A California Court of Appeal recently affirmed a trial court’s denial of an insurer’s motion to compel arbitration, finding that the trial court had the authority to decide the issue of the enforceability of an arbitration agreement, and that the arbitration agreement at issue, which had not been filed with the California Insurance Commission, was void.

In Jackpot Harvesting, Inc. v. Applied Underwriters, Inc., No. H044953, 2019 WL 1396749 (Cal. App. 6 Dist., Mar. 28, 2019), Applied Underwriters and associated entities sold a workers’ compensation package to Jackpot.  The agreements included a Request to Bind coverage, which contained an arbitration clause specifying that arbitration would take place in Nebraska, and a Reinsurance Participation Agreement, which did not contain an arbitration provision and instead contained a forum selection clause, which provided that disputes must be brought in either federal court or in Nebraska state court.  Applied’s affiliate simultaneously issued a workers’ compensation policy to Jackpot, which also did not contain an arbitration provision.  Although the workers’ compensation policy had been filed with the California Department of Insurance (“DOI”), the Reinsurance Participation Agreement and the Request to Bind (the latter of which was the only document to contain an arbitration provision), were not.

After the policy was issued, Jackpot became dissatisfied with what it viewed as increasing policy premiums and a mishandling of the claims under the policy.  Jackpot filed suit, alleging that Applied and its affiliates violated state law by issuing the policy without first submitting all of the “collateral agreements” (i.e., the Reinsurance Participation Agreement and the Request to Bind) along with the policy to the California Department of Insurance for regulatory approval.

The trial court denied the Applied entities’ motion to compel arbitration, holding that the arbitration agreement in the request to bind was void and unenforceable because it was a “collateral agreement” to the policy that should have been filed with the DOI for regulatory approval.

The Court of Appeal agreed, noting that under the severability principle, challenges to the validity of an arbitration agreement are treated separately from challenges to the validity of the entire contract.  The Court noted that if a party specifically challenges an arbitration provision, then courts will decide the enforceability of an arbitration provision.  However, if a party challenges the enforceability of a contract as a whole, then it is an issue for an arbitrator to decide.

The Court concluded that Jackpot specifically challenged the enforceability of the arbitration agreement in the Request to Bind, noting that Jackpot had specifically targeted the arbitration provision in its complaint, and that it argued in its briefs that the provision was invalid under California and Nebraska law.  The Court rejected the Applied entities’ argument that Jackpot failed to make an argument with respect to the arbitration provision that was “analytically distinct” from its argument that the policy was invalid.

The Court noted that, although Jackpot was required to specifically challenge the arbitration provision, which Jackpot did, it was not required to craft a legal argument for that challenge related solely to the arbitration provision.  The Court concluded that Jackpot specifically raised the argument that the arbitration provision was invalid, and that this argument was distinct from the other claims it made with respect to the worker’s compensation program.  This is not Applied’s first ‘rodeo’, as the Court also noted that courts in other jurisdictions had examined the same Applied entities’ worker’s compensation program and determined that the trial court, rather than an arbitrator, should decide the enforceability of the relevant arbitration provision.  The Court joined these other decisions to reach the same conclusion.

The Court then found that the arbitration provision in the Request to Bind was invalid because it was part of a collateral agreement that materially changed the dispute resolution terms of the worker’s compensation policy, and therefore, should have been submitted to the DOI for regulatory approval.  The Applied entities’ failure to do so was a violation of California law and was void.

This decision presents a cautionary tale to insurers: make sure that the relevant agreements contain arbitration provisions (and any other provision) on which the insurer intends to rely, and if there are other provisions in collateral agreements, then make sure those collateral agreements have also been submitted for regulatory approval. It appears that Applied is ‘stuck’ with this programs contractual formulation using a ‘collateral agreement’ in an effort to arbitrate any disputes.  Until this formulation is changed, Applied can likely expect the same result from any subsequent proceedings.

Although no lottery was involved, Jackpot hit the jackpot, and based on prior decisions, the odds were in its favor!