The recent decision of Nielsen Contracting, Inc. v. Applied Underwriters, Inc., 232 Cal.Rptr.3d 282 (Cal. App. 4 Dist. 2018) provides a cautionary tale of the failure to comply with insurance regulatory filing requirements of collateral agreements to insurance policies.
Nielsen Contracting, Inc. and T&M Framing, Inc. (collectively Nielsen) signed a “Request to Bind” with Applied Underwriters, Inc. and Nielsen was issued a worker’s compensation policy by an Applied subsidiary. Nielson also signed a separate Reinsurance Participation Agreement (RPA) with another Applied subsidiary, which included an arbitration provision and a delegation clause that granted the arbitrator the authority to rule on disputes concerning the enforceability
of the arbitration provision. This language is customarily construed by the courts as permitting the arbitrator to determine enforceability of arbitration agreements - but not in this case
In 2016, the California Insurance Commissioner issued an administrative decision in a case involving a different insured that had challenged the same insurance program offered by Applied. The Insurance Commissioner found that the RPA was void as a matter of law for various reasons, including that it had neither been filed nor approved by the Insurance Department.
In 2017, Nielsen filed an action against Applied and its subsidiaries, alleging the collateral agreements to the policy contained a requirement to arbitrate that was neither filed with nor approved by the California Insurance Department.
The defendants moved to compel arbitration, but the court agreed with Nielson that the court must first resolve Nielson’s challenge to the enforceability of the delegation clause, adding:
The delegation and arbitration provisions qualify as collateral agreements which modify the obligation of the underlying CIC [insurance] policy that should have been attached to the original CIC policy as endorsements and filed with the Insurance Commissioner for approval. Because they were not filed and approved, they are unenforceable as a matter of law pursuant to [section] 11658 and [Regulations section] 2268.
The Court of Appeals held that the court, and not the arbitrator, should rule on the enforceability of the delegation clause, noting that, although the general rule is that courts will decide challenges to the validity of an arbitration clause unless the parties have “clearly and unmistakably” agreed to delegate the issue to the arbitrator
(which Applied did in a separate agreement but failed to file with the Department), the “court is the appropriate entity to resolve challenges to a delegation clause nested in an arbitration clause when a specific contract challenge is made to the delegation clause.” Id
. at 289-90.
In doing so, the Court of Appeals rejected the defendants’ contention that the lower court could only rule on the delegation clause if the challenge to the delegation clause was different than the challenge to the RPA or the arbitration clause. Instead, Nielsen had made a “specific, substantive challenge” to the delegation clause that was separate from its challenge to the arbitration clause, and therefore it was proper for the court to rule on the challenge of the enforceability of the delegation clause.
Having reached this conclusion, the Court of Appeals agreed with the lower court’s finding that the provisions of the collateral agreements were unenforceable because they had not, as required, been filed with the Insurance Department.
This case presents a cautionary tale to insurers that where insurance policy forms are required to be filed and approved by the applicable insurance department, the insurers should make sure that any collateral agreements be appended to the policy and subjected to the filing and approval requirements. If not, the insurer may well lose the right to arbitrate the dispute - in one easy (mis)step.