Nielsen Contracting, Inc. v. Applied Underwriters, Inc.

Filed 5/3/18
CERTIFIED FOR PUBLICATION

COURT OF APPEAL, FOURTH APPELLATE DISTRICT

DIVISION ONE

STATE OF CALIFORNIA

NIELSEN CONTRACTING, INC. et al., D072393

Plaintiffs and Respondents,

v. (Super. Ct. No.
37-2017-00001814-CU-CO-CTL)
APPLIED UNDERWRITERS, INC. et al.,

Defendants and Appellants.

APPEAL from a judgment of the Superior Court of San Diego County, Gregory

W. Pollack, Judge. Affirmed.

Hinshaw & Culbertson, Spencer Y. Kook and Travis Wall for Defendants and

Appellants.

Larry J. Lichtenegger for Plaintiffs and Respondents.

Nielsen Contracting, Inc. and T&M Framing, Inc. (collectively Nielsen) sued

several entities (defendants) alleging these entities fraudulently provided workers'

compensation policies to Nielsen that were illegal and contained unconscionable terms.

Defendants moved to compel arbitration and stay the litigation under an arbitration
provision in one defendant's contract, titled Reinsurance Participation Agreement

(RPA). Nielsen opposed the motion, asserting the arbitration provision and the

provision's delegation clause were unlawful and void. After briefing and a hearing, the

trial court agreed and denied defendants' motion.

Defendants appeal. They contend: (1) the arbitrator, and not the court, should

decide the validity of the RPA's arbitration agreement under the agreement's delegation

clause; and (2) if the court properly determined it was the appropriate entity to decide

the validity of the delegation and arbitration provisions, the court erred in concluding

these provisions are not enforceable. We reject these contentions and affirm.

FACTUAL AND PROCEDURAL SUMMARY

We summarize the facts based on the complaint's allegations, and the materials

submitted in support of and opposition to the motion to compel arbitration. We describe

only those facts necessary to resolve the issues pertaining to the arbitration issue, and

make no attempt to discuss all of the facts relevant to Nielsen's substantive allegations

against defendants.

Background

In 2012, Applied Underwriters, Inc. (Applied) provided quotes to Nielsen for

Applied's patented workers' compensation program known as "EquityComp." Based on

Applied's representations about the program's low cost and profit-sharing benefits,

Nielsen signed a "Request to Bind" with Applied. Under this agreement, Nielsen was

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initially issued a guaranteed-cost workers' compensation policy by California Insurance

Company (CIC), one of Applied's subsidiaries.

The Request to Bind also required Nielsen to sign a separate agreement (the

RPA) with another one of Applied's subsidiaries, Applied Underwriters Captive Risk

Assurance Company, Inc. (AUCRA). Nielsen and AUCRA signed the RPA in

December 2012. The RPA had a three-year term.

The RPA modified and supplanted many of the CIC policy terms, including

adding an arbitration provision. As discussed in more detail below, this provision

required arbitration of "[a]ny dispute or controversy" in the British Virgin Islands before

"disinterested officials of insurance or reinsurance companies." The arbitration

provision delegated to the arbitrator the authority to rule on disputes concerning the

enforceability of the arbitration provision. This is known as a "delegation clause."

Complaint

In January 2017, Nielsen filed a complaint against Applied and its two

subsidiaries (AUCRA and CIC) (collectively defendants). Nielsen sought a declaration

that the RPA is void and its provisions are unconscionable, and sought damages for

defendants' misrepresentations and breach of the implied covenant of good faith and fair

dealing. Nielsen alleged the RPA is an adhesion contract with unfair and

unconscionable terms; the RPA was written and structured to purposely mislead Nielsen

and to intentionally avoid and circumvent California insurance laws; and the RPA is an

illegal contract because it was not filed with or approved by the California Department

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of Insurance (Insurance Department), as required by Insurance Code section 11658 and

title 10 of the California Code of Regulations section 2268.1 Nielsen alleged

"EquityComp is the brainchild of Applied," which caused CIC to issue an approved

guaranteed-cost workers' compensation insurance policy "to give the appearance of

compliance with the California insurance regulations, although CIC is never responsible

for making payment on claims using its own money."

Several months before this complaint was filed, in June 2016, the California

Insurance Commissioner (Insurance Commissioner) issued an administrative decision in

a case involving a different insured (Shasta Linen Supply, Inc.) that had challenged the

same EquityComp insurance program offered by these same defendants. (Matter of

Shasta Linen Supply, Inc., Decision & Order, dated June 20, 2016, File No. AHB-

WCA-14-31 (Shasta Linen).) In the 70-page decision, the Insurance Commissioner

found the RPA to be unlawful and void as a matter of law for various reasons, including

that it had not been filed and approved by the Insurance Department before it was

issued. (Ibid.) In reaching this conclusion, the Insurance Commissioner also found the

governing administrative regulations require workers' compensation insurers to obtain

approvals for "side agreements," including arbitration provisions that differ from the

1 Further unspecified statutory references are to the Insurance Code. Further
references to Regulations sections are to title 10 of the California Code of Regulations.
Unless otherwise stated, all references to Regulations section 2268 are to the version
existing in 2012 when the parties signed the RPA.

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dispute resolution provisions in a previously approved insurance policy. (Id. at p. 43;

See Regs., § 2268.)

Two months after the Shasta Linen administrative decision was issued, the

Insurance Department entered into a stipulated cease-and-desist order with Applied,

CIC, and AUCRA. In this stipulation, defendants stated they disagreed with the Shasta

Linen administrative decision, but acknowledged the decision "was made precedential"

under Government Code section 11425.60, subdivision (b).2 Defendants also agreed it

would not issue any new RPA or renew any existing RPA unless the policy is filed with

and approved by the Insurance Department.3

Motion to Compel Arbitration

In response to Nielsen's complaint, AUCRA moved to compel arbitration under

the RPA's lengthy arbitration provision. Of relevance here, the provision states:

"(A) It is the express intention of the parties to resolve any disputes
arising under this Agreement without resort to litigation in order to
protect the confidentiality of their relationship and their respective
business and affairs. Any dispute or controversy . . . arising out of

2 This code section permits an administrative agency to designate a decision as
"precedent" if the decision "contains a significant legal or policy determination of
general application that is likely to recur." (Gov. Code, § 11425.60, subd. (b).) An
administrative decision so designated can be relied upon by the agency in later cases.
(Id., subd. (a).)

3 We deny Nielsen's request that we take judicial notice of a later settlement
agreement between defendants and the Insurance Department in which defendants
agreed to dismiss their superior court writ petition challenging the Shasta Linen
decision. This settlement agreement was not before the trial court, and therefore it is
not properly before this court. (See Vons Companies, Inc. v. Seabest Foods, Inc. (1996)
14 Cal.4th 434, 444, fn. 3.)

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 or related to this Agreement shall be fully determined in the British
Virgin Islands under the provisions of the American Arbitration
Association [AAA].

"(B) All disputes between the parties relating in any way to (1) the
execution and delivery, construction or enforceability of this
Agreement, (2) the management or operations of the Company, or
(3) any other breach or claimed breach of this Agreement or the
transactions contemplated herein shall be . . . finally determined
exclusively by binding arbitration in accordance with the
procedures provided herein. . . . [¶] . . . [¶]

"(D) . . . All arbitrators shall be active or retired, disinterested
officials of insurance or reinsurance companies not under the
control or management of either party to this Agreement and will
not have personal or financial interests in the result of the
arbitration. [¶] . . . [¶]

"(G) . . . Judgment upon the award rendered by the arbitrator or
arbitrators may be entered by any court of competent jurisdiction in
Nebraska or application may be made in such court for judicial
acceptance of the award and an order of enforcement as the law of
Nebraska may require or allow.

"(H) The award of the arbitrator or arbitrators shall be binding and
conclusive on the parties . . . .

"(I) All arbitration proceedings shall be conducted in the English
language in accordance with the rules of the [AAA] and shall take
place in Tortola, British Virgin Islands or at some other location
agreed to by the parties." (Italics added.)

In seeking arbitration under these provisions, AUCRA argued the italicized

language in paragraph (B) requiring arbitration of disputes concerning the

"enforceability of this Agreement" was a delegation clause that gave the arbitrator the

sole and exclusive authority to rule on challenges to the enforceability of the arbitration

agreement. AUCRA presented evidence that the AAA rules likewise delegate to the

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arbitrator the exclusive authority to rule on the arbitration clause's enforceability.

AUCRA thus argued the court had no authority to rule on challenges to the

enforceability of the arbitration agreement or its delegation clause.

As explained in more detail below, AUCRA alternatively argued that if the court

reached the arbitrability issues, the arbitration clause is valid and enforceable.

Defendants Applied and CIC (not named parties in the RPA) joined in the

motion to the extent AUCRA sought to stay the litigation pending the arbitration.

Opposition to Motion to Compel

In opposing the motion to compel arbitration, Nielsen argued that under settled

authority a delegation clause is severable from the main contract and from the

arbitration clause, and the court must first resolve challenges to the enforceability of the

delegation clause if the party brings a specific challenge to the delegation clause. (See

Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S 63 (Rent-A-Center).)

Nielsen argued that its specific challenge to the delegation clause satisfied this

test and therefore the court (and not the arbitrator) was required to rule on the

enforceability of the delegation clause and the arbitration provision. In explaining this

challenge, Nielsen argued that the RPA's arbitration provision and delegation clause

materially changed the dispute resolution provisions in the approved CIC insurance

policies, and therefore they were "collateral" agreements required to be filed with the

Insurance Department under section 11658 and Regulations section 2268. Nielsen

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maintained that by not filing these provisions with the Insurance Department, the

provisions were void and unenforceable.

Nielsen also presented evidence showing the RPA was "virtually identical" to the

agreement found to be unlawful and void in the Shasta Linen administrative decision.

Reply to Motion to Compel

In reply, defendants argued that because Nielsen's illegality challenge was "not

specific" to the arbitration provision or its delegation clause, and instead "implicates"

the RPA "as a whole," the court must allow the arbitrator to decide if the delegation

clause and arbitration agreement are enforceable. Defendants alternatively argued that

even if the court were to consider Nielsen's challenge to the enforceability of the

arbitration provisions (including the delegation provision), these provisions are

enforceable under California law despite the failure to file them with the appropriate

agency.

Court's Ruling

After a hearing, the court denied defendants' motion to compel. On the question

whether the court has the authority to decide the enforceability of the delegation and

arbitration clauses, the court stated that Nielsen was not merely derivatively challenging

the legality of the main contract, but instead was asserting that "both the delegation

provision and the arbitration provision are illegal and unenforceable separate and apart

from the evident unenforceability of the entire RPA, albeit for the same reason, i.e.,

failure to file with, and obtain approval from, the Insurance Commissioner."

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 On the merits, the court agreed with Nielsen that neither the delegation clause

nor the arbitration requirement was enforceable. The court reasoned: "The delegation

and arbitration provisions qualify as collateral agreements which modify the obligation

of the underlying CIC policy that should have been attached to the original CIC policy

as endorsements and filed with the Insurance Commissioner for approval. Because they

were not filed and approved, they are unenforceable as a matter of law pursuant to

[section] 11658 and [Regulations section] 2268."

Defendants appeal.

DISCUSSION

In ruling on a motion to compel arbitration, the trial court shall order parties to

arbitrate "if it determines that an agreement to arbitrate the controversy exists . . . ."

(Code Civ. Proc., § 1281.2.) "[T]he party seeking arbitration bears the burden of

proving the existence of an arbitration agreement by a preponderance of the evidence,

and the party opposing arbitration bears the burden of proving by a preponderance of

the evidence any defense . . . ." (Peng v. First Republic Bank (2013) 219 Cal.App.4th

1462, 1468.) In evaluating an order denying a motion to compel arbitration, " ' "we

review the arbitration agreement de novo to determine whether it is legally enforceable,

applying general principles of California contract law." ' " (Carmona v. Lincoln

Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 82.) If the trial court resolved

contested facts, we "review the court's factual determinations for substantial evidence."

(Ibid.)

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 The parties agree the RPA is governed by the Federal Arbitration Act (FAA),

which provides that a contractual arbitration provision "shall be valid, irrevocable, and

enforceable, save upon such grounds as exist at law or in equity for the revocation of

any contract." (9 U.S.C. § 2.) The FAA " 'declare[s] a national policy favoring

arbitration' of claims that parties contract to settle in that manner." (Preston v. Ferrer

(2008) 552 U.S. 346, 353 (Preston).) Arbitration is a matter of contract, and "parties

are generally free to structure their arbitration agreements as they see fit." (Volt Info.

Sciences v. Leland Stanford Jr. University (1989) 489 U.S. 468, 479.) However, under

the FAA's savings clause, an arbitration agreement is not enforceable if a party

establishes a state law contract defense, such as fraud, duress, unconscionability, or

illegality. (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339; Poublon v.

C.H. Robinson Co. (9th Cir. 2017) 846 F.3d 1251, 1259; see McGill v. Citibank, N.A.

(2017) 2 Cal.5th 945, 962.) Although arbitration agreements cannot be "invalidated 'by

defenses that apply only to arbitration or that derive their meaning from the fact that an

agreement to arbitrate is at issue,' " the enforceability of the agreement remains subject

to defenses applicable to all other contracts. (McGill, at p. 962.)

Under these general principles, we consider defendants' contentions that the trial

court erred in concluding (1) the court, and not the arbitrator, decides the enforceability

of the delegation clause and arbitration agreement; and (2) the unfiled delegation and

arbitration agreements were unlawful and therefore unenforceable.

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 I. "Who Decides": Enforceability of Delegation Clause

The parties agree the delegation clause expresses the parties' clear intent to

delegate the issue of the enforceability of the arbitration clause to the arbitrator, but that

applicable law requires courts to rule on specific challenges to the enforceability of

delegation clauses before compelling the matter to arbitration. They disagree as to

whether Nielsen raised an adequate challenge to the enforceability of the delegation

clause to require judicial resolution of the challenge.

We conclude the court properly found Nielsen's challenge to the delegation

clause was sufficient to require the court to rule on the question of the enforceability of

the delegation clause. To explain this conclusion, it is helpful to understand the general

rules pertaining to the "who decides" issue, and the United States Supreme Court's view

that a delegation clause, an arbitration agreement, and the underlying agreement are

each evaluated—for purposes of applying the FAA—as severable contracts. (Rent-A-

Center, supra, 561 U.S. at pp. 70-72.)

A. Legal Principles

It has long been settled that when parties have agreed to arbitration, challenges to

the validity of the underlying contract, including contract defenses such as fraud in the

inducement or illegality, are for the arbitrator to decide. (Preston, supra, 552 U.S. at p.

353; Buckeye Check Cashing, Inc, v. Cardegna (2006) 546 U.S. 440, 443-445

(Buckeye); Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967) 388 U.S. 395, 402-

403 (Prima Paint).) This is because the arbitration clause is viewed as separate from

11
the underlying contract. (Buckeye, at pp. 445-446.) Thus, allegations that the main

contract is unlawful or unconscionable does not affect the enforceability of the

arbitration clause. (Ibid.)

However, challenges to the validity of the arbitration clause itself are generally

resolved by the court in the first instance. (Rent-A-Center, supra, 561 U.S. at p. 71;

Buckeye, supra, 546 U.S. at pp. 444-445; Prima Paint, supra, 388 U.S. at pp. 403-404.)

An exception to this rule applies when the parties have clearly and unmistakably agreed

to delegate questions regarding the validity of the arbitration clause to the arbitrator.

(Rent-A-Center, at pp. 68-69; Aanderud v. Superior Court (2017) 13 Cal.App.5th 880,

891-892.) Such delegation clauses are generally enforceable according to their terms.

(First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944; Aanderud, at pp.

891-892; Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal.App.4th 227, 239.)

In Rent-A-Center, the United States Supreme Court addressed the question of

who rules on a challenge to the enforceability of a delegation clause: does the court

decide or does the arbitrator decide? (Rent-A-Center, supra, 561 US. at pp. 67-76.) The

high court began this analysis by confirming that a delegation clause—nested within the

larger arbitration agreement—must be viewed as an independent ("severable") contract.

(Id. at pp. 70-71.) Thus, the court held that as with any independent contract, the court

must resolve specific challenges to the delegation clause that are proper under section 2

of the FAA, i.e., any "generally applicable contract defenses." (Rent-A-Center, at pp.

68, 71.) "If a party challenges the validity under [FAA] § 2 of the precise agreement to

12
arbitrate at issue, the federal court must consider the challenge before ordering

compliance with" the delegation clause. (Id. at p. 64.) Otherwise, courts would be

treating the delegation clause on a ground that would " 'elevate it over other forms of

contract,' " which is not permitted under the FAA. (Id. at p. 71.)

But—consistent with its severability reasoning—the Rent-A-Center court made

clear this rule requiring judicial consideration of contractual defenses to the

enforceability of the delegation clause is triggered only if the challenge is "directed

specifically to the agreement to arbitrate." (Rent-A-Center, supra, 561 U.S. at p. 71.)

Thus, an argument that the arbitration agreement or the underlying contract is

unenforceable is not sufficient to trigger the court's obligation to resolve contentions

regarding the enforceability of a severable delegation clause. (Id. at pp. 71-76.)

The facts of Rent-A-Center illustrate this principle. There, the plaintiff filed an

employment discrimination suit against his former employer. (Rent-A-Center, supra,

561 U.S. at p. 65.) The employer responded by seeking arbitration based on an

arbitration agreement that was separate from the underlying employment contract and

contained a delegation clause. (Id. at pp. 65-66.) The employee opposed the motion,

arguing the arbitration agreement was unconscionable. (Id. at p. 66.) But the employee

challenged only the validity of the arbitration contract and never "even mention[ed] the

delegation provision." (Id. at p. 72.) On this record, the United States Supreme Court

found the arbitrator, and not the court, was to consider the enforceability of the

delegation clause because the employee had not challenged the delegation provision.

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(Id. at pp. 72-76.) The court reasoned that the delegation clause must be viewed as a

separate agreement nested within the arbitration agreement, and unless the clause is

directly challenged, the arbitrator must resolve all of the disputed issues. (Ibid.)

Following Rent-A-Center, California courts have recognized that a court is the

appropriate entity to resolve challenges to a delegation clause nested in an arbitration

clause when a specific contract challenge is made to the delegation clause. (See, e.g.,

Malone v. Superior Court (2014) 226 Cal.App.4th 1551, 1559-1560 (Malone).) In

Malone, the plaintiff challenged an employment contract and the delegation clause on

grounds of unconscionability. (Id. at pp. 1556-1557.) The reviewing court held the

unconscionability challenge to the delegation clause was for the court to resolve. (Id. at

pp. 1559-1560.) However, after evaluating that challenge, the court held the

unconscionability challenge to the delegation clause was without merit. (Id. at pp.

1560-1571.) The court thus held the delegation clause was enforceable and the

defendants' motion to compel arbitration should have been granted. (Id. at pp. 1570-

1571.)

B. Analysis

Defendants contend the court erred in finding that Nielsen raised an adequate

challenge to the enforceability of the delegation clause to require judicial resolution of

the challenge. The contention is unsupported. Unlike the Rent-A-Center plaintiff and

similar to the Malone plaintiff, Nielsen expressly raised contract challenges to the

delegation clause. In opposing the motion to compel, Nielsen argued the delegation

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clause was unenforceable because it constituted a material change to CIC's filed

insurance policy (which contained no arbitration clause or delegation clause), and the

RPA's delegation clause constituted an endorsement or collateral agreement that was

required to be filed with the Insurance Department to be lawful and enforceable.

Defendants countered by arguing California law does not require a delegation clause to

be approved by the Insurance Department, and an unfiled arbitration provision and

delegation clause remain lawful and enforceable. These issues relate specifically to the

enforceability of the delegation clause, and thus under Rent-A-Center these issues are

for the court to resolve.

Relying on Rent-A-Center, defendants contend a court may rule on the

enforceability of the delegation clause only if the plaintiff's challenge to the delegation

clause is different from the plaintiff's challenge to the entire contract or to the entire

arbitration agreement. This argument is not supported by Rent-A-Center's holding or

logic. The high court's determination that a court should generally resolve specific state

law contractual defenses to delegation clauses was based on its view that delegation

clauses are separate and severable from the remainder of the arbitration agreement and

the FAA requires that arbitration provisions be enforced in the same manner as other

types of contractual provisions. (Rent-A-Center, supra, 561 U.S. at pp. 67, 70-71 [under

the FAA courts must "place[] arbitration agreements on an equal footing with other

contracts"].) If we were to accept defendants' argument that courts are precluded from

ruling on specific contract defenses to a delegation clause merely because the same

15
defense is also brought to invalidate other related contractual provisions, we would be

treating delegation clauses differently than other contractual clauses, a determination

that would be inconsistent with the FAA, as interpreted by the United States Supreme

Court.

Rent-A-Center's discussion of the type of challenge that might have triggered

court review supports our conclusion. In explaining that the plaintiff's

unconscionability challenge specifically concerned only the validity of the contract as a

whole, rather than the delegation provision, the high court noted that the plaintiff's

"substantive unconscionability arguments assailed arbitration procedures called for by

the [arbitration] contract—the fee-splitting arrangement and the limitations on

discovery—procedures that were to be used during arbitration under both the agreement

to arbitrate employment-related disputes and the delegation provision. It may be that

had [the employee] challenged the delegation provision by arguing that these common

procedures as applied to the delegation provision rendered that provision

unconscionable, the challenge should have been considered by the court. To make such

a claim based on the discovery procedures, [the employee] would have had to argue that

the limitation upon the number of depositions causes the arbitration of his claim that the

Agreement is unenforceable to be unconscionable. That would be, of course, a much

more difficult argument to sustain than the argument that the same limitation renders

arbitration of his factbound employment-discrimination claim unconscionable.

Likewise, the unfairness of the fee-splitting arrangement may be more difficult to

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establish for the arbitration of enforceability than for arbitration of more complex and

fact-related aspects of the alleged employment discrimination. [The employee],

however, did not make any arguments specific to the delegation provision; he argued

that the fee-sharing and discovery procedures rendered the entire Agreement invalid."

(Rent-A-Center, supra, 561 U.S. at p. 74.)

This hypothetical—that if the plaintiff had directed the unconscionability

challenges (the unfairness of the discovery limitations and the fee-splitting

requirements) against the delegation clause in addition to asserting the same

unconscionability challenge against the arbitration agreement itself, the "challenge [to

the delegation clause] should have been considered by the court"—illustrates that the

focus of the court's attention must be on whether the particular challenge is directed at

the delegation clause, not whether the same challenges are also directed at the

agreement or agreements into which the delegation clause is embedded or nested.

(Rent-A-Center, supra, 561 U.S. at p. 74.) Under Rent-A-Center's reasoning, whether

the challenge is the same as or different from the challenge to other provisions of the

arbitration clause or underlying agreement is not dispositive of whether the challenge is

specifically directed at the delegation clause. (See Malone, supra, 226 Cal.App.4th at

pp. 1559-1560.)

We find unhelpful defendants' reliance on Justice Paul Steven's dissenting

opinion to support their interpretation. (Rent-A-Center, supra, 561 U.S. at pp. 76-88

(dis. opn. of Stevens, J.).) Justice Stevens disagreed with the majority's view that a

17
court can "pluck" a delegation clause from a potentially invalid or illegal arbitration

clause, and enforce the delegation clause despite the alleged invalidity of the arbitration

provision in which it is nested. (Id. at pp. 85, 86-87.) In explaining this objection,

Justice Stevens suggested that under the majority opinion, "A claim that an entire

arbitration agreement is invalid will not go to the court unless the party challenges the

particular sentences that delegate such claims to the arbitrator, on some contract ground

that is particular and unique to those sentences." (Id. at p. 86, third italics added.)

Viewed in context, this "particular and unique" observation does not support that

a challenge to the delegation clause cannot be the same as the challenge to the

arbitration agreement. Justice Stevens was emphasizing the majority's view (with

which he disagreed) that the objection must be directed to the delegation clause and not

to the larger arbitration provisions into which it is nested, and did not consider

circumstances when a party makes the same or similar challenge to the delegation and

arbitration clause. Moreover, a dissenting opinion's interpretation of a majority opinion

is not binding, and its validity is particularly questionable when, as here, it is based on

an expansive reading of the majority opinion beyond the particular holding of the case.

Recently, a federal court held the court was the proper entity to resolve

challenges to a delegation clause in a similar RPA. (See Minnieland Private Day

School, Inc. v. Applied Underwriters Captive Risk Assurance Co. (4th Cir. 2017) 867

F.3d 449 (Minnieland).) In Minnieland, a daycare center sued AUCRA, asserting that

the " 'Equity Comp' " program and the RPA "constituted an unlawful 'attempt to

18
circumvent' various Virginia laws related to insurance and workers' compensation." (Id.

at pp. 451, 452.) In response to AUCRA's motion to compel arbitration under an

arbitration provision and delegation clause essentially identical to the provision here,

Minnieland argued that Virginia law "rendered void 'any' arbitration provision in the

RPA" (including the delegation clause) and therefore the court must determine the

enforceability of the delegation clause and the arbitration provision. (Id. at p. 453.) The

district court agreed, and refused to enforce the delegation clause. (Ibid.)

The Fourth Circuit affirmed, reasoning:

"Rent-A-Center makes clear . . . that '[i]f a party challenges the
validity under § 2 of the precise agreement to arbitrate at issue, the
federal court must consider the challenge before ordering
compliance with that agreement . . . .' [¶] . . . [¶]

"[AUCRA] argues that Minnieland, like the plaintiff in Rent-A-
Center, failed to specifically challenge the delegation provision in
the RPA. But before the district court, Minnieland argued that
[Virginia law] rendered void 'any' arbitration provision in the RPA
[citation], necessarily including the delegation provision, which is
simply 'an additional, antecedent agreement' to arbitrate [citations].'
And to avoid any doubt that its challenge to the enforceability of
the arbitration agreements in the RPA extended to the delegation
provision, Minnieland expressly asserted that under [a Virginia
statute], 'the court must resolve the validity of the arbitration
provision,' an argument relevant only to the enforceability of the
delegation provision. [Citation.] Accordingly, Minnieland
'challenged the validity of that delegation with sufficient force and
specificity' to satisfy Rent-A-Center." (Minnieland, supra, 867
F.3d at pp. 455-456.)

In Minnieland, the specific challenge to the delegation clause was the same as the

challenge to the arbitration clause as a whole, but this fact did not preclude the

19
reviewing court from upholding the district court's conclusion that it was the proper

entity to rule on the enforceability of the delegation clause. (Ibid.)

This case and Minnieland are factually distinguishable from the decisions relied

upon by defendants. (See Matter of Monarch Consulting, Inc. v. National Union Fire

Insurance Company of Pittsburgh, PA (2016) 26 N.Y.3d 659 (Monarch Consulting);

Mike Rose's Auto Body, Inc. v. Applied Underwriters Captive Risk Assurance Company,

Inc. (N.D. Cal. 2016) 2016 WL 5407898; South Jersey Sanitation Company, Inc. v.

Applied Underwriters Captive Risk Assurance Company, Inc. (3d Cir. 2016) 840 F.3d

138; Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assurance

Company, Inc. (6th Cir. 2014) 590 Fed. Appx. 482, 485-486.) Although these courts

addressed the enforceability of the same (or similar) arbitration clause contained in the

same (or similar) insurance contracts, the courts found the plaintiff-insured had not

asserted a specific challenge to the delegation clause. (See, e.g., Monarch Consulting,

at p. 676 ["a review of the record reveals that [the insured] did not specifically direct

any challenge to the delegation clauses empowering the arbitrators to determine

gateway questions of arbitrability," italics added]; Mike Rose's, at p. *9 [rejecting

plaintiff-insured's argument that "the delegation provision cannot be enforced because

the Agreements themselves are unlawful"; see also Milan Express, at pp. 485-486.)

Defendants argue that a party cannot trigger a judicial determination on the

enforceability of a delegation provision merely by labeling a challenge to the broader

arbitration clause or the substantive contract as a challenge to the delegation provision.

20
They maintain "it is not enough simply to state that one is challenging" the delegation

provision " 'if [the argument] is a subterfuge for a challenge that the entire agreement

. . .' is unenforceable." We agree with these assertions. But the need for a careful

inquiry regarding the nature of the party's challenge does not support a blanket rule that

any time there is a similar challenge to the delegation clause and to other contractual

provisions, a court must ignore its statutory obligation to rule on state law contract

defenses specifically asserted against the enforceability of the delegation clause. (See

Malone, supra, 226 Cal.App.4th at pp. 1559-1560.)

In this case, the court found Nielsen asserted a specific, substantive challenge to

the delegation clause separate from the challenge to the arbitration clause and the

underlying contracts, and this challenge was not merely a device to challenge other

provisions in the contract. The record supports this conclusion. The court thus properly

found it was the proper entity to rule on Nielsen's challenges to the enforceability of the

delegation clause.

II. Enforceability of Delegation Clause and Arbitration Provision

Defendants contend that assuming the court had the authority to decide the issue,

the court erred in concluding Nielsen met its burden to show the delegation clause and

arbitration provision were unenforceable. This contention is without merit. The court

properly found these provisions were void and unenforceable because defendants had

not filed these provisions with the Insurance Commissioner as required by section

11658 and Regulations section 2268.

21
 A. Applicable Law

Section 11658 states in relevant part:

"(a) 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
Workers Compensation Insurance Rating Bureau] . . . and 30 days
have expired from the date the form or endorsement is received by
the commissioner from the rating organization . . . , unless the
commissioner gives written approval of the form or endorsement
prior to that time.

"(b) If the commissioner notifies the insurer that the filed form or
endorsement does not comply with the requirements of law,
specifying the reasons for his or her opinion, it is unlawful for the
insurer to issue any policy or endorsement in that form." (Italics
added.)

At the time the RPA was executed, Regulations section 2268 provided: "No

collateral agreements modifying the obligation of either the insured or the insurer shall

be made unless attached to and made a part of the policy . . . ." (Italics added.) In 2016,

this Regulations section was amended to delete the reference to "collateral agreements"

and instead state: "An insurer shall not use a policy form, endorsement form, or

ancillary agreement except those filed and approved by the Commissioner in

accordance with these regulations." (Regs., § 2268, subd. (b), italics added.) The

Regulations were also amended to define an "Ancillary agreement" to include a "dispute

resolution agreement[]." (Regs., § 2250, subd. (f).)

In this case, Applied (and/or its subsidiary) filed the CIC guaranteed-cost policies

with the Insurance Commissioner and the Workers Compensation Insurance Rating

Bureau (Rating Bureau). These policies did not require arbitration or contain a

22
delegation clause, and instead provided that the insured had the right to appeal CIC's

classification and rating decisions to administrative agencies under applicable statutory

procedures (§§ 11737, 11753.1).

Shortly after, AUCRA (another one of Applied's wholly-owned subsidiaries)

entered into the contractually-required RPA with Nielsen that changed many of the CIC

policy terms, and for the first time included the broad arbitration provision requiring all

disputes to be submitted to arbitration (including the enforceability of the arbitration

clause), and arbitration proceedings to be conducted in the British Virgin Islands before

"disinterested" insurance executives. The Insurance Commissioner had no opportunity

to consider or evaluate these arbitration provisions.

In Shasta Linen, the Insurance Commissioner found the RPA between Shasta

Linen and AUCRA was a "collateral agreement" within the meaning of Regulations

section 2268 because it modified and supplanted the terms of the CIC policies and

therefore it should have been filed with, and approved by, the Insurance Department

before it became effective. (Shasta Linen, at pp. 1, 46, 53, 58.) The Insurance

Commissioner also found the failure to do so rendered the RPA void as a matter of law.

(Id. at p. 65.) The Insurance Commissioner emphasized section 11658's mandatory

language that an unfiled policy or endorsement " 'shall not be issued by an insurer' " and

that "issuing an unapproved policy or endorsement 'is unlawful.' " (Shasta Linen, at p.

65, italics added.)

The Insurance Commissioner also observed:

23
 "By its own admission [Applied] designed EquityComp and the
RPA to circumvent workers' compensation policy. It would defeat
the statutory purpose to allow CIC to bypass the governmental
review process by simply waiting until after the insurance policy
has gone into effect to introduce additional or modified terms to its
insurance program. Workers' compensation insurance is
mandatory and California employers expect the statute's protection.
CIC knew of the review and pre-approval process and deliberately
ignored that process with regard to the RPA. . . .

"[T]he legal requirement for modifying any workers' compensation
insurance obligation is to endorse the agreement to the insurance
policy. This is done by filing the agreement with the [Rating
Bureau], which in turn will file it with the Insurance
Commissioner, and endorse it to the insurance policy after the
requisite time or approval. Unfiled side agreements are prohibited
and shall not be used without complying with these requirements;
otherwise, they are not permitted in this state and are void as a
matter of law." (Shasta Linen, at pp. 66-67, fns. omitted.)

Although Shasta Linen pertained primarily to the validity of the entire RPA

agreement, the Insurance Commissioner also considered the RPA's arbitration

provisions. The Insurance Commissioner found the RPA's arbitration clause was

"intended to supersede [the dispute resolution provisions] of the [CIC] guaranteed cost

policy" and the arbitration clause substantially modified these CIC provisions. (Shasta

Linen, at p. 56.) The Insurance Commissioner found that Regulations section 2268 was

"clear on its face" that "unendorsed side agreements are prohibited" and an "arbitration

obligation" comes within the definition of a "side agreement" that must be filed before it

is effective. (Shasta Linen, at p. 43.)

24
 B. Filing Required for RPA's Delegation Clause and Arbitration Agreement

The RPA considered in Shasta Linen was essentially identical to the RPA issued

to Nielsen. Although we are not bound by the Shasta Linen decision (Yamaha Corp. of

America v. State Board of Equalization (1998) 19 Cal.4th 1, 7-8), we find its analysis

persuasive on the prohibition of unfiled "collateral" or "side-agreements." Under the

plain language of section 11658 and Regulations section 2268, defendants were required

to file the delegation clause and arbitration provision with the Insurance Commissioner

because these provisions were collateral side agreements that materially modified the

earlier approved CIC policies.4

Defendants contend the delegation clause and arbitration requirement contained

in the RPA were not subject to the filing requirement because AUCRA is not an

"insurer"; the RPA is not a workers' compensation policy; and the RPA did not

"modify" the CIC issued policies. The Insurance Commissioner rejected identical

arguments. After carefully reviewing the terms of Shasta Linen's RPA, the Insurance

Commissioner found that "it is clear the RPA's dispute resolution . . . provisions are

meant to replace those of [the CIC policies]" and that the "affiliated entities" (Applied,

4 The 2016 amendments to Regulations sections 2268 and 2250, subdivision (f)
specifically require ancillary agreements, including dispute resolution provisions, to be
filed with the Insurance Commissioner. Although these amendments are not expressly
applicable here (as the RPA was executed earlier) and there is no information showing
the reason for the amendment, we agree with Nielsen's contention that these
amendments appeared to be clarifications, rather than substantive changes, to the
applicable regulations.

25
AUCRA, and CIC) were "so enmeshed" and "intertwined" that they should be

considered together in determining whether the RPA constitutes a modification of the

CIC policies. (Shasta Linen, at pp. 57, 49.)

The record here supports those findings. The RPA expressly pertains to

Nielsen's workers' compensation coverage and states that it "represents the entire

understanding . . . between the parties with respect to the subject matter hereof and

supersedes all prior negotiations, proposals, letters of intent, correspondence and

understandings relating to the subject matter hereof." The RPA additionally states that

its terms apply "to all payroll, premium, and losses occurring under the Policies . . . ."

In materials provided to Nielsen, Applied stated that its EquityComp program (that

includes the CIC policies and the RPA agreement) "is a seamlessly integrated package

providing nationwide workers' compensation coverage . . . ." Based on this evidence,

we are unpersuaded by defendants' attempt to recharacterize their integrated

EquityComp program to suggest that the statutory filing requirements should not apply.

We likewise find unhelpful defendants' argument that the added arbitration

provision was not an "endorsement" or a "collateral" agreement under applicable law.

(§ 11658; Regs., § 2268.) An endorsement "is an amendment to or modification of an

existing policy of insurance" that " 'may alter or vary any term or condition of the

policy.' " (Adams v. Explorer Ins. Co. (2003) 107 Cal.App.4th 438, 451, 450.) A

collateral agreement is a "secondary," "accompanying," or "auxiliary" agreement.

(Random House Dict. of the English Language (2d. Unabridged ed. 1987) p. 403, col.

26
2.) As found by the Insurance Commissioner, the RPA's arbitration provision and

delegation clause are endorsements and/or collateral agreements to the CIC policies

because they relate to and materially alter the dispute resolution provisions in the earlier

approved policy. (See American Zurich Ins. Co. v. Country Villa Service Corp. (C.D.

Cal. 2015) 2015 WL 4163008, *5-6 (American Zurich).)

Defendants contend the RPA was not an "endorsement" because it was issued by

AUCRA rather than CIC. Defendants rely on authority which they say describe an

endorsement as a modification to the existing insurance contract. (See e.g. Aerojet-

General Corp. v. Transport Indem. Co. (1997) 17 Cal.4th 38, 50, fn. 4; Frontier Oil

Corp. v. RLI Ins. Co. (2007) 153 Cal.App.4th 1436, 1463; Mission Nat'l Ins. Co. v.

Coachella Valley Water Dist. (1989) 210 Cal.App.3d 484, 496-497.) Those decisions

are unhelpful because the courts were not presented with an insurance arrangement

similar to here that required the use of two policies, the second of which amends and/or

supplants the first.

C. Arbitration Clause and Delegation Provision are Unenforceable

Having found that the arbitration and delegation provisions were prohibited

because they were not properly filed with the Insurance Commissioner, we determine

these provisions are unenforceable. Generally, " ' "a contract made in violation of a

regulatory statute is void." ' " (Malek v. Blue Cross of California (2004) 121

Cal.App.4th 44, 70; see Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 150;

American Zurich, supra, 2015 WL 4163008, at p. *6.) Although there are exceptions to

27
this rule if the unenforceability would result in unjust enrichment, forfeiture, or other

form of unfair outcome (see Malek, at pp. 70-71), none of these factual circumstances

are present here.

Section 11658, subdivision (b) expressly states it is "unlawful" for an insurer to

issue any policy or endorsement or form that is not approved by the Insurance

Commissioner, and the regulations implementing this law made clear that collateral

agreements must be filed to be effective. (See Regs., § 2268.) These prohibitions

would have no meaning if the insurer could enforce contracts despite having violated

the disclosure and approval requirements. Allowing the insurer to make material

modifications to the filed and approved dispute resolution mechanism without the

knowledge of the Rating Bureau or the Insurance Commissioner would effectively

remove any regulatory oversight of this process.

In California, workers' compensation insurance (or an adequate substitute) is

mandatory, and the Insurance Commissioner is charged with closely scrutinizing

insurance plans to protect both workers and their employers. (See American Zurich,

supra, 2015 WL 4173009, at p. *17.) To accomplish this objective, the Legislature

mandated that the Commissioner have full access to insurance information through

mandatory filing requirements. (Regs., § 2268.) It follows that a violation of these

requirements prevents crucial regulatory oversight and thus renders the unfiled

agreement unlawful and void as a matter of law.

28
 Defendants contend the arbitration provisions were not void and unenforceable

because section 11658 and Regulations section 2268 do not specifically provide for this

remedy, citing Gonzales v. Concord Gardens Mobile Home Park, Ltd. (1979) 90

Cal.App.3d 871.) In Gonzales, a building contractor violated a statute requiring the

contractor to give a notice describing lien laws to a client (a homeowners' association)

before starting work. (Id. at pp. 873-874.) When the contractor sued the homeowners'

association for payment, the association argued the contractor had forfeited his rights to

compensation by failing to provide this notice. (Ibid.) The court disagreed,

emphasizing that the association's argument would impose "a forfeiture upon the

contractor," which is disfavored. (Id. at p. 873.) The court also noted that because the

statute did not include a penalty for noncompliance, and another provision in the

contractor's license law expressly required a forfeiture (for working without a license),

the maxim of " 'expressio unius est exclusio alterius' " applied to support a conclusion

that no forfeiture was required for the violation of the lien law notice. (Id. at p. 874.)

This case is distinguishable. First, by not enforcing the unfiled delegation and

arbitration provisions, there is no forfeiture. The parties will still have their day in

court, and all parties will have the opportunity to present evidence, arguments, and

defenses. Second, unlike the statutory notice requirement at issue in Gonzales, the

statutes here specifically provide that an agreement that has not been appropriately filed

is "unlawful." (§ 11658, subd. (b).)

29
 Relying on section 11658.5, defendants contend the Legislature specifically

rejected the rule that an unfiled arbitration or delegation clause is void as a matter of

law. Section 11658.5 states in relevant part:

"(a)(1) An insurer that intends to use a dispute resolution or
arbitration agreement to resolve disputes arising in California out
of a workers' compensation insurance policy or endorsement issued
to a California employer shall disclose to the employer,
contemporaneously with any written quote that offers to provide
insurance coverage, that choice of law and choice of venue or
forum may be a jurisdiction other than California and that these
terms are negotiable between the insurer and the employer. The
disclosure shall be signed by the employer as evidence of receipt
where the employer accepts the offer of coverage from that insurer.

"(2) After compliance with paragraph (1), a dispute resolution or
arbitration agreement may be negotiated by the insurer and the
employer before any dispute arises.

"(b) Nothing in this section is intended to interfere with any
authority granted to the Insurance Commissioner under current law.

"(c) Failure by the insurer to observe the requirements of
subdivision (a) shall result in a default to California as the choice
of law and forum for resolution of disputes arising in California."

Defendants contend this statute shows "the Legislature knows how to impose

penalties for non-compliance with statutory requirements, and could have included a

provision rendering all unfiled arbitration agreements void if that were the Legislature's

intention. Because it did not do so, this penalty may not be inferred."

The argument is unpersuasive. Based on the statute's plain language, it is

apparent the Legislature enacted section 11658.5 in 2011 to address a specific issue—

the circumstances when an insurance contract designates the controlling law or the

30
forum/venue to be a jurisdiction other than California. The Legislature did not prohibit

these terms, but wanted to ensure employers were fully informed of the existence and

consequences of such provisions. The statute thus requires that the insured be made

aware of these extra-territorial provisions, be informed that they are negotiable, and sign

a disclosure form "as evidence of" the receipt of this information. (§ 11658.5, subd.

(a)(1).)

In the proceedings below, Nielsen did not challenge the choice-of-law or

forum/venue provisions; it asserted that the delegation and arbitration clause are

unenforceable because they were not filed and approved by the Insurance Department as

required under section 11658 and Regulations section 2268. Because section 11658.5

does not concern or address the filing requirement issue, it does not govern the remedies

for an insurer's intentional failure to file and obtain approval of a modified dispute

resolution provision.

Defendants rely on legislative history materials underlying section 11658.5.

However, on the issue before us (whether the unfiled arbitration provision is

enforceable), section 11658 and Regulations section 2268 are clear and unambiguous,

and therefore resort to legislative history regarding a separate code section is

inappropriate. (See Microsoft Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 750, 758.)

Moreover, on our review of the proffered committee reports and the evolution of

the statutory language, we do not discern any clear intent to eliminate or modify the

filing requirement for endorsements or collateral agreements as it pertains to arbitration-

31
related provisions or to limit the remedies for an unfiled arbitration agreement. The

proposed bill that was eventually enacted as section 11658.5 changed many times and

its final language appears to have been the result of a compromise. Because (as here) a

bill's committee and floor analysis reports are often fragmented and unclear, "the wisest

course is to rely on legislative history only when that history itself is unambiguous."

(J.A. Jones Construction Co. v. Superior Court (1994) 27 Cal.App.4th 1568, 1578, fn.

omitted.)

Under this principle, the legislative materials relating to section 11658.5 do not

support that the Legislature was intending to create rules applicable to section 11658's

filing requirements with respect to an arbitration agreement or a delegation clause. This

is particularly true given the recent regulatory clarification that arbitration agreements

must be filed and approved under section 11658 and Regulations section 2268. (See

Regs., § 2268 (as amended 2016), § 2250, subd. (f).) Defendants do not challenge the

validity of this amendment or suggest it is inconsistent with section 11658.5.

We also find unhelpful defendants' reliance on decisions reached by courts

interpreting other states' insurance statutes. (See e.g. McCullough Transfer Co. v.

Virginia Sur. Co. (6th Cir. 1954) 213 F.2d 440, 442; Ritter v. Shotwell (1964) 63 Wash.

2d 601, 606-607 [388 P.2d 527].) These statutes are different from here, and none of

these decisions involved the question whether an unfiled arbitration provision is

enforceable under California law.

32
 Based on our conclusion, we do not reach Nielsen's alternate argument (not

raised below) that the FAA is reverse-preempted under the McCarran-Ferguson Act (15

U.S.C. §§ 1011-1015.) (See Citizens of Humanity, LLC v. Applied Underwriters, Inc.

(2017) 17 Cal.App.5th 806, 812-821; Monarch Consulting, supra, 26 N.Y.3d at pp.

670-674.)5

DISPOSITION

Order affirmed. Appellants to bear respondents' costs on appeal.

HALLER, J.

WE CONCUR:

McCONNELL, P. J.

HUFFMAN, J.

5 We emphasize that in resolving the parties' contentions on the "who decides" and
the arbitration/delegation clause enforceability issues, we base our determinations solely
on the limited factual record presented in the motion to compel proceedings. These
determinations do not preclude the parties from litigating the merits of Nielsen's causes
of action and requested relief at trial based on a more complete evidentiary record.

33