22 Cal.App.5th 1096
Cal. Ct. App.2018Background
- Nielsen Contracting and T&M Framing (Nielsen) purchased Applied Underwriters’ EquityComp workers’ compensation program; Nielsen signed a Request to Bind and a separate Reinsurance Participation Agreement (RPA) with AUCRA that supplanted many CIC policy terms and added a broad arbitration clause and a delegation clause.
- The RPA required arbitration in the British Virgin Islands under AAA rules and expressly delegated questions about the arbitration clause’s enforceability to the arbitrator.
- Nielsen sued, alleging the RPA (including the arbitration and delegation clauses) was an adhesion, unconscionable, and illegal because it was not filed with or approved by the California Insurance Commissioner as required by Insurance Code §11658 and Cal. Code Regs. §2268.
- The Insurance Commissioner previously found a substantially identical RPA void in Matter of Shasta Linen Supply, Inc.; defendants later entered a stipulated cease-and-desist acknowledging the decision’s precedential effect.
- AUCRA moved to compel arbitration relying on the RPA’s delegation clause and AAA rules; Nielsen argued it specifically challenged the delegation clause’s enforceability and that the arbitration/delegation provisions were void as unfiled and unlawful. The trial court denied the motion; defendants appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Who decides enforceability of the delegation clause? | Nielsen: raised a specific challenge to the delegation clause; court must decide before sending question to arbitrator. | AUCRA: Rent-A-Center means arbitrator decides because the delegation clause delegates enforceability questions and challenges were to the RPA as a whole. | Court: Nielsen specifically challenged the delegation clause; under Rent‑A‑Center the court must resolve such a specific challenge. |
| Whether the arbitration and delegation clauses were subject to insurer filing/approval requirements | Nielsen: clauses materially modified CIC’s filed policy and thus were collateral endorsements/ancillary agreements that had to be filed and approved; unfiled provisions are unlawful and void. | Defendants: RPA/clauses are not insurer-filed endorsements, AUCRA is not the insurer, and §11658/Regs. §2268 do not void unfiled arbitration clauses; §11658.5 shows legislature didn’t intend voiding. | Court: clauses materially modified the approved CIC policy, were required to be filed/approved, and because they were not, they are unenforceable and void under §11658 and Regs. §2268. |
| Preemption/FAA effect on state filing requirement | Nielsen: state filing law is a generally applicable contract defense allowing invalidation of arbitration provision under FAA §2. | Defendants: FAA preempts state law or §11658.5 limits remedy — unfiled arbitration clauses should still be enforceable. | Court: FAA permits applying state contract defenses; the court did not find preemption and rejected defendants’ §11658.5 argument as inapplicable. |
| Remedy for unfiled collateral agreement | Nielsen: unenforceable/void; no forfeiture; parties still may litigate merits. | Defendants: statutes do not expressly provide voiding as remedy; Gonzales suggests forfeiture not favored. | Court: voiding is appropriate; §11658(b) makes unapproved forms unlawful and regulatory scheme requires disabling unfiled side agreements. |
Key Cases Cited
- Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010) (court must decide specific challenges to a delegation clause; delegation clause is severable)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) (arbitration clause is separable from underlying contract; arbitrator decides validity of the main contract absent a specific challenge to the arbitration clause)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (arbitrability and separability principles underpinning arbitrator vs. court allocation)
- Preston v. Ferrer, 552 U.S. 346 (2008) (FAA establishes federal policy favoring arbitration and separability of arbitration clauses)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (FAA savings clause permits generally applicable contract defenses to invalidate arbitration agreements)
- Malone v. Superior Court, 226 Cal.App.4th 1551 (2014) (California application of Rent‑A‑Center: court resolves unconscionability challenges specifically directed to delegation clause)
- Minnieland Private Day School, Inc. v. Applied Underwriters Captive Risk Assurance Co., 867 F.3d 449 (4th Cir. 2017) (federal court held court was proper forum to decide enforceability of similar RPA delegation clause)
- McGill v. Citibank, N.A., 2 Cal.5th 945 (2017) (arbitration agreements subject to generally applicable contract defenses under state law)