Monarch Consulting, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh

• Decision Date: 11 September 2014
• Citation: 2014 N.Y. Slip Op. 06158,993 N.Y.S.2d 275,123 A.D.3d 51
• Parties: In re MONARCH CONSULTING, INC., et al., Petitioners–Appellants. v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Respondent–Respondent. In re National Union Fire Insurance Company of Pittsburgh, PA., Petitioner–Respondent, v. Priority Business Services, Inc., formerly known as Inland Valley Staffing Services, etc., Respondent–Appellant. In re National Union Fire Insurance Company of Pittsburgh, PA., Petitioner–Appellant, v. Source One Staffing, LLC, Respondent–Respondent.
• Court: New York Supreme Court — Appellate Division

?123 A.D.3d 51
993 N.Y.S.2d 275
2014 N.Y. Slip Op. 06158

In re MONARCH CONSULTING, INC., et al., Petitioners–Appellants.
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Respondent–Respondent.
In re National Union Fire Insurance Company of Pittsburgh, PA., Petitioner–Respondent,
v.
Priority Business Services, Inc., formerly known as Inland Valley Staffing Services, etc., Respondent–Appellant.
In re National Union Fire Insurance Company of Pittsburgh, PA., Petitioner–Appellant,
v.
Source One Staffing, LLC, Respondent–Respondent.

Supreme Court, Appellate Division, First Department, New York.

Sept. 11, 2014

Petitions to compel arbitration dismissed; cross-petitions to stay arbitration granted.

Gische, J., joined by Manzanet–Daniels, J., filed dissenting opinion.

[993 N.Y.S.2d 278]

Bond, Schoeneck & King, PLLC, Syracuse (Clifford G. Tsan of counsel), and Roxborough, Pomerance, Nye & Adreani, LLP, Woodland Hills, CA (Nicholas P. Roxborough of the bar of the State of California, admitted pro hac vice, of counsel), for Monarch Consulting, Inc., Elite Management, Inc., Brentwood Television Funnies, Inc., Professional Employer Option, Inc., Recrurrent Software Solutions, Ahill, Inc., The Accounting Group, LLC and Pes Payroll, IA, Inc., appellants.

Anderson Kill & Olick, P.C., New York (Jeffrey E. Glen and Edward J. Stein of counsel), for Priority Business Services, Inc., appellant.

Sidley Austin LLP, New York (Nicholas P. Crowell, Andrew W. Stern and Gazeena K. Soni of counsel), for National Union

[993 N.Y.S.2d 279]

Fire Insurance Company of Pittsburgh, PA., appellant/respondent.
Anderson Kill & Olick, P.C., New York (Rene F. Hertzog of counsel), for Source One Staffing, LLC., respondent.
PETER TOM, J.P., JOHN W. SWEENY, KARLA MOSKOWITZ, SALLIE MANZANET–DANIELS, JUDITH J. GISCHE, JJ. MOSKOWITZ, J.

In this appeal, we are called on to decide whether three insureds are compelled to arbitrate their disputes with their workers' compensation insurance carrier even though the carrier failed to file the arbitration agreements, contained in side agreements to the insurance policies, with the California Department of Insurance as California law requires.

We find that, in light of the strong policy under California law of regulating insurance carriers and their agreements with their insureds, the side agreements, along with the arbitration clauses contained in them, are not enforceable because the insurer failed to file them with the Workers' Compensation Insurance Rating Bureau (WCIRB) and the California Department of Insurance (CDI). Thus, the petitions to compel arbitration are dismissed and the cross petitions to stay arbitration are granted.

The Parties

National Union Fire Insurance Company of Pittsburgh, PA. (National Union) is an insurance company licensed in Pennsylvania with its principal place of business in New York. Source One Staffing, Monarch Consulting, Inc. and Priority Business Services, Inc. (collectively, the insureds) are all either California companies or have their principal places of business in that state. ¹

The California Statutory Insurance Scheme

California law provides for a mandatory insurance program so that employers can compensate workers injured on the job, and employers must buy workers' compensation insurance as a condition of doing business in California ( see Cal. Labor Code § 3700). The state of California has also created a comprehensive system to regulate the insurance companies that provide workers' compensation insurance to employers. To that end, the California legislature grants broad authority to the California Commissioner of Insurance (the Commissioner) and WCIRB to regulate and oversee the form and substance of all workers' compensation insurance plans, including the rates and practices of all insurance companies in the state. The Insurance Code provides that the WCIRB was organized, among other purposes, “[t]o provide reliable statistics and rating information with respect to workers' compensation insurance and employer's liability insurance incidental thereto and written in connection therewith” and “[t]o examine policies, daily reports, endorsements or other evidences of insurance for the purpose of ascertaining whether they comply with the provisions of law and to make reasonable rules governing their submission” (Cal. Ins. Code § 11750.3).

The law requires workers' compensation carriers, before issuing a workers' compensation insurance policy, to file copies of their insurance policies, endorsements and forms with WCIRB; after a

[993 N.Y.S.2d 280]

preliminary inspection, the WCIRB then sends the filed documents to the CDI for approval ( see Cal. Ins. Code § 11658, see also Cal. Ins. Code §§ 11750.3 and 11735, 10 California Code of Regulations (CCR) §§ 2218 and 2268). The CDI has 30 days in which to reject the filed form or endorsement; should the CDI reject the documents, “it is unlawful for the insurer to issue any policy or endorsement in that form” (Cal. Ins. Code § 11658[b] ). Thus, two regulatory agencies must review and approve all workers' compensation insurance forms; the Commissioner, however, has the exclusive authority to regulate, accept, and reject workers' compensation insurance plans.

The Policies and the Payment Agreements

As required under the various laws regulating insurance in the state of California, the insureds each secured, from National Union, annual workers' compensation insurance policies, the earliest of which went into effect on October 21, 2003 and the latest of which terminated on October 21, 2010 (collectively, the policies).

After National Union issued the policies, it sent each insured a series of additional agreements and addenda (the payment agreements), governing, among other things, the extension of credit and deferral of certain payment obligations, the timing of those payment obligations, and default and dispute resolution procedures and processes. The payment agreements contained numerous defined terms, including the insureds' “Payment Obligation,” defined as “the amounts that [insureds] must pay [National Union] for the insurance and services in accordance with the terms of the Policies, this Agreement, and any similar primary casualty insurance Policies and agreements with [National Union] incurred before the inception date hereof.” These amounts included, but were not limited to, “premiums and premium surcharges,” “deductible loss reimbursement” and any amount that National Union paid to a claimant on the insureds' behalf.

The payment agreements also provided that, if an insured defaulted under those agreements, National Union could “change any or all unexpired Policies under Loss Reimbursement or Deductible plan to Non–Deductible plans for the remaining term of any such Policy, to become effective after ten days written notice to [the insured]. [National Union] will therewith increase the premiums for those Policies in accordance with our applicable rate plan.”

The payment agreements contained broad arbitration clauses requiring the arbitration of “[a]ny” disputes concerning an insured's payment obligation as well as “[a]ny other unresolved dispute” arising out of the payment agreements. The payment agreements further provided that any arbitration would be governed by the Federal Arbitration Act (FAA) and that the arbitrators “will have exclusive jurisdiction over the entire matter in dispute, including the question as to its arbitrability” and that “any action or proceeding concerning arbitrability, including motions to compel or to stay arbitration, may be brought only in a court of competent jurisdiction in the City, County, and State of New York.”

The insureds do not dispute that they executed each of the payment agreements, including all schedules and addenda. For its part, National Union does not dispute that the payment agreements were not attached to the policies and, in fact, were usually issued months after the policies.

In each of the above-entitled actions, a dispute arose between the insureds and National Union when the insureds defaulted on the payment agreements, and National Union demanded arbitration under those agreements. In each case, the insureds

[993 N.Y.S.2d 281]

resisted arbitration by challenging, among other things, the payment agreements' arbitration clauses, arguing that they violated California Insurance Code § 11658.

The insureds argued that despite the arbitration clause, the issue was for the courts to decide. Specifically, the insureds asserted that the Federal Arbitration Act (FAA) could not preempt the California Insurance Code for one of two reasons: first, because the challenge is to the arbitration clause itself, rather than to the entire agreement; and, second, because the McCarran–Ferguson Act precludes preemption. In response, National Union argued that neither the payment agreements nor the arbitration clauses constitute policies or endorsements, and thus, there is no requirement that the CDI review them because they are not subject to the same regulation as the policies themselves.

The CDI Directive

On February 14, 2011, the CDI issued a directive to the WCIRB reiterating its position that under “Insurance Code Section 11658, 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 rating organization pursuant to subdivision (e) of Section 11750.3.” The directive states, “[T]he Insurance Commissioner has prohibited the use of Collateral Agreements, which is synonymous with the term ‘side-agreement,’ concerning workers' compensation insurance unless they are attached to the policy.” The directive further notes: “The Department is particularly concerned with arbitration provisions contained in unattached collateral agreements and considers such terms unenforceable unless the insurer can demonstrate that the arbitration agreement was expressly...