Monday, July 15, 2013

Zurich, DOI and Out-of-State Arbitration

If you're going to do business in California, then you must follow California law.

That's what the California Department of Insurance (DOI) essentially said to Zurich American Insurance Co. and Zurich Insurance Co. of Illinois (collectively "Zurich") who have entered into a settlement agreement with DOI that revokes mandatory arbitration in policy disputes outside of California.

Zurich agreed not to enforce contractual provisions requiring large-deductible policyholders to arbitrate disputes with the carrier in its home state, and Zurich said it will not enter into or amend future deductible agreements with California employers unless the agreement forms have been submitted to the Workers’ Compensation Insurance Rating Bureau (WCIRB) and the Insurance Department, and the forms have not been disapproved.

What sparked this action was the failure of Zurich to file workers’ compensation large-deductible agreements with the DOI or the WCIRB  as required by law. The large-deductible agreements mandated that policyholders resolve all disputes through arbitration in Schaumburg, Ill., where Zurich is headquartered, and use New York law.

The settlement was signed July 9.

DOI agreed not to require Zurich to obtain approval for agreements that are already in effect. It also said that “its rules and requirements regarding deductible agreements will be applied evenly to Zurich and its competitors on a level playing field basis” and that it will approve the terms and conditions in any proposed Zurich deductible agreement or endorsement “that it has been approved for use by Zurich’s competitors.”

For policies already in place, Zurich has waived its rights to require arbitration in Illinois or the application of New York law to those disputes. Arbitration will take place in California, using California law, unless the parties agree to the application of another law or venue.

The waiver will not apply to any dispute that has already been resolved by a settlement or finalized through arbitration. However, for current disputes – defined as any request for arbitration or any issues pending arbitration prior to May 1, 2013 – Zurich will grant a one-time option to adhere to the binding arbitration provisions or to litigate disputes in a California civil proceeding.

This is huge win for companies in California using large deductible agreements.

I'm not a big fan of binding arbitration, particularly if there is an unequal bargaining position between parties. While employers with large deductible provisions are generally going to be well financed, the fact that workers' compensation insurance is mandatory places the employer's relative negotiating strength against carriers in a weak position.

It's no secret that binding arbitration provisions mandating alternative jurisdictions to California are popular because they make it less likely that an employer will pursue a complaint due to costs, and provide an uneven playing fields in other states. In this situation, arbitration would occur in Zurich's domicile using New York law, which is considered favorable for insurance companies.

“Zurich’s practices required California employers to resolve disputes in Zurich’s backyard, under unfavorable law and circumstances and at added expense to employers,” Insurance Commissioner Dave Jones said in a statement. “This settlement gives California employers the opportunity to level the playing field by arbitrating disputes in California, under California law.”

Bravo to the California DOI for doing its job.

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