In a dispute between Low Desert Empire Pizza (Desert Pizza) and its insurers over alleged mismanagement of claims and unjustifiable cost increases related to a workers' compensation insurance program, a California appellate court recently upheld the denial of the insurers' motion to compel arbitration. The insurers had moved to compel based on arbitration provisions contained, not in the underlying insurance policy, but in side agreements modifying the policy's terms. Desert Pizza opposed arbitration, claiming the arbitration provisions were unenforceable because the insurers did not file the side agreements containing them with the California Insurance Commissioner—they only filed the underlying insurance policy with the state. The lower court agreed and the appellate court affirmed.
First, the court held that it was entitled to decide the enforceability of the delegation and arbitration provisions—not the arbitrator. It rejected the insurers' argument based on Rent-A-Center, West, Inc. v. Jackson that Desert Pizza did not directly challenge the arbitration agreement's delegation clause. The court found Desert Pizza sufficiently argued the arbitration and delegation clauses were voided by the insurers' failure to file them with the state as required by the insurance statutes, heavily citing another recent California appellate court's decision. The court found that accepting such an argument would undermine the FAA by treating delegation clauses differently than other contractual provisions.
Second, the court rejected the insurers' challenge to the lower court's finding that provisions were unenforceable based on the failure to file them with the state. It reasoned that it would defeat the statutory purpose of the filing requirement if insurers could file an insurance policy with the state, gain approval, and then modify the terms with unfiled side agreements. The plain statutory language required the insurers to file the delegation clause and arbitration provisions because they constituted endorsements, or alternatively, collateral or ancillary agreements that materially altered underlying insurance policy. Furthermore, the court cited subsequent 2016 amendments to the implementing regulations which make clear that the filing requirements apply to dispute resolution agreements.
Finally, the court concluded the proper remedy for noncompliance was voiding the arbitration provisions. It found that the statute's lack of an express grant of authority to void unfiled agreement does not restrict the court's power to do so. The court declined the insurers' invitation to review the legislative history given the clear and unambiguous filing requirement, but noted that even if the history were relevant, it would support the court's conclusion. Low Desert Empire Pizza, Inc. v. Applied Underwriters, Inc., Case No. PSC1602331 (Cal. Ct. App. Oct. 19, 2018).
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