Wednesday, February 29, 2012

Zurich, CDI and Arbitration Agreements - What's the Big Deal?

It's no secret that insurance companies don't really like doing business in California. The burdensome regulatory environment, liberal judges and juries, complex laws, high tax structure - each of these plays against doing business in The Golden State.

But the eighth largest economy in the world, comprising 13% of the entire country's gross domestic product, is a very tempting piece of candy, with about $7 billion in available gross written premium workers' compensation insurance market (about 20% of the entire nation's available market).

Insurance is all about risk management, which includes controlling the market insurance is being written in. If one can control who says what and where about disputes, then there is better risk management control.

It's all about how one goes about doing this though, and states have laws that require certain actions be performed in the name of risk management, in particular in a regulated market, like work comp.

One of those laws, intended to protect the less sophisticated of insurance product customers, requires that the California Department of Insurance (CDI) get a copy of all pieces of paper purporting to bind the work comp insurance customer to certain practices and requirements.

The reason CDI has regulations in place like that (one of those regulatory schemes that make California such a burden on business - by the way, I'm being sarcastic here) is because the insurance contract is a complex document filled with legal mumbo jumbo that would put to sleep even the most astute and interested student of insurance contract study.

A simple business owner isn't going to take the time to read everything, if anything at all.

And the typical business owner, even if the time is taken to read the entire insurance contract, isn't going to understand or appreciate the implications of certain clauses, like how, when and under what laws disputes are going to be resolved.

The HBO movie which I had earlier written about, Hot Coffee, highlights four elements that corporate America uses to eviscerate the Seventh Amendment to the United States Constitution - the right to have disputes heard and resolved in a civil court of law. One of those elements is the use of arbitration to remove the right of the plaintiff to have his or her day in court.

So it comes as no surprise that the CDI has brought action against Zurich American Insurance Co. and Zurich Insurance Co. of Illinois, saying they are improperly using large-deductible workers’ compensation agreements that have not been approved for use in California, and which specifically direct the use of arbitration in Illinois for policy disputes, and specifically direct the use of New York law in the resolution of those disputes even though the contract is executed in California by a California business affecting the rights and obligations of parties in California.

I have nothing against Illinois, or New York for that matter. I like Chicago. Great people, wonderful architecture and New York has some of the best food in the world.

But if I'm from California with a California dispute, I want my fellow Californian's interpreting California law to resolve that dispute. I don't know many people in Illinois. I don't know New York laws. And I certainly don't like that my fate would be decided by a single person with no appeal available.

Now, in Zurich's defense, at issue are contracts with large loss deductibles, which means that the businesses covered by such contracts are pretty big businesses probably with dedicated risk management departments employing dozens of legal minds. These guys knew what they were buying and liked the pricing, which Zurich could do if it kept things out of the expensive and unpredictable California litigation environment.

That would be fine - but Zurich failed to have the contracts approved by CDI. What was it hiding? Why was Zurich afraid to have those contracts reviewed by CDI?

So, bully for CDI in taking Zurich to task for, CDI alleges, trying to scam the insurance purchasing public by including contractual documents mandating arbitration in Illinois using New York law for California workers' compensation policy disputes.

Zurich doesn't have to write workers' compensation business in California if it doesn't like the laws or the jurisdiction. But I can see why it likes the business.

According to CDI records, the Zurich Insurance Group was the second-largest carrier in California at the end of 2010, with $611 million in written premiums and 8.6% of market. The largest workers' comp carrier, State Compensation Insurance Fund, had a 16% market share.

Steve McKay, media and public relations director for Zurich, said in an email to WorkCompCentral that the carrier is “currently reviewing the enforcement action and will look to resolve with the department any concerns contained therein.”

Where? In Illinois? With New York law?

The insurance industry makes a big deal out of claimant fraud, even though statistics reflect that only about 1% of all claims have any fraud component. Carriers also make a big deal about employer fraud, which IS a big deal because the numbers are so much greater. Carriers don't like to point fingers at themselves though for obvious reasons even though history is replete with bad actors hiding behind insurance licenses involving big money.

Zurich's actions border on the fraudulent. It knew what it was doing and that it was against California law.

Since May 2003, Zurich initiated large-deductible agreements by issuing a policy and large-deductible endorsement attachment that were both filed with the Rating Bureau and approved by the insurance commissioner. But, CDI says, Zurich would enter into a “separate agreement” that is not part of the filed policy or endorsement, calling for arbitration in Illinois using New York law.

The separate agreements were never filed with the Rating Bureau or CDI as “a knowing and/or intentional practice that was undertaken for the purpose of avoiding review,” the CDI complaint says. Additionally, Zurich was notified of the filing requirement in 2011, but “continued to fail and refuse to file” the separate agreement with the Rating Bureau and the Insurance Department.

And in August 2011, Justice Eileen Bransten of the Supreme Court of the State of New York refused to enforce an arbitration clause included in a policy written by Chartis subsidiary National Union Fire Insurance Co. of Pittsburgh covering Southern California staffing agency Source One Staffing. Bransten said the arbitration agreement was not filed with the California Insurance Department, and forcing arbitration would "invalidate, impair or supercede" California's Insurance Code in violation of the McCarren-Ferguson Act of 1945.

I'm sure Zurich brass weighed the consequences - that's good risk management - and the consequences weren't so terrible. After all, will CDI really revoke Zurich's license to do business in the state and remove over $600 million in coverage?

And the worst that could happen is that a dispute ends up back in a California court - and what the heck, a couple of years of litigation just to get to a ruling that arbitration is not enforceable is good litigation practice management when resources are disproportionately in favor of a large insurance company.

But really, what am I complaining about? Zurich got caught. CDI will have a word with them, probably pay a small fine, and then go on with business as usual until the next time some ingenious, albeit legally questionable, risk management technique is introduced and implemented.

No comments:

Post a Comment