Nielsen Contracting, Inc. v. Applied Underwriters, Inc.

Filed 5/3/18
CERTIFIED FOR PUBLICATION
COURT OF APPEAL, FOURTH APPELLATE DISTRICT
DIVISION ONE
STATE OF CALIFORNIA
NIELSEN CONTRACTING, INC. et al., D072393
Plaintiffs and Respondents,
v. (Super. Ct. No.
37-2017-00001814-CU-CO-CTL)
APPLIED UNDERWRITERS, INC. et al.,
Defendants and Appellants.
APPEAL from a judgment of the Superior Court of San Diego County, Gregory
W. Pollack, Judge. Affirmed.
Hinshaw & Culbertson, Spencer Y. Kook and Travis Wall for Defendants and
Appellants.
Larry J. Lichtenegger for Plaintiffs and Respondents.
Nielsen Contracting, Inc. and T&M Framing, Inc. (collectively Nielsen) sued
several entities (defendants) alleging these entities fraudulently provided workers'
compensation policies to Nielsen that were illegal and contained unconscionable terms.
Defendants moved to compel arbitration and stay the litigation under an arbitration
provision in one defendant's contract, titled Reinsurance Participation Agreement
(RPA). Nielsen opposed the motion, asserting the arbitration provision and the
provision's delegation clause were unlawful and void. After briefing and a hearing, the
trial court agreed and denied defendants' motion.
Defendants appeal. They contend: (1) the arbitrator, and not the court, should
decide the validity of the RPA's arbitration agreement under the agreement's delegation
clause; and (2) if the court properly determined it was the appropriate entity to decide
the validity of the delegation and arbitration provisions, the court erred in concluding
these provisions are not enforceable. We reject these contentions and affirm.
FACTUAL AND PROCEDURAL SUMMARY
We summarize the facts based on the complaint's allegations, and the materials
submitted in support of and opposition to the motion to compel arbitration. We describe
only those facts necessary to resolve the issues pertaining to the arbitration issue, and
make no attempt to discuss all of the facts relevant to Nielsen's substantive allegations
against defendants.
Background
In 2012, Applied Underwriters, Inc. (Applied) provided quotes to Nielsen for
Applied's patented workers' compensation program known as "EquityComp." Based on
Applied's representations about the program's low cost and profit-sharing benefits,
Nielsen signed a "Request to Bind" with Applied. Under this agreement, Nielsen was
2
initially issued a guaranteed-cost workers' compensation policy by California Insurance
Company (CIC), one of Applied's subsidiaries.
The Request to Bind also required Nielsen to sign a separate agreement (the
RPA) with another one of Applied's subsidiaries, Applied Underwriters Captive Risk
Assurance Company, Inc. (AUCRA). Nielsen and AUCRA signed the RPA in
December 2012. The RPA had a three-year term.
The RPA modified and supplanted many of the CIC policy terms, including
adding an arbitration provision. As discussed in more detail below, this provision
required arbitration of "[a]ny dispute or controversy" in the British Virgin Islands before
"disinterested officials of insurance or reinsurance companies." The arbitration
provision delegated to the arbitrator the authority to rule on disputes concerning the
enforceability of the arbitration provision. This is known as a "delegation clause."
Complaint
In January 2017, Nielsen filed a complaint against Applied and its two
subsidiaries (AUCRA and CIC) (collectively defendants). Nielsen sought a declaration
that the RPA is void and its provisions are unconscionable, and sought damages for
defendants' misrepresentations and breach of the implied covenant of good faith and fair
dealing. Nielsen alleged the RPA is an adhesion contract with unfair and
unconscionable terms; the RPA was written and structured to purposely mislead Nielsen
and to intentionally avoid and circumvent California insurance laws; and the RPA is an
illegal contract because it was not filed with or approved by the California Department
3
of Insurance (Insurance Department), as required by Insurance Code section 11658 and
title 10 of the California Code of Regulations section 2268.1 Nielsen alleged
"EquityComp is the brainchild of Applied," which caused CIC to issue an approved
guaranteed-cost workers' compensation insurance policy "to give the appearance of
compliance with the California insurance regulations, although CIC is never responsible
for making payment on claims using its own money."
Several months before this complaint was filed, in June 2016, the California
Insurance Commissioner (Insurance Commissioner) issued an administrative decision in
a case involving a different insured (Shasta Linen Supply, Inc.) that had challenged the
same EquityComp insurance program offered by these same defendants. (Matter of
Shasta Linen Supply, Inc., Decision & Order, dated June 20, 2016, File No. AHB-
WCA-14-31 (Shasta Linen).) In the 70-page decision, the Insurance Commissioner
found the RPA to be unlawful and void as a matter of law for various reasons, including
that it had not been filed and approved by the Insurance Department before it was
issued. (Ibid.) In reaching this conclusion, the Insurance Commissioner also found the
governing administrative regulations require workers' compensation insurers to obtain
approvals for "side agreements," including arbitration provisions that differ from the
1 Further unspecified statutory references are to the Insurance Code. Further
references to Regulations sections are to title 10 of the California Code of Regulations.
Unless otherwise stated, all references to Regulations section 2268 are to the version
existing in 2012 when the parties signed the RPA.
4
dispute resolution provisions in a previously approved insurance policy. (Id. at p. 43;
See Regs., § 2268.)
Two months after the Shasta Linen administrative decision was issued, the
Insurance Department entered into a stipulated cease-and-desist order with Applied,
CIC, and AUCRA. In this stipulation, defendants stated they disagreed with the Shasta
Linen administrative decision, but acknowledged the decision "was made precedential"
under Government Code section 11425.60, subdivision (b).2 Defendants also agreed it
would not issue any new RPA or renew any existing RPA unless the policy is filed with
and approved by the Insurance Department.3
Motion to Compel Arbitration
In response to Nielsen's complaint, AUCRA moved to compel arbitration under
the RPA's lengthy arbitration provision. Of relevance here, the provision states:
"(A) It is the express intention of the parties to resolve any disputes
arising under this Agreement without resort to litigation in order to
protect the confidentiality of their relationship and their respective
business and affairs. Any dispute or controversy . . . arising out of
2 This code section permits an administrative agency to designate a decision as
"precedent" if the decision "contains a significant legal or policy determination of
general application that is likely to recur." (Gov. Code, § 11425.60, subd. (b).) An
administrative decision so designated can be relied upon by the agency in later cases.
(Id., subd. (a).)
3 We deny Nielsen's request that we take judicial notice of a later settlement
agreement between defendants and the Insurance Department in which defendants
agreed to dismiss their superior court writ petition challenging the Shasta Linen
decision. This settlement agreement was not before the trial court, and therefore it is
not properly before this court. (See Vons Companies, Inc. v. Seabest Foods, Inc. (1996)
14 Cal. 4th 434, 444, fn. 3.)
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or related to this Agreement shall be fully determined in the British
Virgin Islands under the provisions of the American Arbitration
Association [AAA].
"(B) All disputes between the parties relating in any way to (1) the
execution and delivery, construction or enforceability of this
Agreement, (2) the management or operations of the Company, or
(3) any other breach or claimed breach of this Agreement or the
transactions contemplated herein shall be . . . finally determined
exclusively by binding arbitration in accordance with the
procedures provided herein. . . . [¶] . . . [¶]
"(D) . . . All arbitrators shall be active or retired, disinterested
officials of insurance or reinsurance companies not under the
control or management of either party to this Agreement and will
not have personal or financial interests in the result of the
arbitration. [¶] . . . [¶]
"(G) . . . Judgment upon the award rendered by the arbitrator or
arbitrators may be entered by any court of competent jurisdiction in
Nebraska or application may be made in such court for judicial
acceptance of the award and an order of enforcement as the law of
Nebraska may require or allow.
"(H) The award of the arbitrator or arbitrators shall be binding and
conclusive on the parties . . . .
"(I) All arbitration proceedings shall be conducted in the English
language in accordance with the rules of the [AAA] and shall take
place in Tortola, British Virgin Islands or at some other location
agreed to by the parties." (Italics added.)
In seeking arbitration under these provisions, AUCRA argued the italicized
language in paragraph (B) requiring arbitration of disputes concerning the
"enforceability of this Agreement" was a delegation clause that gave the arbitrator the
sole and exclusive authority to rule on challenges to the enforceability of the arbitration
agreement. AUCRA presented evidence that the AAA rules likewise delegate to the
6
arbitrator the exclusive authority to rule on the arbitration clause's enforceability.
AUCRA thus argued the court had no authority to rule on challenges to the
enforceability of the arbitration agreement or its delegation clause.
As explained in more detail below, AUCRA alternatively argued that if the court
reached the arbitrability issues, the arbitration clause is valid and enforceable.
Defendants Applied and CIC (not named parties in the RPA) joined in the
motion to the extent AUCRA sought to stay the litigation pending the arbitration.
Opposition to Motion to Compel
In opposing the motion to compel arbitration, Nielsen argued that under settled
authority a delegation clause is severable from the main contract and from the
arbitration clause, and the court must first resolve challenges to the enforceability of the
delegation clause if the party brings a specific challenge to the delegation clause. (See
Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S 63 (Rent-A-Center).)
Nielsen argued that its specific challenge to the delegation clause satisfied this
test and therefore the court (and not the arbitrator) was required to rule on the
enforceability of the delegation clause and the arbitration provision. In explaining this
challenge, Nielsen argued that the RPA's arbitration provision and delegation clause
materially changed the dispute resolution provisions in the approved CIC insurance
policies, and therefore they were "collateral" agreements required to be filed with the
Insurance Department under section 11658 and Regulations section 2268. Nielsen
7
maintained that by not filing these provisions with the Insurance Department, the
provisions were void and unenforceable.
Nielsen also presented evidence showing the RPA was "virtually identical" to the
agreement found to be unlawful and void in the Shasta Linen administrative decision.
Reply to Motion to Compel
In reply, defendants argued that because Nielsen's illegality challenge was "not
specific" to the arbitration provision or its delegation clause, and instead "implicates"
the RPA "as a whole," the court must allow the arbitrator to decide if the delegation
clause and arbitration agreement are enforceable. Defendants alternatively argued that
even if the court were to consider Nielsen's challenge to the enforceability of the
arbitration provisions (including the delegation provision), these provisions are
enforceable under California law despite the failure to file them with the appropriate
agency.
Court's Ruling
After a hearing, the court denied defendants' motion to compel. On the question
whether the court has the authority to decide the enforceability of the delegation and
arbitration clauses, the court stated that Nielsen was not merely derivatively challenging
the legality of the main contract, but instead was asserting that "both the delegation
provision and the arbitration provision are illegal and unenforceable separate and apart
from the evident unenforceability of the entire RPA, albeit for the same reason, i.e.,
failure to file with, and obtain approval from, the Insurance Commissioner."
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On the merits, the court agreed with Nielsen that neither the delegation clause
nor the arbitration requirement was enforceable. The court reasoned: "The delegation
and arbitration provisions qualify as collateral agreements which modify the obligation
of the underlying CIC 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."
Defendants appeal.
DISCUSSION
In ruling on a motion to compel arbitration, the trial court shall order parties to
arbitrate "if it determines that an agreement to arbitrate the controversy exists . . . ."
(Code Civ. Proc., § 1281.2.) "[T]he party seeking arbitration bears the burden of
proving the existence of an arbitration agreement by a preponderance of the evidence,
and the party opposing arbitration bears the burden of proving by a preponderance of
the evidence any defense . . . ." (Peng v. First Republic Bank (2013) 219 Cal. App. 4th
1462, 1468.) In evaluating an order denying a motion to compel arbitration, " ' "we
review the arbitration agreement de novo to determine whether it is legally enforceable,
applying general principles of California contract law." ' " (Carmona v. Lincoln
Millennium Car Wash, Inc. (2014) 226 Cal. App. 4th 74, 82.) If the trial court resolved
contested facts, we "review the court's factual determinations for substantial evidence."
(Ibid.)
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The parties agree the RPA is governed by the Federal Arbitration Act (FAA),
which provides that a contractual arbitration provision "shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of
any contract." (9 U.S.C. § 2.) The FAA " 'declare[s] a national policy favoring
arbitration' of claims that parties contract to settle in that manner." (Preston v. Ferrer
(2008) 552 U.S. 346, 353 (Preston).) Arbitration is a matter of contract, and "parties
are generally free to structure their arbitration agreements as they see fit." (Volt Info.
Sciences v. Leland Stanford Jr. University (1989) 489 U.S. 468, 479.) However, under
the FAA's savings clause, an arbitration agreement is not enforceable if a party
establishes a state law contract defense, such as fraud, duress, unconscionability, or
illegality. (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339; Poublon v.
C.H. Robinson Co. (9th Cir. 2017) 846 F.3d 1251, 1259; see McGill v. Citibank, N.A.
(2017) 2 Cal.5th 945, 962.) Although arbitration agreements cannot be "invalidated 'by
defenses that apply only to arbitration or that derive their meaning from the fact that an
agreement to arbitrate is at issue,' " the enforceability of the agreement remains subject
to defenses applicable to all other contracts. (McGill, at p. 962.)
Under these general principles, we consider defendants' contentions that the trial
court erred in concluding (1) the court, and not the arbitrator, decides the enforceability
of the delegation clause and arbitration agreement; and (2) the unfiled delegation and
arbitration agreements were unlawful and therefore unenforceable.
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I. "Who Decides": Enforceability of Delegation Clause
The parties agree the delegation clause expresses the parties' clear intent to
delegate the issue of the enforceability of the arbitration clause to the arbitrator, but that
applicable law requires courts to rule on specific challenges to the enforceability of
delegation clauses before compelling the matter to arbitration. They disagree as to
whether Nielsen raised an adequate challenge to the enforceability of the delegation
clause to require judicial resolution of the challenge.
We conclude the court properly found Nielsen's challenge to the delegation
clause was sufficient to require the court to rule on the question of the enforceability of
the delegation clause. To explain this conclusion, it is helpful to understand the general
rules pertaining to the "who decides" issue, and the United States Supreme Court's view
that a delegation clause, an arbitration agreement, and the underlying agreement are
each evaluated—for purposes of applying the FAA—as severable contracts. (Rent-A-
Center, supra, 561 U.S. at pp. 70-72.)
A. Legal Principles
It has long been settled that when parties have agreed to arbitration, challenges to
the validity of the underlying contract, including contract defenses such as fraud in the
inducement or illegality, are for the arbitrator to decide. (Preston, supra, 552 U.S. at p.
353; Buckeye Check Cashing, Inc, v. Cardegna (2006) 546 U.S. 440, 443-445
(Buckeye); Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 402-
403 (Prima Paint).) This is because the arbitration clause is viewed as separate from
11
the underlying contract. (Buckeye, at pp. 445-446.) Thus, allegations that the main
contract is unlawful or unconscionable does not affect the enforceability of the
arbitration clause. (Ibid.)
However, challenges to the validity of the arbitration clause itself are generally
resolved by the court in the first instance. (Rent-A-Center, supra, 561 U.S. at p. 71;
Buckeye, supra, 546 U.S. at pp. 444-445; Prima Paint, supra, 388 U.S. at pp. 403-404.)
An exception to this rule applies when the parties have clearly and unmistakably agreed
to delegate questions regarding the validity of the arbitration clause to the arbitrator.
(Rent-A-Center, at pp. 68-69; Aanderud v. Superior Court (2017) 13 Cal.App.5th 880,
891-892.) Such delegation clauses are generally enforceable according to their terms.
(First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944; Aanderud, at pp.
891-892; Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal. App. 4th 227, 239.)
In Rent-A-Center, the United States Supreme Court addressed the question of
who rules on a challenge to the enforceability of a delegation clause: does the court
decide or does the arbitrator decide? (Rent-A-Center, supra, 561 US. at pp. 67-76.) The
high court began this analysis by confirming that a delegation clause—nested within the
larger arbitration agreement—must be viewed as an independent ("severable") contract.
(Id. at pp. 70-71.) Thus, the court held that as with any independent contract, the court
must resolve specific challenges to the delegation clause that are proper under section 2
of the FAA, i.e., any "generally applicable contract defenses." (Rent-A-Center, at pp.
68, 71.) "If a party challenges the validity under [FAA] § 2 of the precise agreement to
12
arbitrate at issue, the federal court must consider the challenge before ordering
compliance with" the delegation clause. (Id. at p. 64.) Otherwise, courts would be
treating the delegation clause on a ground that would " 'elevate it over other forms of
contract,' " which is not permitted under the FAA. (Id. at p. 71.)
But—consistent with its severability reasoning—the Rent-A-Center court made
clear this rule requiring judicial consideration of contractual defenses to the
enforceability of the delegation clause is triggered only if the challenge is "directed
specifically to the agreement to arbitrate." (Rent-A-Center, supra, 561 U.S. at p. 71.)
Thus, an argument that the arbitration agreement or the underlying contract is
unenforceable is not sufficient to trigger the court's obligation to resolve contentions
regarding the enforceability of a severable delegation clause. (Id. at pp. 71-76.)
The facts of Rent-A-Center illustrate this principle. There, the plaintiff filed an
employment discrimination suit against his former employer. (Rent-A-Center, supra,
561 U.S. at p. 65.) The employer responded by seeking arbitration based on an
arbitration agreement that was separate from the underlying employment contract and
contained a delegation clause. (Id. at pp. 65-66.) The employee opposed the motion,
arguing the arbitration agreement was unconscionable. (Id. at p. 66.) But the employee
challenged only the validity of the arbitration contract and never "even mention[ed] the
delegation provision." (Id. at p. 72.) On this record, the United States Supreme Court
found the arbitrator, and not the court, was to consider the enforceability of the
delegation clause because the employee had not challenged the delegation provision.
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(Id. at pp. 72-76.) The court reasoned that the delegation clause must be viewed as a
separate agreement nested within the arbitration agreement, and unless the clause is
directly challenged, the arbitrator must resolve all of the disputed issues. (Ibid.)
Following Rent-A-Center, California courts have recognized that a 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. (See, e.g.,
Malone v. Superior Court (2014) 226 Cal. App. 4th 1551, 1559-1560 (Malone).) In
Malone, the plaintiff challenged an employment contract and the delegation clause on
grounds of unconscionability. (Id. at pp. 1556-1557.) The reviewing court held the
unconscionability challenge to the delegation clause was for the court to resolve. (Id. at
pp. 1559-1560.) However, after evaluating that challenge, the court held the
unconscionability challenge to the delegation clause was without merit. (Id. at pp.
1560-1571.) The court thus held the delegation clause was enforceable and the
defendants' motion to compel arbitration should have been granted. (Id. at pp. 1570-
1571.)
B. Analysis
Defendants contend the court erred in finding that Nielsen raised an adequate
challenge to the enforceability of the delegation clause to require judicial resolution of
the challenge. The contention is unsupported. Unlike the Rent-A-Center plaintiff and
similar to the Malone plaintiff, Nielsen expressly raised contract challenges to the
delegation clause. In opposing the motion to compel, Nielsen argued the delegation
14
clause was unenforceable because it constituted a material change to CIC's filed
insurance policy (which contained no arbitration clause or delegation clause), and the
RPA's delegation clause constituted an endorsement or collateral agreement that was
required to be filed with the Insurance Department to be lawful and enforceable.
Defendants countered by arguing California law does not require a delegation clause to
be approved by the Insurance Department, and an unfiled arbitration provision and
delegation clause remain lawful and enforceable. These issues relate specifically to the
enforceability of the delegation clause, and thus under Rent-A-Center these issues are
for the court to resolve.
Relying on Rent-A-Center, defendants contend a court may rule on the
enforceability of the delegation clause only if the plaintiff's challenge to the delegation
clause is different from the plaintiff's challenge to the entire contract or to the entire
arbitration agreement. This argument is not supported by Rent-A-Center's holding or
logic. The high court's determination that a court should generally resolve specific state
law contractual defenses to delegation clauses was based on its view that delegation
clauses are separate and severable from the remainder of the arbitration agreement and
the FAA requires that arbitration provisions be enforced in the same manner as other
types of contractual provisions. (Rent-A-Center, supra, 561 U.S. at pp. 67, 70-71 [under
the FAA courts must "place[] arbitration agreements on an equal footing with other
contracts"].) If we were to accept defendants' argument that courts are precluded from
ruling on specific contract defenses to a delegation clause merely because the same
15
defense is also brought to invalidate other related contractual provisions, we would be
treating delegation clauses differently than other contractual clauses, a determination
that would be inconsistent with the FAA, as interpreted by the United States Supreme
Court.
Rent-A-Center's discussion of the type of challenge that might have triggered
court review supports our conclusion. In explaining that the plaintiff's
unconscionability challenge specifically concerned only the validity of the contract as a
whole, rather than the delegation provision, the high court noted that the plaintiff's
"substantive unconscionability arguments assailed arbitration procedures called for by
the [arbitration] contract—the fee-splitting arrangement and the limitations on
discovery—procedures that were to be used during arbitration under both the agreement
to arbitrate employment-related disputes and the delegation provision. It may be that
had [the employee] challenged the delegation provision by arguing that these common
procedures as applied to the delegation provision rendered that provision
unconscionable, the challenge should have been considered by the court. To make such
a claim based on the discovery procedures, [the employee] would have had to argue that
the limitation upon the number of depositions causes the arbitration of his claim that the
Agreement is unenforceable to be unconscionable. That would be, of course, a much
more difficult argument to sustain than the argument that the same limitation renders
arbitration of his factbound employment-discrimination claim unconscionable.
Likewise, the unfairness of the fee-splitting arrangement may be more difficult to
16
establish for the arbitration of enforceability than for arbitration of more complex and
fact-related aspects of the alleged employment discrimination. [The employee],
however, did not make any arguments specific to the delegation provision; he argued
that the fee-sharing and discovery procedures rendered the entire Agreement invalid."
(Rent-A-Center, supra, 561 U.S. at p. 74.)
This hypothetical—that if the plaintiff had directed the unconscionability
challenges (the unfairness of the discovery limitations and the fee-splitting
requirements) against the delegation clause in addition to asserting the same
unconscionability challenge against the arbitration agreement itself, the "challenge [to
the delegation clause] should have been considered by the court"—illustrates that the
focus of the court's attention must be on whether the particular challenge is directed at
the delegation clause, not whether the same challenges are also directed at the
agreement or agreements into which the delegation clause is embedded or nested.
(Rent-A-Center, supra, 561 U.S. at p. 74.) Under Rent-A-Center's reasoning, whether
the challenge is the same as or different from the challenge to other provisions of the
arbitration clause or underlying agreement is not dispositive of whether the challenge is
specifically directed at the delegation clause. (See Malone, supra, 226 Cal.App.4th at
pp. 1559-1560.)
We find unhelpful defendants' reliance on Justice Paul Steven's dissenting
opinion to support their interpretation. (Rent-A-Center, supra, 561 U.S. at pp. 76-88
(dis. opn. of Stevens, J.).) Justice Stevens disagreed with the majority's view that a
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court can "pluck" a delegation clause from a potentially invalid or illegal arbitration
clause, and enforce the delegation clause despite the alleged invalidity of the arbitration
provision in which it is nested. (Id. at pp. 85, 86-87.) In explaining this objection,
Justice Stevens suggested that under the majority opinion, "A claim that an entire
arbitration agreement is invalid will not go to the court unless the party challenges the
particular sentences that delegate such claims to the arbitrator, on some contract ground
that is particular and unique to those sentences." (Id. at p. 86, third italics added.)
Viewed in context, this "particular and unique" observation does not support that
a challenge to the delegation clause cannot be the same as the challenge to the
arbitration agreement. Justice Stevens was emphasizing the majority's view (with
which he disagreed) that the objection must be directed to the delegation clause and not
to the larger arbitration provisions into which it is nested, and did not consider
circumstances when a party makes the same or similar challenge to the delegation and
arbitration clause. Moreover, a dissenting opinion's interpretation of a majority opinion
is not binding, and its validity is particularly questionable when, as here, it is based on
an expansive reading of the majority opinion beyond the particular holding of the case.
Recently, a federal court held the court was the proper entity to resolve
challenges to a delegation clause in a similar RPA. (See Minnieland Private Day
School, Inc. v. Applied Underwriters Captive Risk Assurance Co. (4th Cir. 2017) 867
F.3d 449 (Minnieland).) In Minnieland, a daycare center sued AUCRA, asserting that
the " 'Equity Comp' " program and the RPA "constituted an unlawful 'attempt to
18
circumvent' various Virginia laws related to insurance and workers' compensation." (Id.
at pp. 451, 452.) In response to AUCRA's motion to compel arbitration under an
arbitration provision and delegation clause essentially identical to the provision here,
Minnieland argued that Virginia law "rendered void 'any' arbitration provision in the
RPA" (including the delegation clause) and therefore the court must determine the
enforceability of the delegation clause and the arbitration provision. (Id. at p. 453.) The
district court agreed, and refused to enforce the delegation clause. (Ibid.)
The Fourth Circuit affirmed, reasoning:
"Rent-A-Center makes clear . . . that '[i]f a party challenges the
validity under § 2 of the precise agreement to arbitrate at issue, the
federal court must consider the challenge before ordering
compliance with that agreement . . . .' [¶] . . . [¶]
"[AUCRA] argues that Minnieland, like the plaintiff in Rent-A-
Center, failed to specifically challenge the delegation provision in
the RPA. But before the district court, Minnieland argued that
[Virginia law] rendered void 'any' arbitration provision in the RPA
[citation], necessarily including the delegation provision, which is
simply 'an additional, antecedent agreement' to arbitrate [citations].'
And to avoid any doubt that its challenge to the enforceability of
the arbitration agreements in the RPA extended to the delegation
provision, Minnieland expressly asserted that under [a Virginia
statute], 'the court must resolve the validity of the arbitration
provision,' an argument relevant only to the enforceability of the
delegation provision. [Citation.] Accordingly, Minnieland
'challenged the validity of that delegation with sufficient force and
specificity' to satisfy Rent-A-Center." (Minnieland, supra, 867
F.3d at pp. 455-456.)
In Minnieland, the specific challenge to the delegation clause was the same as the
challenge to the arbitration clause as a whole, but this fact did not preclude the
19
reviewing court from upholding the district court's conclusion that it was the proper
entity to rule on the enforceability of the delegation clause. (Ibid.)
This case and Minnieland are factually distinguishable from the decisions relied
upon by defendants. (See Matter of Monarch Consulting, Inc. v. National Union Fire
Insurance Company of Pittsburgh, PA (2016) 26 N.Y.3d 659 (Monarch Consulting);
Mike Rose's Auto Body, Inc. v. Applied Underwriters Captive Risk Assurance Company,
Inc. (N.D. Cal. 2016) 2016 WL 5407898; South Jersey Sanitation Company, Inc. v.
Applied Underwriters Captive Risk Assurance Company, Inc. (3d Cir. 2016) 840 F.3d
138; Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assurance
Company, Inc. (6th Cir. 2014) 590 Fed. Appx. 482, 485-486.) Although these courts
addressed the enforceability of the same (or similar) arbitration clause contained in the
same (or similar) insurance contracts, the courts found the plaintiff-insured had not
asserted a specific challenge to the delegation clause. (See, e.g., Monarch Consulting,
at p. 676 ["a review of the record reveals that [the insured] did not specifically direct
any challenge to the delegation clauses empowering the arbitrators to determine
gateway questions of arbitrability," italics added]; Mike Rose's, at p. *9 [rejecting
plaintiff-insured's argument that "the delegation provision cannot be enforced because
the Agreements themselves are unlawful"; see also Milan Express, at pp. 485-486.)
Defendants argue that a party cannot trigger a judicial determination on the
enforceability of a delegation provision merely by labeling a challenge to the broader
arbitration clause or the substantive contract as a challenge to the delegation provision.
20
They maintain "it is not enough simply to state that one is challenging" the delegation
provision " 'if [the argument] is a subterfuge for a challenge that the entire agreement
. . .' is unenforceable." We agree with these assertions. But the need for a careful
inquiry regarding the nature of the party's challenge does not support a blanket rule that
any time there is a similar challenge to the delegation clause and to other contractual
provisions, a court must ignore its statutory obligation to rule on state law contract
defenses specifically asserted against the enforceability of the delegation clause. (See
Malone, supra, 226 Cal.App.4th at pp. 1559-1560.)
In this case, the court found Nielsen asserted a specific, substantive challenge to
the delegation clause separate from the challenge to the arbitration clause and the
underlying contracts, and this challenge was not merely a device to challenge other
provisions in the contract. The record supports this conclusion. The court thus properly
found it was the proper entity to rule on Nielsen's challenges to the enforceability of the
delegation clause.
II. Enforceability of Delegation Clause and Arbitration Provision
Defendants contend that assuming the court had the authority to decide the issue,
the court erred in concluding Nielsen met its burden to show the delegation clause and
arbitration provision were unenforceable. This contention is without merit. The court
properly found these provisions were void and unenforceable because defendants had
not filed these provisions with the Insurance Commissioner as required by section
11658 and Regulations section 2268.
21
A. Applicable Law
Section 11658 states in relevant part:
"(a) 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
Workers Compensation Insurance Rating Bureau] . . . and 30 days
have expired from the date the form or endorsement is received by
the commissioner from the rating organization . . . , unless the
commissioner gives written approval of the form or endorsement
prior to that time.
"(b) If the commissioner notifies the insurer that the filed form or
endorsement does not comply with the requirements of law,
specifying the reasons for his or her opinion, it is unlawful for the
insurer to issue any policy or endorsement in that form." (Italics
added.)
At the time the RPA was executed, Regulations section 2268 provided: "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 . . . ." (Italics added.) In 2016,
this Regulations section was amended to delete the reference to "collateral agreements"
and instead state: "An insurer shall not use a policy form, endorsement form, or
ancillary agreement except those filed and approved by the Commissioner in
accordance with these regulations." (Regs., § 2268, subd. (b), italics added.) The
Regulations were also amended to define an "Ancillary agreement" to include a "dispute
resolution agreement[]." (Regs., § 2250, subd. (f).)
In this case, Applied (and/or its subsidiary) filed the CIC guaranteed-cost policies
with the Insurance Commissioner and the Workers Compensation Insurance Rating
Bureau (Rating Bureau). These policies did not require arbitration or contain a
22
delegation clause, and instead provided that the insured had the right to appeal CIC's
classification and rating decisions to administrative agencies under applicable statutory
procedures (§§ 11737, 11753.1).
Shortly after, AUCRA (another one of Applied's wholly-owned subsidiaries)
entered into the contractually-required RPA with Nielsen that changed many of the CIC
policy terms, and for the first time included the broad arbitration provision requiring all
disputes to be submitted to arbitration (including the enforceability of the arbitration
clause), and arbitration proceedings to be conducted in the British Virgin Islands before
"disinterested" insurance executives. The Insurance Commissioner had no opportunity
to consider or evaluate these arbitration provisions.
In Shasta Linen, the Insurance Commissioner found the RPA between Shasta
Linen and AUCRA was a "collateral agreement" within the meaning of Regulations
section 2268 because it modified and supplanted the terms of the CIC policies and
therefore it should have been filed with, and approved by, the Insurance Department
before it became effective. (Shasta Linen, at pp. 1, 46, 53, 58.) The Insurance
Commissioner also found the failure to do so rendered the RPA void as a matter of law.
(Id. at p. 65.) The Insurance Commissioner emphasized section 11658's mandatory
language that an unfiled policy or endorsement " 'shall not be issued by an insurer' " and
that "issuing an unapproved policy or endorsement 'is unlawful.' " (Shasta Linen, at p.
65, italics added.)
The Insurance Commissioner also observed:
23
"By its own admission [Applied] designed EquityComp and the
RPA to circumvent workers' compensation policy. It would defeat
the statutory purpose to allow CIC to bypass the governmental
review process by simply waiting until after the insurance policy
has gone into effect to introduce additional or modified terms to its
insurance program. Workers' compensation insurance is
mandatory and California employers expect the statute's protection.
CIC knew of the review and pre-approval process and deliberately
ignored that process with regard to the RPA. . . .
"[T]he legal requirement for modifying any workers' compensation
insurance obligation is to endorse the agreement to the insurance
policy. This is done by filing the agreement with the [Rating
Bureau], which in turn will file it with the Insurance
Commissioner, and endorse it to the insurance policy after the
requisite time or approval. Unfiled side agreements are prohibited
and shall not be used without complying with these requirements;
otherwise, they are not permitted in this state and are void as a
matter of law." (Shasta Linen, at pp. 66-67, fns. omitted.)
Although Shasta Linen pertained primarily to the validity of the entire RPA
agreement, the Insurance Commissioner also considered the RPA's arbitration
provisions. The Insurance Commissioner found the RPA's arbitration clause was
"intended to supersede [the dispute resolution provisions] of the [CIC] guaranteed cost
policy" and the arbitration clause substantially modified these CIC provisions. (Shasta
Linen, at p. 56.) The Insurance Commissioner found that Regulations section 2268 was
"clear on its face" that "unendorsed side agreements are prohibited" and an "arbitration
obligation" comes within the definition of a "side agreement" that must be filed before it
is effective. (Shasta Linen, at p. 43.)
24
B. Filing Required for RPA's Delegation Clause and Arbitration Agreement
The RPA considered in Shasta Linen was essentially identical to the RPA issued
to Nielsen. Although we are not bound by the Shasta Linen decision (Yamaha Corp. of
America v. State Board of Equalization (1998) 19 Cal. 4th 1, 7-8), we find its analysis
persuasive on the prohibition of unfiled "collateral" or "side-agreements." Under the
plain language of section 11658 and Regulations section 2268, defendants were required
to file the delegation clause and arbitration provision with the Insurance Commissioner
because these provisions were collateral side agreements that materially modified the
earlier approved CIC policies.4
Defendants contend the delegation clause and arbitration requirement contained
in the RPA were not subject to the filing requirement because AUCRA is not an
"insurer"; the RPA is not a workers' compensation policy; and the RPA did not
"modify" the CIC issued policies. The Insurance Commissioner rejected identical
arguments. After carefully reviewing the terms of Shasta Linen's RPA, the Insurance
Commissioner found that "it is clear the RPA's dispute resolution . . . provisions are
meant to replace those of [the CIC policies]" and that the "affiliated entities" (Applied,
4 The 2016 amendments to Regulations sections 2268 and 2250, subdivision (f)
specifically require ancillary agreements, including dispute resolution provisions, to be
filed with the Insurance Commissioner. Although these amendments are not expressly
applicable here (as the RPA was executed earlier) and there is no information showing
the reason for the amendment, we agree with Nielsen's contention that these
amendments appeared to be clarifications, rather than substantive changes, to the
applicable regulations.
25
AUCRA, and CIC) were "so enmeshed" and "intertwined" that they should be
considered together in determining whether the RPA constitutes a modification of the
CIC policies. (Shasta Linen, at pp. 57, 49.)
The record here supports those findings. The RPA expressly pertains to
Nielsen's workers' compensation coverage and states that it "represents the entire
understanding . . . between the parties with respect to the subject matter hereof and
supersedes all prior negotiations, proposals, letters of intent, correspondence and
understandings relating to the subject matter hereof." The RPA additionally states that
its terms apply "to all payroll, premium, and losses occurring under the Policies . . . ."
In materials provided to Nielsen, Applied stated that its EquityComp program (that
includes the CIC policies and the RPA agreement) "is a seamlessly integrated package
providing nationwide workers' compensation coverage . . . ." Based on this evidence,
we are unpersuaded by defendants' attempt to recharacterize their integrated
EquityComp program to suggest that the statutory filing requirements should not apply.
We likewise find unhelpful defendants' argument that the added arbitration
provision was not an "endorsement" or a "collateral" agreement under applicable law.
(§ 11658; Regs., § 2268.) An endorsement "is an amendment to or modification of an
existing policy of insurance" that " 'may alter or vary any term or condition of the
policy.' " (Adams v. Explorer Ins. Co. (2003) 107 Cal. App. 4th 438, 451, 450.) A
collateral agreement is a "secondary," "accompanying," or "auxiliary" agreement.
(Random House Dict. of the English Language (2d. Unabridged ed. 1987) p. 403, col.
26
2.) As found by the Insurance Commissioner, the RPA's arbitration provision and
delegation clause are endorsements and/or collateral agreements to the CIC policies
because they relate to and materially alter the dispute resolution provisions in the earlier
approved policy. (See American Zurich Ins. Co. v. Country Villa Service Corp. (C.D.
Cal. 2015) 2015 WL 4163008, *5-6 (American Zurich).)
Defendants contend the RPA was not an "endorsement" because it was issued by
AUCRA rather than CIC. Defendants rely on authority which they say describe an
endorsement as a modification to the existing insurance contract. (See e.g. Aerojet-
General Corp. v. Transport Indem. Co. (1997) 17 Cal. 4th 38, 50, fn. 4; Frontier Oil
Corp. v. RLI Ins. Co. (2007) 153 Cal. App. 4th 1436, 1463; Mission Nat'l Ins. Co. v.
Coachella Valley Water Dist. (1989) 210 Cal. App. 3d 484, 496-497.) Those decisions
are unhelpful because the courts were not presented with an insurance arrangement
similar to here that required the use of two policies, the second of which amends and/or
supplants the first.
C. Arbitration Clause and Delegation Provision are Unenforceable
Having found that the arbitration and delegation provisions were prohibited
because they were not properly filed with the Insurance Commissioner, we determine
these provisions are unenforceable. Generally, " ' "a contract made in violation of a
regulatory statute is void." ' " (Malek v. Blue Cross of California (2004) 121
Cal. App. 4th 44, 70; see Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal. 2d 141, 150;
American Zurich, supra, 2015 WL 4163008, at p. *6.) Although there are exceptions to
27
this rule if the unenforceability would result in unjust enrichment, forfeiture, or other
form of unfair outcome (see Malek, at pp. 70-71), none of these factual circumstances
are present here.
Section 11658, subdivision (b) expressly states it is "unlawful" for an insurer to
issue any policy or endorsement or form that is not approved by the Insurance
Commissioner, and the regulations implementing this law made clear that collateral
agreements must be filed to be effective. (See Regs., § 2268.) These prohibitions
would have no meaning if the insurer could enforce contracts despite having violated
the disclosure and approval requirements. Allowing the insurer to make material
modifications to the filed and approved dispute resolution mechanism without the
knowledge of the Rating Bureau or the Insurance Commissioner would effectively
remove any regulatory oversight of this process.
In California, workers' compensation insurance (or an adequate substitute) is
mandatory, and the Insurance Commissioner is charged with closely scrutinizing
insurance plans to protect both workers and their employers. (See American Zurich,
supra, 2015 WL 4173009, at p. *17.) To accomplish this objective, the Legislature
mandated that the Commissioner have full access to insurance information through
mandatory filing requirements. (Regs., § 2268.) It follows that a violation of these
requirements prevents crucial regulatory oversight and thus renders the unfiled
agreement unlawful and void as a matter of law.
28
Defendants contend the arbitration provisions were not void and unenforceable
because section 11658 and Regulations section 2268 do not specifically provide for this
remedy, citing Gonzales v. Concord Gardens Mobile Home Park, Ltd. (1979) 90
Cal. App. 3d 871.) In Gonzales, a building contractor violated a statute requiring the
contractor to give a notice describing lien laws to a client (a homeowners' association)
before starting work. (Id. at pp. 873-874.) When the contractor sued the homeowners'
association for payment, the association argued the contractor had forfeited his rights to
compensation by failing to provide this notice. (Ibid.) The court disagreed,
emphasizing that the association's argument would impose "a forfeiture upon the
contractor," which is disfavored. (Id. at p. 873.) The court also noted that because the
statute did not include a penalty for noncompliance, and another provision in the
contractor's license law expressly required a forfeiture (for working without a license),
the maxim of " 'expressio unius est exclusio alterius' " applied to support a conclusion
that no forfeiture was required for the violation of the lien law notice. (Id. at p. 874.)
This case is distinguishable. First, by not enforcing the unfiled delegation and
arbitration provisions, there is no forfeiture. The parties will still have their day in
court, and all parties will have the opportunity to present evidence, arguments, and
defenses. Second, unlike the statutory notice requirement at issue in Gonzales, the
statutes here specifically provide that an agreement that has not been appropriately filed
is "unlawful." (§ 11658, subd. (b).)
29
Relying on section 11658.5, defendants contend the Legislature specifically
rejected the rule that an unfiled arbitration or delegation clause is void as a matter of
law. Section 11658.5 states in relevant part:
"(a)(1) An insurer that intends to use a dispute resolution or
arbitration agreement to resolve disputes arising in California out
of a workers' compensation insurance policy or endorsement issued
to a California employer shall disclose to the employer,
contemporaneously with any written quote that offers to provide
insurance coverage, that choice of law and choice of venue or
forum may be a jurisdiction other than California and that these
terms are negotiable between the insurer and the employer. The
disclosure shall be signed by the employer as evidence of receipt
where the employer accepts the offer of coverage from that insurer.
"(2) After compliance with paragraph (1), a dispute resolution or
arbitration agreement may be negotiated by the insurer and the
employer before any dispute arises.
"(b) Nothing in this section is intended to interfere with any
authority granted to the Insurance Commissioner under current law.
"(c) Failure by the insurer to observe the requirements of
subdivision (a) shall result in a default to California as the choice
of law and forum for resolution of disputes arising in California."
Defendants contend this statute shows "the Legislature knows how to impose
penalties for non-compliance with statutory requirements, and could have included a
provision rendering all unfiled arbitration agreements void if that were the Legislature's
intention. Because it did not do so, this penalty may not be inferred."
The argument is unpersuasive. Based on the statute's plain language, it is
apparent the Legislature enacted section 11658.5 in 2011 to address a specific issue—
the circumstances when an insurance contract designates the controlling law or the
30
forum/venue to be a jurisdiction other than California. The Legislature did not prohibit
these terms, but wanted to ensure employers were fully informed of the existence and
consequences of such provisions. The statute thus requires that the insured be made
aware of these extra-territorial provisions, be informed that they are negotiable, and sign
a disclosure form "as evidence of" the receipt of this information. (§ 11658.5, subd.
(a)(1).)
In the proceedings below, Nielsen did not challenge the choice-of-law or
forum/venue provisions; it asserted that the delegation and arbitration clause are
unenforceable because they were not filed and approved by the Insurance Department as
required under section 11658 and Regulations section 2268. Because section 11658.5
does not concern or address the filing requirement issue, it does not govern the remedies
for an insurer's intentional failure to file and obtain approval of a modified dispute
resolution provision.
Defendants rely on legislative history materials underlying section 11658.5.
However, on the issue before us (whether the unfiled arbitration provision is
enforceable), section 11658 and Regulations section 2268 are clear and unambiguous,
and therefore resort to legislative history regarding a separate code section is
inappropriate. (See Microsoft Corp. v. Franchise Tax Bd. (2006) 39 Cal. 4th 750, 758.)
Moreover, on our review of the proffered committee reports and the evolution of
the statutory language, we do not discern any clear intent to eliminate or modify the
filing requirement for endorsements or collateral agreements as it pertains to arbitration-
31
related provisions or to limit the remedies for an unfiled arbitration agreement. The
proposed bill that was eventually enacted as section 11658.5 changed many times and
its final language appears to have been the result of a compromise. Because (as here) a
bill's committee and floor analysis reports are often fragmented and unclear, "the wisest
course is to rely on legislative history only when that history itself is unambiguous."
(J.A. Jones Construction Co. v. Superior Court (1994) 27 Cal. App. 4th 1568, 1578, fn.
omitted.)
Under this principle, the legislative materials relating to section 11658.5 do not
support that the Legislature was intending to create rules applicable to section 11658's
filing requirements with respect to an arbitration agreement or a delegation clause. This
is particularly true given the recent regulatory clarification that arbitration agreements
must be filed and approved under section 11658 and Regulations section 2268. (See
Regs., § 2268 (as amended 2016), § 2250, subd. (f).) Defendants do not challenge the
validity of this amendment or suggest it is inconsistent with section 11658.5.
We also find unhelpful defendants' reliance on decisions reached by courts
interpreting other states' insurance statutes. (See e.g. McCullough Transfer Co. v.
Virginia Sur. Co. (6th Cir. 1954) 213 F.2d 440, 442; Ritter v. Shotwell (1964) 63 Wash.
2d 601, 606-607 [388 P.2d 527].) These statutes are different from here, and none of
these decisions involved the question whether an unfiled arbitration provision is
enforceable under California law.
32
Based on our conclusion, we do not reach Nielsen's alternate argument (not
raised below) that the FAA is reverse-preempted under the McCarran-Ferguson Act (15
U.S.C. §§ 1011-1015.) (See Citizens of Humanity, LLC v. Applied Underwriters, Inc.
(2017) 17 Cal.App.5th 806, 812-821; Monarch Consulting, supra, 26 N.Y.3d at pp.
670-674.)5
DISPOSITION
Order affirmed. Appellants to bear respondents' costs on appeal.
HALLER, J.
WE CONCUR:
McCONNELL, P. J.
HUFFMAN, J.
5 We emphasize that in resolving the parties' contentions on the "who decides" and
the arbitration/delegation clause enforceability issues, we base our determinations solely
on the limited factual record presented in the motion to compel proceedings. These
determinations do not preclude the parties from litigating the merits of Nielsen's causes
of action and requested relief at trial based on a more complete evidentiary record.
33