminary inspection" and "review," then forwards the documents to the
Commissioner "for final action."1 (California Code of Regulations, title 10, § 2218
[Regulation 2218].) No policy or endorsement may be issued unless it has
received the Commissioner's explicit approval, or unless 30 days have passed
without the Commissioner disapproving the material. (Ins Code§ 11658[a], [b].)
1 The WCIRB is the only rating organization licensed under Insurance Code
§ 11751, and is the only statistical agent of the Commissioner for workers'
compensation insurance under Insurance Code§ 11751.5. National Union is a
member ofWCIRB, as required by Insurance Code§ 11751.4. (Respondent's
Appendix [RA] 137-138.) As set forth in Insurance Code§ 11750.3(e), one of
WCIRB's roles as a rating organization is "[t]o examine policies, daily reports,
endorsements or other evidences of insurance for the purpose of ascertaining
whether they comply with the provisions of law and to make reasonable rules
governing their submission."
5
These safeguards would be ineffective if an insurer could receive approval
of one set of documents, then modify the parties' obligations via unreviewed side
agreements. As a result, longstanding California law forbids evading the prefiling
requirements by the use ofunfiled collateral agreements. Under California Code
of Regulations, title 10, § 2268 (Regulation 2268), any "collateral agreements" that
modify the obligations of the insured or the insurer must be attached to and made a
part of the policy.2 Compliance with that requirement ensures that such
agreements are submitted for regulatory review, thus effectuating§ 11658's
requirement that insurers file policies or "endorsements" for the Commissioner's
review. (See Adams v. Explorer Ins. Co., 107 Cal App 4th 438, 451, 132 Cal Rptr
2d 24, 33 [2d Dist 2003]) ["[A]n endorsement is an amendment to or modification
ofan existing policy of insurance."].)
C. California's Open Rating System and Statutory Filing
Requirements for Deductible Arrangements
National Union's policies in this case were issued under California's "open
rating" system. Under open rating, which took effect in 1995, insurance rates are
not set by the state. Instead, insurers set their own rates, subject to review of filed
documents by the Commissioner for compliance with the statutory requirements in
Insurance Code§§ 11730 et seq.
2 Regulation 2268 was originally promulgated in 1946 as Regulation 1265. It was
renumbered in 1961 and 1968 with no changes to its text.
6
As part of open rating, insurers and insureds may negotiate and select
a deductible. Insurers may offer policies with large deductibles and lower
premiums to employers with the financial means to absorb claims up to the
deductible amount. Such large deductible agreements allow insureds to
share in the cost of providing workers' compensation benefits in exchange
for reduced premiums. Insurers generally offer fewer deductible options to
smaller employers who, in the insurers' judgment, are not in a position to
absorb such risk.
Under the 1995 open rating law, endorsements setting deductibles must
comply not only with the general policy and endorsement filing requirements of
Insurance Code§ 11658 and Regulation 2268, but also with the open rating
provisions of§ 11735. Under § 11735( e ), supplementary rate information filed
with the Commissioner for purposes of offering deductibles to policyholders for all
or part of the benefits payable under the policy must include a copy of the
deductible endorsement, and that endorsement must specify for the policyholder:
• That the insurer's payments under the deductible are
treated as an advancement of funds to the employer and
"create a legal obligation for reimbursements, and may be
secured by appropriate security;"
7
• Whether or not loss adjustment expenses will be treated
as advancements within the deductible to be reimbursed by
the policyholder;
• That an employer's nonpayment of deductible amounts or
failure to comply with security-related terms of the policy
will be treated the same as nonpayment of premium; and
• A clear explanation of the premium reductions reflecting
the type and level of the deductible.
ARGUMENT
I. BECAUSE THE PAYMENT AGREEMENTS MODIFIED THE PARTIES'
POLICY OBLIGATIONS, NATIONAL UNION COULD NOT ISSUE THE
AGREEMENTS IN CALIFORNIA WITHOUT SATISFYING THE PREFILING
REQUIREMENTS OF CALIFORNIA LAW.
National Union's payment agreements included provisions that substantially
modified the obligations of the parties. Under California law, National Union
could not issue those agreements without first filing them for the Commissioner's
review through the WCIRB.
A. The Payment Agreements Substantially Modified the Parties'
Rights and Obligations Under the Insurance Contract
The arbitration clauses on which National Union relies were not included in
the insurance policies that National Union filed for review and that the
Commissioner allowed National Union to issue. Instead, the arbitration clauses
8
appear only in payment agreements which National Union sent to its customers
months after each policy's inception. (See A-319-141, 147-148, 153, 359-368.3)
As the Appellate Division noted, the payment agreements modified the
parties' obligations "in a significant way." (Monarch Consulting, 123 AD3d at
69.) First, as this appeal shows, the agreements modified the method by which
disputes would be resolved. In the absence of the payment agreements, disputes
under the policies could be brought in California courts. The payment agreements,
however, require mandatory arbitration. Any action regarding arbitrability,
including motions to compel or stay arbitration, must be brought in a New York
court. This modification changed the policy by adding the potential burden of out-
of-state litigation on the insured -- something of obvious interest not only to the
insured but also to the Commissioner, who is charged with ensuring that
California's insurance laws are in fact enforced. A change of forum might affect
the insured's rights, which are effective only if the insured can enforce them.
Second, the payment agreements modified the policies by changing the
substantive law that governs and interprets the policy. Before the payment
agreement, disputes about how to interpret the policy presumably would have been
governed by California law. Under the payment agreement, however, New York
3 "A" references are to the Appellant's Appendix.
9
law purportedly governs such disputes. This, too, was a significant change for the
policyholders and should have been subject to the Commissioner's review.
Third, as the Appellate Division's opinion observed, the payment
agreements instituted a new default provision, under which National Union has
unilateral power to change the nature of the policies, from deductible to non-
deductible, if the insureds default under the agreements. (Monarch Consulting,
123 AD3d at 69.) This was a significant change which, as the Appellate Division
opinion recognized, "directly alter[ ed] the policies, and indeed, directly
implicate[d] the insureds' reasons for obtaining the policies in the first place."
(Id.) Once again, National Union used the side agreement to effect changes that
directly implicated not only the parties' rights, but also California's public policy.
This attempt to unilaterally change a deductible policy into a non-deductible
policy conflicts with California law. California's Insurance Code requires the
insurer to treat payments within the deductible as an advancement of funds that the
employer must reimburse(§ 11735[e][3]), and provides that nonpayment of
deductible amounts "shall" be treated in accordance with the cancellation rules set
forth in Insurance Code§ 676.S(b)(l) (see§ 11735[e][7]). Section 676.S(b)(l), in
tum, permits cancellation only for certain kinds of defaults, and only upon
specified notice. National Union's automatic conversion provision therefore was
illegal under California law. If National Union's default provision had been
10
properly disclosed in the policies and endorsements submitted for Commissioner
review, the Commissioner could have objected.
With respect to each of these substantive changes, the inappropriateness of
National Union's approach is highlighted by the fact that the policy National
Union actually filed for approval explicitly forbade side agreements. The policies
reviewed by the Commissioner provided that "[t]he only agreements relating to
this insurance are stated in this policy," and "[t]he terms of this policy may not be
changed or waived except by endorsement issued by us to be part of this policy."
(RA-904 [emphasis added].) Such an endorsement, of course, would require filing
and Commissioner review under§ 11658 -- meaning that the Commissioner could
not have anticipated that National Union would subsequently try to change the
contract terms, governing law, or dispute resolution mechanisms via an untiled and
unreviewed document. In short, National Union seeks to use the Payment
Agreements to enforce insurance arrangements that substantially differ from what
the Commissioner approved.
4 "RA" references are to the Respondents' Appendix.
11
B. The Payment Agreements Should Have Been Submitted for
Commissioner Review
By issuing these modifications without filing for Commissioner review,
National Union violated California law. Under Regulation 2268,5 because the
payment agreements modified the parties' obligations, they should have been
attached to the policies. They should also have been submitted as "endorsements"
for Commissioner review under Insurance Code § 1165 8. Additionally, they
should have been submitted for review under the provisions specific to deductible
agreements in I1,1surance Code§ 11735(e). (See pp. 6-8, supra.)
This commonsense reading of the statute and regulation is in accord with the
Commissioner's long-expressed view. In a 2011 directive to the WCIRB, the
Department of Insurance explained:6
"Pursuant to Insurance Code Section 11658, 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
5 Regulation 2268 provides:
No 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, provided, however, that if
such agreements are attached and in any way restrict or limit
the coverage of the policy, they shall conform in all respects
with these rules.
6 The directive was signed by Christopher Citko, Senior Staff Attorney at the
California Department of Insurance.
12
11750.3 ... The Insurance Commissioner has prohibited the
use of collateral agreements, which is synonymous with the
. term 'side-agreement,' concerning workers' compensation
insurance unless they are attached to the policy."
(A-458, 459.) The directive further specified that an insurer's failure to file an
agreement may mean, among other things, "possible unenforceability of the
collateral agreements." (A-459.)
Both California and New York courts accord respect to a state agency's
view and interpretation of the statutes the agency is charged with administering
and enforcing. (Yamaha Corp. v. State Bd. of Equalization, 19 Cal 4th 1, 12, 960
P2d 1031, 1037 [1998]; New York City Council v. City of New York, 4 AD3d 85,
96-97 [1st Dept 2004].) As the California Supreme Court's most recent discussion
of deference to administrative agencies makes clear, an agency interpretation that
is "not plainly at odds with the statutory scheme" deserves "great weight." (J,arkin
v. Workers' Comp. Appeals Bd., _Cal 4th_,_P 3d_, 2015 WL 6446499
at *3, 2015 Cal LEXIS 8129 at *9 [Oct. 26, 2015].) Under California law, the
Department of Insurance's interpretation of its own regulation likewise "deserves
substantial weight." (State Farm Mut. Ins. Co. v. Quackenbush, 77 Cal App 4th
65, 71, 91 Cal Rptr 2d 381, 385 [1st Dist 1999].) The February 2011 directive is
thus an agency interpretation that should be accorded respect by this Court.
13
C. The Ceradyne and Country Villa Decisions Explain Why
National Union Was Required to Prefile the Payment
Agreements
The California Court of Appeal, considering a similar arrangement at length
in Ceradyne v. Argonaut Ins. Co. (2009 WL 1526071, 2009 Cal App Unpub
LEXIS 4375 [4th Dist June 2, 2009]), found that a side agreement similar to the
ones here should have been filed under California law.7
Ceradyne's background facts closely resemble the facts here. Ceradyne
purchased large deductible workers' compensation policies, which did not contain
arbitration provisions. The policies contained an integration clause, stating that
"[t]he terms of this policy may not be changed or waived except by endorsement
issued by us to [sic] part of this policy." (Ceradyne, 2009 WL 1526071 at *2,
7 The fact that Ceradyne was unpublished does not make it inappropriate for this
Court to rely on it. Although California's state courts do not rely on unpublished
opinions under Rule 8.1115 of the California Rules of Court, that rule does not
prohibit other court systems from relying on such opinions. Indeed, such opinions
are often useful indications of California law. (See e.g. Employers Ins. ofWassau
v. Granite State Ins. Co., 330 F3d 1214, 1220 n 8 [9th Cir. 2003]; Washington v.
California City Correctional Ctr., 871 F Supp 2d 1010, 1028 n 3 [ED Cal 2012].)
Given its familiarity with the overall structure of California insurance and
administrative law, the California Court of Appeal was particularly well positioned
in Ceradyne to analyze the issue of how the California Insurance Code treats side
agreements. The Ceradyne court applied this knowledge in a thorough and closely
reasoned opinion. The fact that the opinion was not published merely reflects that
it relied on settled California law rather than"[ e ]stablish[ing] a new rule of law,"
addressing a "conflict in the law," or "advanc[ing] a new interpretation" of
California law, any of which would have required publication. (Cal Rule of Court
8.1105[c][l], [4] & [5].) The Appellate Division in this case (Monarch
Consulting, 123 AD3d at 67) was correct to consider Ceradyne persuasive.
14
2009 Cal App Unpub LEXIS 4375 at *4-6.) The insurer asked the employer to
enter into a separate agreement, months after the inception of the policy,
containing forum-selection and mandatory arbitration clauses. (Id., 2009 WL
1526071 at *3, 2009 Cal App Unpub LEXIS 4375 at *8-9.) Although the original
policy had been submitted for Commissioner approval, the side agreement was
never subrp.itted to or approved by the Commissioner or the WCIRB. (Id., 2009
WL 1526071 at *l, 2009 Cal App Unpub LEXIS 4375 at *3.)
The California Court of Appeal held that the side agreements should have
been filed for review. (Id., 2009 WL 1526071 at *1, 2009 Cal App Unpub LEXIS
4375 at *4.) "Legislative intent could not be more clear," the court reasoned.
Under§ 11658 and Regulation 2218(a), the workers' compensation policy
arbitration provision "required review and approval by the Insurance
Commissioner and the WCIRB." (Id., 2009 WL 1526071 at *11, 2009 Cal App
Unpub LEXIS 4375 at *31-32.) Important public policy reasons also required this
result. "It would defeat the statutory purpose to allow an insurance company to
bypass the governmental review process by simply waiting nine months after the
policy has gone into effect to introduce additional or modified terms to its
insurance program .... " (Id., 2009 WL 1526071 at* 11, 2009 Cal App Unpub
LEXIS 4375 at *33-34.) Even when the insured is a large company, it still benefits
from "the statute's oversight protection," given that "workers' compensation
15
coverage is not optional for the employer." (Id.) Because the agreement had not
been properly filed, the court refused to enforce the agreement's arbitration
provision. (Id., 2009 WL 1526071 at *12, 2009 Cal App Unpub LEXIS 4375 at
*35.)
A federal district court in California reasoned similarly in Am. Zurich Ins.
Co. v. Country Villa Serv. Corp. (2015 WL 4163008, 2015 US Dist LEXIS 89452
[CD Cal July 9, 2015]). There, too, an insurance company issued workers'
compensation insurance policies, then followed those policies with subsequent side
agreements, titled "Incurred Deductible Agreements." The side agreements were
not filed with the WCIRB and were never approved by the California Department
of Insurance. (Id., 2015 WL 4163008 at *6, 2015 US Dist LEXIS 89452 at *16.)
The court reasoned that the side agreements, which related to the insureds'
deductible and cost obligations under the policies, "simply cannot be understood as
a stand alone financial agreement separate from the related Policy." (Id., 2015 WL
4163008 at *15, 2015 US Dist LEXIS 89452 at *42.) Instead, the side agreements
were "endorsements to the Policies between the parties" for purposes of§ 11658,
and were "collateral agreements modifying the obligation of either the insured or
the insurer" under Regulation 2268. (Id., 2015 WL 4163008 at *6, 2015 US Dist
LEXIS 89452 at * 14.) Accordingly, the court reasoned, the side agreements "were
required to be filed with the WCIRB under Insurance Code § 11658" and had to be
16
"'attached to and made a part of the policy'" under Regulation 2268. (Id.)
Zurich's failure to comply with these requirements meant that the side agreements
"are illegal and void as a matter of law." (Id., 2015 WL 4263008 at *6, 2015 US
Dist LEXIS 89452 at* 14.) The court refused to enforce the void agreements on
the ground that "enforcing the [agreements] would encourage illegal activity."
(Id., 2015 WL 4163008 at *17, 2015 US Dist LEXIS 89452 at *46.)
Ceradyne and Country Villa point to the correct result here. Though
denominated as merely "payment agreements," National Union's side agreements
in fact substantially altered the practical impact and enforceability of the original
insurance agreements. Indeed, National Union's view at the time was that the
payment agreement "constitute[ s] the basis for a program of insurance coverage."
(A-419 [2006 Addendum to Source One payment agreement].) National Union
chose to issue insurance policies in California, and thereby subjected itself to
California's regulations, including its prefiling requirement. The Legislature's
purpose for enacting California's prefiling requirement would be defeated if
National Union could enter into insurance agreements via one set of purportedly
complete documents which were submitted for approval, then modify the practical
effects of those documents via subsequent, unreviewed side agreements. The fact
that National Union's default was not an isolated incident, but rather a deliberate
program which it implemented repeatedly, with multiple customers, does not
17
absolve it from responsibility; rather, it makes particularly urgent the need to apply
here the well reasoned analyses from Ceradyne and Country Villa.
D. National Union's Counterarguments Are Unavailing
National Union's counterarguments miss the mark.
1. National Union argues that the 2011 directive to WCIRB should not be
accorded weight because it was signed by a single Department employee. But the
letter, which was signed by a Senior Staff Attorney, explicitly sets forth the views
of the Department and the Commissioner. The letter begins by saying that "[i]t has
come to the attention of the Insurance Commissioner" that side agreements are
being used. (RA-144 [emphasis added].) It continues by saying that "[t]he
Department of Insurance has reviewed these allegations" and has concluded that
such agreements require prefiling under California law. (Id. [emphasis added].)
The letter therefore states that "[t]he Department is directing" that insurance
companies be reminded of the requirements. (Id.) The letter could hardly be
clearer: it expresses the Department's official views.
Other actions by the Department confirm that the position expressed in that
letter represents the Department's and Commissioner's considered position. The
Commissioner has espoused that position in California courts. (See Brief of
Insurance Commissioner Dave Jones as Amicus Curiae in DMS Servs., LLC v.
Superior Court, 205 Cal App 4th 1346, 140 Cal Rptr 3rd 896 [2d Dist 2012],
18
available at 2011 WL 6345401.) The Department and Commissioner took the
same position in instituting administrative proceedings in 2011 against Zurich
American Insurance Company. (See RA-338-51 [Notice of Hearing and Order to
Show Cause].) Indeed, this very case signifies that the 2011 letter was not the
product of a rogue employee; the Commfssioner would hardly appear as amicus, in
a dispute between private parties in a sister state's court, to defend a view that was
not the Commissioner's considered view.
2. National Union suggests that its payment agreements might not need to
be filed under§ 11658 because they dealt with matters such as "payment
obligations, default, and dispute resolution." (Appellant's Brief at 63.) National
Union suggests that the question of whether such matters make the agreement an
insurance policy or endorsement which state law required to be submitted for
regulatory approval would be best settled by a panel of arbitrators who "bring
substantive expertise to that issue," presumably by virtue of their being "[current]
executive officers or former executive officers of property or casualty insurance or
reinsurance companies or insurance brokerage companies or risk management
officials in an industry similar to" the insureds'. (Id., at 64-65.) But this is not a
question that turns on industry customs, on which the arbitrators might possess
special knowledge. Rather, this is a question about California insurance law and
regulation, and the Commissioner is unquestionably more of an expert on that
19
subject than the general pool of current and former insurance company executives,
especially where National Union has shifted the forum from California to New
York. That is why New York and California law accord respect to the
Commissioner's views, and not to the views of selected panels of industry
executives. (See pp. 12-13, supra.) In any event, Ceradyne's reasoning,
Regulation 2268, and the legislative purpose behind the prefiling requirement
provide a clear answer to the question: National Union's side agreements required
prefiling and Commissioner review under California law.
3. Nor does National Union's citation of contrary cases introduce doubt.
(Appellant's Brief at 63-64 & n 20.) National Union cites four cases: Grove
Lumber & Building Supply, Inc. v. Argonaut Ins. Co. (2008 WL 2705169, 2008 US
Dist LEXIS 51752 [CD Cal 2008]); AO Reed & Co. v. St. Paul Fire & Marine Ins.
Co. (No. 07-cv-04106-AHS [CD Cal Apr. 21, 2008]) (C-1-11)8; Healthsmart
Pacific Inc. v. Zurich Am. Ins. Co. (No. 08-01207 [CD Cal Feb. 20, 2009]) (C-22-
27); and DMS Servs., LLC v. Zurich Am. Ins. Co. (No. EC 055245 [Cal Super Ct
Aug. 5, 2011]) (C-12-21). Unlike the California Court of Appeal decision in
Ceradyne, National Union's cited cases are trial court opinions.9 Three of National
8 "C" references are to the Compendium filed by the parties.
9 National Union's brief introduces some confusion by citing the Superior Court
decision in DMS Services, Inc. v. Zurich Am. Ins. Co. as "aff d in part" by the
Court of Appeal decision in DMS Services, LLC v. Superior Court. (See
20
Union's four cases were decided before the Commissioner's 2011 directive; they
therefore never evaluated the directive's arguments and do not reflect the respect
which California law accords to the Commissioner's views on matters of insurance
law. The fourth, the Superior Court opinion in DMS, chose not to consider the
Commissioner's directive because the directive did not "include any language
indicating" that the Commissioner was actively "investigating" the particular
agreement between the Plaintiffs and the Defendants."10 (C-17.)
Moreover, none of National Union's cited cases contains anything like the
thorough analysis and discussion in Ceradyne. In Grove Lumber, the customer
conceded that the side agreement at issue was "a 'financial' agreement and not an
insurance policy or endorsement." (2008 WL 2705169 at *7, 2008 US Dist LEXIS
51752 at* 19.) Given that concession and the fact that Grove Lumber preceded the
Commissioner's directive, the case says little about whether such side agreements
should in fact be considered part of ( or an endorsement to) the insurance policy,
Appellant's Brief at 64 n 20.) In fact, the Court of Appeal granted a writ of
mandate reversing the trial court's decision ordering arbitration with respect to one
party. (DMS Services, 205 Cal App 4th at 1349, 140 Cal Rptr 3d at 898.) With
respect to the other party, the Court of Appeal summarily denied the petition based
not on any evaluation of the merits of the§ 11658 claim, but rather because that
portion of the petition had been included only "for protective purposes" in case the
other portion of the petition was denied. (Id., 205 Cal App 4th at 1348, 1358, 140
Cal Rptr 3d at 897-898, 905.)
10 In fact, Zurich's practices were soon to become the subject of a Department
enforcement action. (Seep. 19, supra.)
21
and submitted for review. The Superior Court decision in DMS simply followed
Grove Lumber, without'independently judging whether Grove Lumber's analysis
was correct. (C-18.) The opinion in Healthsmart was a minute order which ·
similarly followed Grove Lumber because it was "analogous" and not
distinguishable -- but never independently examined the validity of Grove
Lumber's reasoning. (C-25.) The district court decision in AO Reed adopted,
without analysis, the conclusory language of defendant's proposed finding that the
side agreements in that case were not ''form[s] or endorsements." (C-10).
Later decisions which squarely considered the§ 11658 issue in light of the
Commissioner's directive have found that the practices of the insurers in most of
National Union's cited cases were in fact illegal. Thus, Argonaut Insurance
Company's practice, though upheld in Grove Lumber, was subsequently held
improper by the California Court of Appeal in Ceradyne. (See pp. 14-16, supra.)
And Zurich's practices, although upheld in DMS and Healthsmart, were
disapproved by the more recent decision in Country Villa. (See pp. 16-17, supra.)
In short, National Union relies on outmoded cases whose cursory analyses have
now been superseded by more thorough judicial treatments undertaken with the
benefit of the regulator's views.
4. This Court should reje?t National Union's attempt to separate the
insurance arrangement into separate packages and thereby evade review. As noted
22
above, the payment agreements worked significant changes to the overall insurance
arrangement -- changes that the Commissioner could not have anticipated when the
policies were filed, because the policies' integration clause suggested that they
were complete and that they would only be changed by endorsements which would
themselves be subject to mandatory filing.
In the Commissioner's view, the Appellate Division correctly concluded
that, as a matter of California law, the terms in the payment agreement should have
been filed with the Commissioner, because "where, as here, a contract alters large
and important parts of the policies' scheme as it was originally issued, it qualifies
as an endorsement even if the contract purports to be merely a loan agreement."
(Monarch Consulting, 123 AD3d at 69 [citations omitted].) That conclusion
matches not only the Commissioner's long-expressed view, but also the
conclusions of Ceradyne, the most thorough California court decision on the topic.
The insurer in Ceradyne similarly contended that its side agreement was merely a
"financial document," rather than part of an insurance policy, because it did not
address indemnity obligations for loss or liability and did not expressly affect the
insurance policy provisions. (Id., 2009 WL 1526071 at *6, 2009 Cal App Unpub
LEXIS 4375 at* 17-18.) The court disagreed, reasoning that California's
"statutory language calls for the disclosure and review of more than just the
\
23
indemnity and liability portions of the [insurance] plans." (Id., 2009 WL 1526071
at *6, 2009 Cal App Unpub LEXIS 4375 at *18.)11
E. Under California Law, National Union Cannot Unilaterally
Enforce its Unfiled Side Agreements
The Appellate Division properly concluded that, under California law,
National Union's failure to prefile its side agreements renders the arbitration
provisions unenforceable. As that opinion noted, the Commissioner's view, as
stated in the 2011 directive, is that "arbitration provisions contained in unattached
collateral agreements [are] unenforceable unless the insurer can demonstrate that
the arbitration agreement was expressly agreed to by the insured at the time the
policy was issued." (RA-145.) As the California Court of Appeal reasoned in
Ceradyne, "the review and pre-approval safeguards were created to protect both
employers and employees." (2009 WL 1526071, at *11, 2009 Cal App Unpub
LEXIS 4375 at *33.) Under California law, illegal contracts are not enforced
except in a "compelling" case where enforcement is necessary to "avoid unjust
enrichment to a defendant and a disproportionately harsh penalty upon the
plaintiff." (Id.) The insureds here do not seek unjust enrichment or a
11 Finally, this Court should accord no weight to National Union's argument that a
contrary interpretation of California law is supported by legislative reports on
never-enacted bills. (Appellant's Brief at 22 n 6.) California courts have stated
that "'[as] evidences of Legislative intent [unpassed bills] have little value."'
(State Compensation Ins. Fund v. Workers' Comp. Appeals Bd., 88 Cal App 3d 43,
63, 152 Cal Rptr 153, 166 [4th Dist 1979]; Miles v. Workers' Comp. Appeals Bd.,
67 Cal App 3d 243, 248 n 4, 136 Cal Rptr 508, 511 n 4 [3d Dist 1977].)
24
disproportionate penalty; rather, they seek to adjudicate the parties' just and
proportionate rights and duties in a court of law. Under these circumstances, the
Appellate Division correctly interpreted California law as requiring that the
arbitration provision not be enforced.
II. THE MCCARRAN-FERGUSON ACT REQUIRES GENERAL ARBITRATION
PRINCIPLES TO GIVE WAY IN FAVOR OF THE STATE'S SPECIAL,
CONGRESSIONALLY RECOGNIZED POWER TO REGULATE INSURANCE,
The parties dispute whether California law's nonenforcement of the
arbitration clause would violate the Federal Arbitration Act of 1925. The Court
need not decide that issue, however, because, in relation to insurance disputes, the
FAA has been superseded by Congress's enactment of the 1945 McCarran-
Ferguson Act.
A. Congress Did Not Intend General Federal Arbitration Law to
Take Precedence over California's Insurance-Specific Prefiling
Requirement
The McCarran-Ferguson Act provides that
"[n]o Act of Congress shall be construed to invalidate,
impair, or supersede any law enacted by any State for the
purpose of regulating the business of insurance, ... unless
such Act specifically relates to the business of insurance ... "
(15 USC§ 1012[b].)
Congress intended, by this statute, "to allow the states to regulate the
business of insurance 'free from inadvertent preemption by federal statutes of
general applicability."' (Autry v. Northwest Premium Servs., 144 F3d 1037, 1040
25
[7th Cir 1998].) Congress therefore "reversed the standard rules for preemption,
creating a 'clear-statement rule ... that state laws enacted for the purpose of
regulating the business of insurance do not yield to conflicting federal statutes
unless a federal statute specifically requires otherwise."' (Id.) The Act's purpose
is to safeguard the states' primacy in insurance regulation and ensure that states
enjoy broad authority in regulating "the activities of insurance companies in
· dealing with their policyholders." (Sec. & Exch. Commn. v. Natl. Sec., Inc., 393
us 453, 458-459 [1969].)
Courts have adopted a four-part test to determine the applicability of the
McCarran-Ferguson Act:
"The McCarran-Ferguson Act precludes the application of a
federal statute if: (1) the statute does not 'specifically relate'
to the business of insurance, (2) the acts challenged under
the statute constitute the business of insurance, (3) the state
has enacted a law or laws regulating the challenged acts, and
(4) the state law would be superseded, impaired or
invalidated by the application of the federal statute."
(Merchants Home Delivery Service, Inc. v. Frank B. Hall & Co., Inc., 50 F3d
1486, 1489 [9th Cir 1995]; see SEC v. Waltzer & Assoc., 122 F3d 1057, 1997 WL
561062 at *3, 1997 US App LEXIS 23830, *4-6 [2d Cir 1997] [unpublished]
[applying same test].)12 All four factors are satisfied here.
12 Other courts have adopted a three-part test, asking:
26
First, "[n]o one disputes the fact that the FAA does not specifically relate to
insurance." (Stephens v. American Intern. Ins. Co., 66 F3d 41, 44 [2d Cir 1995];
see also Washburn v. Corcoran, 643 F Supp 554, 557 [SD NY 1986] [FAA "does
not 'specifically relate[] to the business of insurance."'].) Instead, the FAA is the
sort of general statute that Congress, in enacting McCarran-Ferguson, intended to
subordinate to state insurance regulation. (See 91 Cong Rec [Senate], Jan. 25,
1945, at 481 [statement of co-sponsor Ferguson describing proposed bill: "If there
is on the books of the United States a legislative act which relates to interstate
commerce, if the act does not specifically relate to insurance, it would not apply at
the present time."].)
Second, the challenged acts here constitute and entirely concern the business
of insurance. For Congress, in enacting McCarran-Ferguson, "[t]he relationship
between insurer and insured, the type of policy which could be issued, its
reliability, interpretation, and enforcement -- these were the core of the 'business
of insurance."' (SEC v. Natl. Sec., Inc., 393 US at 460.) National Union's attempt
to alter its insurance arrangement via unapproved side agreements directly affects
"[F]irst, does the federal statute at issue 'specifically relate ·
to the business of insurance;' second, was the state statute
'enacted ... for the purpose of regulating the business of
insurance'; and third, would application of the federal statute
'invalidate, impair or supersede' the state law."
(Autry, 144 F3d at 1040-1041.) The two tests lead to the same result here.
27
the "relationship between insurer and insured." And National Union's attempt to
impose an unapproved arbitration provision that would be interpreted under
another state's law goes to the "interpretation" and "enforcement" of the insurance
contract. (Id., see generally Group Life and Health Ins. Co. v. Royal Drug, 440 US
205, 215 [1979] [noting that a common aspect of the "business of insurance" is the
contract between the insurer and insured].)
Third, Insurance Code §§ 11658 and 11735, and Regulations 2218 and 2268,
are state laws regulating the business of insurance. California's prefiling
requirements regulate the conduct of insurance companies, in order to protect and
regulate the relationship between the insured and the insurer. "Statutes aimed at
protecting or regulating this relationship, directly or indirectly, are laws governing
the 'business of insurance."' (SEC v. Natl. Sec., Inc., 393 US at 460.)
Fourth, adopting National Union's position in this case would "invalidate,
impair, or supersede" the California laws at issue. The Supreme Court explained,
in Humana Inc. v. Forsyth (525 US 299 [1999]), that for purposes ofMcCarran-
Ferguson, to "invalidate," means "to render ineffective, generally without
providing a replacement rule or law." (Id. at 307.) Enforcing an agreement that
was never filed for review would effectively remove the agreement from the
Commissioner's regulatory oversight without enabling review by another
equivalent agency. Humana further explained that to "impair" a state law in the
28
McCarran-Ferguson sense means "to weaken, to make worse, to lessen in power,
diminish, or relax, or otherwise affect in an injurious manner." (See id. at 309-310,
citing Black's Law Dictionary 752 [6th ed 1990].) This, too, describes what would
happen if the unapproved arbitration clause were put into effect. California law
required the Commissioner to ensure that California's insurance laws are complied
with, and one way California law does that is by allowing him to review insurance
agreements and endorsements in advance of their issuance. (See pp. 5-6, supra.)
The Commissioner cannot effectively carry out these roles if the policies which he
has approved are later modified by side agreements that were never submitted to
him, and which he could not have anticipated. To enforce an unapproved
arbitration agreement in this context would render the Commissioner's right and
duty of review illusory, thus "weaken[ing]" and diminish[ing]" the state's
regulatory power. (Humana, 525 US at 309-310.)
B. McCarran-Ferguson Allows California To Enforce its
Insurance Regulations on Prefiling Regardless of Whether
California Approves or Disapproves of Insurance-Related
Arbitration as a General Matter
National Union does not dispute that, under the McCarran-Ferguson Act,
California could bar arbitration entirely in the insurance context if it chose to do so.
(See Mutual Reinsurance Bureau v. Great Plains Mutual Ins. Co., Inc., 969 F2d
931 [2d Cir 1992].) But National Union argues that application of the FAA here
would not impair California's insurance laws, because the state law at issue does
29
not "specifically regulate ( or prohibit) arbitration clauses." (Appellant's Brief at
54.) That argument misunderstands the governing rule. In Humana, the Supreme
Court held that reverse-preemption under the Act is not limited to cases where the
federal law "collide[s] head on with state regulation." (Humana, 525 US at 310.)
Instead, McCarran-Ferguson also applies if"application of the federal law" would
"frustrate any declared state policy or interfere with a State's administrative
regime." (Id.)
McCarran-Ferguson therefore does not require a state to either accept or
reject insurance arbitration without qualification. A state may instead, as part of its
regulation of insurance, determine the terms on which arbitration will be permitted.
Here, California law provides that, like other provisions that modify the policy, an
arbitration provision must be pre-submitted to the Commissioner for review. A
federal law that "frustrate[s]" such a state policy, or "interfere[s]" with such a
regime, will therefore be preempted. That is the case here.
National Union argues that, even assuming it violated California law by not
prefiling the payment agreement, submitting the arbitrability question to an
arbitrator for decision would not impair enforcement of California's prefiling
requirement because the arbitrator could decide that California law was violated
and that the dispute is not arbitrable. This is akin to the reasoning employed by the
district court in In re Arbitration Between National Union Fire Ins. Co. v.
30
Personnel Plus, Inc. (954 F Supp 2d 239, 248 [SD NY 2013]), and by the Eighth
Circuit in St. Paul Fire & Marine Ins. Co. v. Courtney Enter. (270 F3d 621 [8th
Cir 2001].) But such arguments fall short. To submit even the arbitrability dispute
to the arbitrator is, in effect, to enforce the unapproved agreement. And enforcing
an unapproved agreement impairs the Commissioner's power to block such
agreements. The McCarran-Ferguson Act does not permit applying the FAA to
reach any such result where state insurance regulation is at stake.
CONCLUSION
The decision of the Appellate Division should be affirmed.
Dated: November 12, 2015
31
Respectfully submitted,
KAMALA D. HARRIS
Attorney General of California
EDWARD C. DUMONT
Solicitor General
KATHLEEN A. KENEALY
Chief Assistant Attorney General
PAUL D. GIFFORD
Senior Assistant Attorney General ·
JOSHUA A. KLEIN
Deputy Solicitor General
. . ,,/
By: ~
-S----