Workers Compensation Ancillary Agreements
Laura Maxwell

Workers Compensation Ancillary Agreements

California Assembly Bill No. 1922

Laura Maxwell July 14, 2016 Posted in: Blog Posts, Workers’ Compensation

California Assembly Member Tom Daly introduced Assembly Bill No. 1922 in February 2016. This bill revises Section 11658 of the Insurance Code regarding workers compensation ancillary agreements. The latest action on this bill was June 22, 2016, when it was amended and re-referred to the Committee on Insurance.

Current workers compensation laws require that insurers file workers compensation policies and endorsements and prohibit the use of the endorsement until 30 days have passed or the commissioner has approved the filing. The California Department of Insurance included ancillary agreements in the definition of endorsements in a regulation adopted on December 16, 2015 and effective April 1, 2016. An ancillary agreement is defined as an agreement that is a supplementary writing or contract relating to a policy or endorsement form that adds to, subtracts from, or revises the obligations of either the insured or the insurer regarding any terms of an insurance policy. These agreements include, but are not limited to, dispute resolution agreements, policy premium amounts or rates, expense or tax reimbursement or allocation, deductible amounts, policy duration, cancellation, or claims administration.

Ancillary agreements have made headlines recently with the Shasta Linen Supply, Inc. case, as well as cease and desist orders in Vermont and Wisconsin. Shasta Linen, a family-owned company with 63 full-time employees, sought to lower its workers compensation premium. Shasta Linen had a guaranteed policy with a maximum rate of $322,623. At the end of the 3-year Reinsurance Participant Agreement, Shasta Linen had been billed more than $1 million, and the insurer was seeking $290,000 more from the insured. This demand for the additional funds came after the employer decided not to renew the policy1. For information on the Shasta Linen case, see Jing Liu’s blog, Applied Underwriters’ EquityComp Program under Fire in California.

Assembly Member Daly believes that these filing requirements are necessary to protect small employers but are not needed for large, sophisticated employers.2 His bill would allow ancillary agreements to be used without filing for large employers that purchase high-deductible policies. Ancillary agreements would not need to be filed for large employers that purchase a workers compensation insurance policy with a deductible of at least $250,000 if the employer meets at least three of the following criteria:

  • Has a full-time risk manager
  • Is represented by counsel during negotiations over the agreements
  • Has 500 or more employees
  • Has annual gross revenue in excess of $20 million
  • Has a workers compensation manual standard premium on a countrywide basis in excess of $750,000

This bill is supported by the California Chamber of Commerce, the Independent Insurance Agents & Brokers of California and the National Association of Mutual Insurance Companies. Opposed to the bill are the California Department of Insurance, the California Small Business Association and the California Applicants’ Attorneys Associations.

Group captives and self-insureds that meet these minimum requirements need to make sure they understand the potential costs of any ancillary agreements before purchasing workers compensation insurance.

UPDATE: On September 16, 2016 Governor Brown vetoed this legislation.

Laura Maxwell is a Consulting Actuary with Pinnacle Actuarial Resources, Inc. in the San Francisco, California office. She has over 25 years of actuarial experience in the property/casualty insurance industry and has provided consulting services since 2003. Laura is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. She currently serves the Casualty Actuarial Society as a member of the Examination Committee and Chair of the Webinar Committee.

1Senate Committee on Insurance, AB 1922 Version June 13, 2016, page 7
2Assembly Committee on Insurance, AB 1922 (Daly) As Amended April 28, 2016, Comment 1, Purpose
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