Workers’ Compensation Side Agreements in a Nutshell
Proliferation of Disputes
By Donald DeCarlo, Esq.
The workers’ compensation policy, referred to as the “standard policy” is used in all states with the exception of the four exclusive fund states of North Dakota, Ohio, Washington and Wyoming. In the majority of states, the National Council on Compensation Insurance (NCCI) files the standard policy with insurance departments for approval on behalf of their insurance company members, which is required under the insurance laws of the states before it can be used. In a number of state independent rating bureaus file the policy (ie. California, Massachusetts and New York).
Insurance carriers have a requirement in the law to file policy forms, rates and rating plans or at least loss costs before they are used for premium billings. The state insurance regulators have a corresponding legal authority to approve such filings. There are various so-called loss sensitive programs for larger insureds that further modify premiums charged, which programs include Retrospective Rating Plans, Dividend Plans, Deductible Programs.
Recently there have been disputes between insurance carriers and their insureds, which have resulted in increased litigation or arbitration that involve “side agreements” related to loss sensitive programs. The side agreements are generally described as payment terms and collateral protection for loss sensitive programs. The recent raft of litigation/arbitration related to the side agreements has resulted in additional premium charges to insureds, clearly more than just payment terms or collateral for premium for loss adjustments.
The Florida Office of Insurance Regulation issued an Informational Memorandum OIR-16-03M issued on May 24, 2016 focused primarily on large deductible loss sensitive programs. The purpose of the memorandum is to address the use of unfiled side agreements in conjunction with workers’ compensation and employer’s liability policies applicable to risks and exposures in Florida. The Office of Insurance Regulation (“Office”) has become aware that some insurance companies are entering into side agreements related to workers’ compensation and employers’ liability insurance policies. These side agreements sometimes alter the rules, rates, rating plans, forms or endorsements that were approved by the regulator for use.
The Florida regulators wanted to remind insurers of pertinent Florida Statutes and Florida Administrative Code Rules governing workers’ compensation and employer’s liability insurances. Specifically, Section 627.091(1), Florida Statutes, provides in part: “As to workers’ compensation and employer’s liability insurances, every insurer shall file with the office every manual of classifications, rules, and rates, every rating plan, and every modification of any of the foregoing which it proposes to use.” Section 627.410(1), Florida Statutes provides:
Section 627.191, Florida Statutes, prohibits insurers from making or issuing “a contract or policy of worker’s compensation or employer’s liability insurance except in accordance with the filings which are in effect for such insurers.
Rule 690-189.016, Florida Administrative Code, implements Sections 627.091 and 627.410, Florida Statutes, and requires in part that each insurer “file with the Office every manual of classification, rules, rates rating plans, deviations and every modification of any of the foregoing, which it proposes to use.” Rule 690-189.016(3), Florida Administrative Code, further requires each insurer to “file with the Office all policy forms and endorsements as defined in Section 627.402,F.S., which it proposes to use.” The term “policy” is defined in Section 627.403(3), Florida Statutes, to mean “a written contract of insurance or written agreement for or effecting insurance, or the certificate thereof, by whatever name called, and includes all clauses, riders, endorsements, and papers that are a part thereof.”
The California Insurance Commissioner issued on May 29, 2016 a cease and desist order, stating side agreements are illegal, as related to workers’ compensation policies if unapproved. The order requires carries to cease and desist from issuing or renewing any workers’ compensation policy that use an unfiled and unapproved ancillary or collateral agreement,
The New York Department of Financial Services (“DFS”) is looking into the issue of unfiled side agreements involving workers’ compensation policies. The related issue of whether insurance carrier/insured disputes involving these agreements should be arbitrated or go to court because the side agreements frequently include arbitration clauses.
The disputes referred above have proliferated in states such as California, Florida, Kentucky, New York, Wisconsin and elsewhere. The cases are working their way through the courts and arbitrations, and before insurance regulators. Disputes based on side agreements by a few insurance carriers will continue until they follow the law/regulations and orders of the regulators as referred to above. Stay tuned!
