Filed 12/4/18; Certified for Publication 1/3/19 (order attached)




               IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FIRST APPELLATE DISTRICT

                                               DIVISION FOUR


 LUXOR CABS, INC., et al.,
             Plaintiffs and Respondents,
                                                                   A147962
 v.
 APPLIED UNDERWRITERS CAPTIVE                                      (San Francisco City & County
 RISK ASSURANCE CO. et al.,                                        Super. Ct. No. CGC 15-548928)
             Defendants and Appellants.




          In this case involving the provision of workers’ compensation insurance to Luxor
Cabs, Inc. and Luxor Executive Car Service, LLC (Luxor), appellants Applied
Underwriters Captive Risk Assurance Company, Inc. (AUCRA), California Insurance
Company (CIC), and certain other affiliated entities1 challenge the denial of AUCRA’s
motion to compel arbitration pursuant to the terms of a reinsurance participation
agreement (RPA) between Luxor and AUCRA. In particular, appellants argue that the
trial court erred both in determining the issue of arbitrability—given the existence of a
valid delegation clause—and in subsequently concluding that both the delegation clause
and the arbitration provision of which it is a part are unenforceable. The EquityComp
workers’ compensation insurance program at issue in this case has garnered nationwide
attention from numerous administrative agencies and judicial tribunals. (See, e.g.,


         1
        These additional appellants include Applied Risk Services, Inc. (ARS), Applied
Risk Services of New York, Inc., and California Indemnity Company.


                                                          1
Minnieland Private Day School, Inc. v. Applied Underwriters Captive Risk Assurance
Co. (4th Cir. 2017) 867 F.3d 449 [challenge to EquityComp program under Virginia
insurance laws]; South Jersey Sanitation Co. v. Applied Underwriters Captive Risk
Assurance Co. (3d Cir. 2016) 840 F.3d 138 [challenge under Nebraska insurance laws to
use of EquityComp program in New Jersey]; Vermont Dept. of Financial Regulation
(Oct. 30, 2015, No. 15-026-I) Stipulation and Consent Order at p. 6 [concluding that,
through use of an RPA in a similar program, AUCRA and its affiliates “de facto engaged
in the sale of an unfiled, unapproved insurance product in Vermont”].) In this state, the
California Insurance Commissioner (Insurance Commissioner) issued an extensive 2016
administrative decision concluding that the EquityComp program violated state insurance
laws and that the RPA between AUCRA and the insured employer in that case was void
as a matter of law. (Matter of Shasta Linen Supply, Inc., Decision & Order (June 22,
2016) file No. AHB-WCA-14-31 (Shasta Linen).)2 Even more recently, the Fourth
Appellate District came to a similar decision in Nielsen Contracting, Inc. v. Applied
Underwriters, Inc. (2018) 22 Cal.App.5th 1096 (Nielsen)—a case essentially identical to
this one involving arbitrability under an RPA. Following these persuasive prior
decisions, we affirm.

                                   I. BACKGROUND
       In 2012, Luxor engaged defendant Heffernan Insurance Brokers (Heffernan) to
provide it with workers’ compensation insurance quotes. One of the options Heffernan


       2
          We hereby grant Luxor’s September 2016 request for judicial notice of the
Shasta Linen decision and related orders and court filings, all of which were issued or
filed after the trial court rendered its decision in this matter. (Evid. Code, §§ 452, subds.
(a), (c), & (d), 459, subd. (a).) The Insurance Commissioner has designated the Shasta
Linen decision precedential pursuant to section 11425.60, subdivision (b), of the
Government Code. (Shasta Linen, supra, at p. 70.) In August 2016, as a result of Shasta
Linen, CIC and AUCRA entered into a stipulated consent cease and desist order with the
Insurance Commissioner, agreeing, among other things, to “cease and desist from issuing
new RPAs or renewing existing RPAs with respect to a California Policy” unless they are
filed with the Insurance Commissioner pursuant to applicable law and not disapproved.
The RPA in Shasta Linen is materially identical to the RPA at issue in this appeal.


                                              2
presented to Luxor was the EquityComp program from Applied Underwriters, Inc.
(Applied). In the “Workers’ Compensation Program Proposal & Rate Quotation,”
Applied—an indirect subsidiary of Berkshire Hathaway, Inc.—described EquityComp as
a “seamlessly integrated package providing nationwide workers’ compensation coverage
and sophisticated risk financing solutions.” (Italics added.) Luxor decided to participate
in the EquityComp program and thus, in July 2012, executed a “Request to Bind
Coverages & Services” with Applied (Request to Bind) pursuant to which Applied agreed
to “cause to be issued” a workers’ compensation insurance policy, subject to Luxor
executing the RPA. In accordance with the Request to Bind, a one-year guaranteed cost
workers’ compensation insurance policy (collectively with all renewals, the Policy) was
issued to Luxor by CIC, a wholly owned subsidiary of North American Casualty
Company, which is in turn wholly owned by Applied. “Under a guaranteed cost policy,
the insured company pays a fixed annual premium for the policy term, regardless of
subsequent loss experience.” (Shasta Linen, supra, at p. 12.) The CIC Policy was based
on forms and rates that had been filed with California’s rating organization—the
Workers’ Compensation Insurance Rating Bureau (WCIRB)—and approved by the
Insurance Commissioner as required by California Law, including section 11658 of the
Insurance Code.3 According to the Insurance Commissioner, “[a] great majority of
California employers receive workers’ compensation insurance coverage through
guaranteed cost policies.” (Shasta Linen, supra, at p. 12.)
       However, as stated above, as a condition for the issuance of the Policy by CIC,
Luxor was also required to enter into the RPA with AUCRA, another wholly owned
subsidiary of Applied. The RPA had a three-year term and set forth different calculations
for “[p]remium and [l]oss [a]mounts” applicable to “all payroll, premium, and losses
occurring under the [CIC Policy].” It also applied distinct early cancellation terms should
Luxor cancel the RPA or should the Policy be cancelled or not renewed during the RPA’s
three-year term. And, it required Luxor to make certain capital deposits into a


       3
           All statutory references are to the Insurance Code unless otherwise specified.


                                               3
“segregated protective cell” maintained by AUCRA for payment of potential profits and
losses in connection with the Policy. In addition, the RPA included an arbitration
provision mandating resolution of “any dispute . . . arising out of or related to this
Agreement” through binding arbitration in the British Virgin Islands and under the
provisions of the American Arbitration Association. In particular, the arbitration
agreement provided that “[a]ll disputes between the parties relating in any way to (1) the
execution and delivery, construction or enforceability of this [RPA], (2) the management
or operations of [AUCRA], or (3) any other breach or claimed breach of this [RPA] or
the transactions contemplated herein” were subject to mandatory binding arbitration.
Finally, the RPA contained a choice of law provision stating: “This Agreement shall be
exclusively governed by and construed in accordance with the laws of Nebraska and any
matter concerning this Agreement that is not subject to the dispute resolution
provisions . . . hereof shall be resolved exclusively by the courts of Nebraska without
reference to its conflict of laws.”
       In November 2015—unhappy with both the handling of its workers’ compensation
claims and the ever-increasing premiums it was paying under the EquityComp program,
and unable to obtain a satisfactory explanation from AUCRA—Luxor and Haight Street
Garage, Inc. (Haight Street) filed a complaint in San Francisco Superior Court against
appellants and Heffernan (Complaint) asserting, among other things, breach of contract,
breach of the implied covenant of good faith and fair dealing, negligent
misrepresentation, and unfair business practices. The Complaint also sought a
declaratory judgment stating that the RPA and its arbitration provision were void as
violative of California workers’ compensation insurance laws. AUCRA responded in
December 2015 by issuing a demand for arbitration against Luxor in accordance with the
terms of the RPA.4 Luxor then filed a motion in the instant action specifically




       4
         The parties agree that Haight Street is not a party to the RPA or required to
arbitrate.


                                              4
challenging the RPA’s arbitration clause, and AUCRA filed a motion to compel
arbitration and otherwise stay court proceedings with respect to the Complaint.
       After hearing, the trial court issued a March 2016 order granting Luxor’s motion
to declare the RPA’s arbitration clause unenforceable and, on that basis, denying
AUCRA’s motion to compel arbitration. In particular, the trial court declined to
determine whether the Federal Arbitration Act (9 U.S.C. § 1 et seq.; FAA) was reverse
preempted by the McCarran-Ferguson Act (15 U.S.C. §§ 1011–1015; McCarran-
Ferguson) in this context; found that—as required by the FAA and related precedent—
Luxor had made a specific challenge to the delegation clause in the RPA, thereby
allowing the trial court to determine the issue of arbitrability; and concluded that both the
delegation clause and related arbitration provision were void because they constituted
endorsements to the CIC Policy that had not been appropriately filed and approved by the
Insurance Commissioner as required by section 11658. Appellants’ timely notice of
appeal now brings the matter before this court.

                                      II. DISCUSSION
A.     Standard of Review
       Recently, the Nielsen court aptly summarized our standard of review in the context
of a motion to compel arbitration as follows: “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 . . . .’ [Citation.] ‘[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 . . . .’ [Citation.] 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.’ ” ’ ” (Nielsen, supra, 22 Cal.App.5th at p. 1106.) To the extent
the trial court resolved contested facts, we review those determinations for substantial
evidence. (Ibid.) Finally, should our review of the arbitration provisions here at issue



                                                5
require statutory interpretation, we engage in such analysis independently. (Robles v.
Employment Development Dept. (2015) 236 Cal.App.4th 530, 546.)
       The parties’ dispute, however, must also be considered in the context within which
it has arisen. Specifically, the California Constitution “expressly declare[s]” that
workers’ compensation for workplace injury is “the social public policy of this State” and
vests the Legislature “with plenary power, unlimited by any provision of this
Constitution, to create, and enforce a complete system of workers’ compensation, by
appropriate legislation . . . .” (Cal. Const., art. XIV, § 4.) This mandate includes making
“full provision for adequate insurance coverage against liability to pay or furnish
compensation” and “full provision for regulating such insurance coverage in all its
aspects . . . .” (Ibid., italics added.) In response, the Legislature has created a
comprehensive regulatory scheme, requiring California employers to purchase workers’
compensation insurance (Lab. Code, § 3700) and dictating the permissible terms for such
insurance (§§ 11650 et seq., 11730 et seq.). (See Am. Zurich Ins. Co. v. Country Villa
Serv. Corp. (C.D.Cal. July 9, 2015, Civ. No. 2:14-cv-03779-RSWL-AS) 2015 U.S.Dist.
Lexis 89452 at pp. *30, *36–*37 (Country Villa) [“[i]n California, ‘ “[w]orkers’
compensation insurance programs are to be closely scrutinized and are highly
regulated” ’ ”; “employers in California ‘have no choice but to secure workers’
compensation insurance . . . and, consequently, the entire system is highly regulated’ ”])
As an example, the Insurance Commissioner is charged with reviewing and approving
“all rates and supplementary rate information that are to be used in this state.” (§ 11735,
subd. (a); see § 11737 [authorizing disapproval of rates under specified circumstances];
§ 11750.3 [authorizing the WCIRB to, among other things, collect and tabulate statistics
for the purpose of developing rates and formulating rules and regulations for the
administration of ratings systems].) Thus, in construing the arbitration provisions here at
issue, we are mindful not only of this significant regulatory backdrop, but also of the
express public policies underlying California’s workers’ compensation system.




                                               6
B.     The Trial Court Properly Determined Arbitrability
       As a threshold matter, we must decide whether the trial court properly determined
the enforceability of the RPA’s arbitration clause, or whether the validity of that clause
should, itself, have been referred to arbitration in accordance with the RPA’s terms.
Under the FAA, “an arbitration provision contained in any contract involved in interstate
commerce ‘shall be valid, irrevocable, and enforceable, save upon such grounds as exist
at law or in equity for the revocation of any contract.’ ” (Matter of Monarch Consulting
Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA (2016) 26 N.Y.3d 659, 665
[47 N.E.3d 463], quoting FAA § 2.) Generally speaking, “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.”
(Nielsen, supra, 22 Cal.App.5th at p. 1107; see Prima Paint Corp. v. Flood & Cocklin
(1967) 388 U.S. 395, 402–403.) This is because an arbitration clause is viewed as
severable from the main contract and thus enforceable regardless of the ultimate
enforceability of the underlying agreement. (Buckeye Check Cashing, Inc. v. Cardegna
(2006) 546 U.S. 440, 443–445.) In contrast, “challenges to the validity of the arbitration
clause itself are generally resolved by the court in the first instance.” (Nielsen, supra, at
p. 1108; see Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 71 (Rent-A-Center)
[“[T]hat agreements to arbitrate are severable does not mean that they are unassailable. If
a party challenges the validity under § 2 [of the FAA] of the precise agreement to
arbitrate at issue, the federal court must consider the challenge before ordering
compliance with that agreement under § 4 [of the FAA].”].) “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.” (Nielsen, at p. 1108.)
These so-called “delegation clauses” are generally enforceable according to their terms,
requiring the issue of arbitrability to be submitted to the arbitrator for decision. (Ibid.)
       In Rent-A-Center, however, the United States Supreme Court explained the
specific circumstances under which the enforceability of a delegation clause should be
determined by the courts rather than through arbitration. Characterizing a delegation


                                               7
clause as simply “an agreement to arbitrate threshold issues concerning the arbitration
agreement,” the high court made clear that “the FAA operates on this additional
arbitration agreement just as it does on any other. The additional agreement is valid
under § 2 [of the FAA] ‘save upon such grounds as exist at law or in equity for the
revocation of any contract.’ ” (Rent-A-Center, supra, 561 U.S. at pp. 68–70.) Thus, like
an arbitration provision generally, a delegation clause nested in an arbitration provision is
severable from the remainder of the contract and the question of its enforceability is for
the court to decide if a challenge is directed specifically at the validity of the delegation
clause. (Id. at pp. 71–72; see Nielsen, supra, 22 Cal.App.5th at p. 1108.) In Rent-A-
Center, the plaintiff opposing arbitration challenged only the validity of the arbitration
contract as a whole in the district court—“[n]owhere . . . did he even mention the
delegation provision” and none of his substantive unconscionability challenges were
“specific to the delegation provision.” (Id. at pp. 72–74.) Under such circumstances, it
was for the arbitrator, not the court, to consider the enforceability of the delegation
clause. (Id. at pp. 72–76.)
       Neither party here suggests that the arbitration provisions of the RPA do not
contain a clear delegation clause. And, indeed, the language at issue—making arbitrable
“[a]ll disputes between the parties relating in any way to . . . the . . . construction or
enforceability of this [RPA]”—is similar to that analyzed by the Rent-A-Center court as a
delegation clause. (See Rent-A-Center, supra, 561 U.S. at p. 68.) Nor do appellants
dispute the analytical framework established by Rent-A-Center for determining the
arbitrability of the delegation clause. Rather, they claim that Luxor did not specifically
challenge the delegation clause as mandated by Rent-A-Center. We disagree.
       In its briefing contesting the enforceability of the RPA’s arbitration provisions and
opposing AUCRA’s motion to compel, Luxor specifically challenged the delegation
clause on two distinct grounds. First, after asserting that the RPA’s arbitration provisions
as a whole were unlawful and void, it argued that “under operation of California’s
insurance law, [AUCRA’s] delegation clause is just another unfiled and unapproved
policy modification that is independently void because it too was issued in violation of


                                               8
law.” (Italics added.) Luxor also argued that the RPA was governed by Nebraska law,
which prohibits arbitration of “any agreement concerning or relating to an insurance
policy.” (Neb. Rev. Stat., § 25-2602.01(f)(4).) After contending that this Nebraska
statute reverse preempts the FAA under McCarren-Ferguson, Luxor concluded that the
statute “governs the RPA as an agreement concerning or relating to an insurance policy,
and it renders the arbitration agreements within the RPA—both the arbitration clause
and the ‘delegation provision’—void and unenforceable.”5 (Italics added.) During oral
argument, Luxor’s attorney explained Luxor’s specific challenge to the delegation clause,
stating: “Under the severability principles of Federal Arbitration Law, you sever out the
arbitration agreement and the delegation clause, and you’re challenging each for being
void as against [section] 11658.” (Italics added.) Moreover, the trial court clearly
recognized Luxor’s directed challenge, noting that Luxor’s counsel “says there’s a
challenge not just to the RPA as a whole, there’s a challenge to the arbitration provision
therein, and to the delegation clause nested within the arbitration provision.” And,
ultimately, the trial court decided the issue on this basis. Under these circumstances, it is
beyond serious dispute that Luxor directed a specific challenge to the delegation clause of
the RPA as mandated by Rent-A-Center.
       Appellants, however, asserts that Luxor’s challenge to the delegation clause is not
specifically targeted because it is the same claim that Luxor raises with respect to the
unenforceability of the arbitration provisions and the RPA as a whole. They claim that a
challenge directed at a delegation clause must be “distinct,” and thus “[m]aking the same
undifferentiated argument as to the RPA, arbitration provision and delegation provision,
as Luxor has done here, is not enough.” We are not persuaded. Rather, we agree with
the Nielsen court—which recently considered and rejected this same argument—that




       5
        As we discuss further below, the trial court did not reach this issue of reverse
preemption and enforceability under Nebraska law, because it concluded that the
delegation clause was void as violative of section 11658.


                                              9
appellants’ position “is not supported by Rent-A-Center’s holding or logic.” (Nielsen,
supra, 22 Cal.App.5th at p. 1110.)
       Indeed, the Rent-A-Center court expressly stated that “[i]n some cases the claimed
basis of invalidity for the contract as a whole will be much easier to establish than the
same basis as applied only to the severable agreement to arbitrate.” (Rent-A-Center,
supra, 561 U.S. at p. 71, italics added.) And, after concluding that the plaintiff’s
unconscionability challenge in that case was directed to the agreement as a whole rather
than specifically at the delegation clause, the high court speculated: “It may be that had
Jackson challenged the delegation provision by arguing that these common [allegedly
unconscionable] 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, Jackson 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 establish for the
arbitration of enforceability than for arbitration of more complex and fact-related aspects
of the alleged employment discrimination.” (Id. at pp. 72–74.) Thus, Rent-A-Center,
itself, makes clear “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.” (Nielsen, supra, 22 Cal.App.5th at p. 1111.) Moreover, to reject a
legitimate contractual challenge to a severed delegation clause merely because similar
grounds are suggested as a basis for invalidating the related arbitration provision or entire
contract is nonsensical and violates the FAA’s mandate that courts “must ‘place[]
arbitration agreements [such as delegation clauses] on an equal footing with other
contracts.’ ” (Nielsen, at p. 1110, quoting Rent-A-Center.) Thus, under the facts of this
case, the trial court properly determined that it was the proper forum for determining


                                             10
arbitrability under the RPA.6 We therefore turn next to the merits of the court’s
arbitrability decision.
C.     The Delegation Clause and Arbitration Provision Are Not Enforceable
       The trial court in this case concluded that both the delegation clause and the
arbitration provision in the RPA were void and therefore unenforceable because they
each separately constituted an “endorsement” to the Policy which was not properly vetted
and approved as required by section 11658. Pursuant to that statute: “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 and 30 days have
expired from the date the form or endorsement is received by the commissioner from the
rating organization without notice from the commissioner, unless the commissioner gives
written approval of the form or endorsement prior to that time.”7 (§ 11658, subd. (a),
italics added.) If the Insurance Commissioner rejects a filed policy or endorsement “it is
unlawful for the insurer to issue any policy or endorsement in that form.” (Id., subd. (b),
italics added.)
       “An endorsement is an amendment to or modification of an existing policy of
insurance.” (Adams v. Explorer Ins. Co. (2003) 107 Cal.App.4th 438, 451.) It “may be


       6
         Appellants’ citation to Grove Lumber & Bldg. Supply v. Argonaut Ins. Co.
(C.D.Cal. July 7, 2008, SA CV 07-1396 AHS(RNBx)) 2008 U.S.Dist. Lexis 51752
(Grove Lumber) does not change our analysis. In that case, arbitrability was a question
for the arbitration panel in the first instance because the plaintiff had only challenged the
enforceability of the agreement as a whole. (Id. at p. *16.) The court’s statement cited
by appellants—that section 11658 “does not address the topic of arbitration or provide a
procedural framework for resolution of disputes” (Grove Lumber, at p. *17)—while
undoubtedly true, was made in the context of a discussion of potential reverse preemption
under McCarren-Ferguson and has no relevance to our analysis of who decides
arbitrability.
       7
         Pursuant to subdivision (e) of section 11750.3, the rating agency—the WCIRB—
is charged with examining “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.”


                                             11
attached to a policy at its inception or added during the term of the policy.” (Id. at
p. 450.) Further, and particularly relevant for our purposes, endorsements “ ‘may alter or
vary any term or condition of the policy.’ ” (Ibid., italics added; see Country Villa,
supra, 2008 U.S.Dist. Lexis 89452 at p. *32 [“an endorsement, which must be filed, is
not limited to provisions addressing the insurer’s indemnity obligations, but may be any
agreement that alters or adds to any term or condition of an insurance policy”].) In a
related vein, at all times relevant to this dispute, California Code of Regulations, title 10
(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
part of the policy . . . .”8 Finally, the CIC Policy, itself, provides: “[T]his policy,
including all endorsements forming a part thereof, constitutes the entire contract of
insurance. No condition, provision, agreement, or understanding not set forth in this
policy or such endorsements shall affect such contract, or any rights, duties, or privileges
arising therefrom.” (Italics added.) Under these circumstances, the RPA’s delegation
clause constitutes a collateral agreement that should have been endorsed to the CIC
Policy after appropriate regulatory review if it alters or adds to the dispute resolution
provisions of the CIC Policy. We conclude that it does.
       With respect to dispute resolution, the CIC Policy provides: “If you are aggrieved
by our decision adopting a change in classification assignment that results in increased



       8
         Although not applicable to this dispute, Regulations section 2268 was amended
in 2016 to reference “ancillary agreements” rather than “collateral agreements.”
(Nielsen, supra, 22 Cal.App.5th at p. 1114.) In its current form, Regulations section 2268
provides that an insurer shall not use any policy form, endorsement form, or ancillary
agreement unless it is “attached to and made a part of the policy” and “filed and approved
by” the Insurance Commissioner. Moreover, ancillary agreement is defined by
Regulations 2250, subdivision (f), as meaning “an agreement that is a supplementary
writing or contract relating to a policy or endorsement form that adds to, subtracts from,
or revises the obligations of either the insured or the insurer regarding any terms of an
insurance policy including, but not limited to, dispute resolution agreements, policy
premium amounts or rates, expense or tax reimbursement or allocation, deductible
amounts, policy duration, cancellation, or claims administration.”


                                              12
premium, or by the application of our rating system to your worker’s compensation
insurance, you may dispute these matters with us. . . . If you are dissatisfied . . . you may
appeal to the insurance commissioner.” Such an appeal is to be made pursuant to
sections 11737 and 11753.1. Other than this right to administrative review under
specified circumstances, the CIC Policy is silent as to the resolution of disputes, leaving
intact all of the insured standard rights to judicial review.
       In contrast, as stated above, the RPA’s delegation clause makes arbitrable “[a]ll
disputes between the parties relating in any way to . . . the . . . construction or
enforceability of this [RPA].” The stated purpose of the RPA is to allow Luxor to “share
in the underwriting results” of the CIC Policy. To this end, the RPA, among other things,
contains early cancellation terms triggered by the cancellation or nonrenewal of the
Policy; appoints ARS—another subsidiary of Applied—as the billing agent for both
AUCRA and CIC, stating that Luxor, AUCRA, and CIC authorize ARS “to account for
offset and true up any and all amounts due each of the parties”; and authorizes AUCRA
to “take all reasonable steps to protect its and its affiliates’ ” interests upon any default by
Luxor under the RPA or any affiliated agreements (italics added). Finally, the RPA
states that it “supersedes all prior . . . understandings relating to the subject matter
hereof.” (Italics added.) On these facts, it is clear that the RPA alters or adds to the
dispute resolution provisions of the CIC Policy in that a dispute could arise pursuant to
the Policy that would trigger a demand for arbitration under the terms of the RPA.
Indeed, that is exactly what happened in this case: Luxor’s Complaint—alleging
mishandling of claims, irregularities in the computation of its payment obligations, and
excessive charges upon CIC’s unilateral nonrenewal of the Policy—was subjected to
AUCRA’s motion to compel. Moreover, supplanting the Policy’s dispute resolution
provisions was clearly the intent behind the EquityComp program, as the Request to Bind
required Luxor to agree that “any claims, disputes, and/or controversies” involving the
RPA or the Policy would be resolved through alternative dispute resolution.
       In Shasta Linen, the Insurance Commissioner found that the RPA between Shasta
Linen and AUCRA was a “collateral agreement” within the meaning of


                                              13
Regulations former 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, supra, at pp. 1, 46, 53, 58.) The
Insurance Commissioner further found that “the RPA’s arbitration clause was intended to
‘supplant [the dispute resolution provisions] of the [CIC] guaranteed cost policy’ and the
arbitration clause substantially modified these CIC provisions.” (Nielsen, supra,
22 Cal.App.5th at p. 1115, quoting Shasta Linen, supra, at p. 56.) Moreover, according
to the Insurance Commissioner, “Regulations former 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.”
(Neilsen, at pp. 1115–1116, quoting Shasta Linen, at p. 43.) Finding this analysis
persuasive, the Nielsen court concluded that both the delegation clause and arbitration
provision of the RPA in that case were required to be filed with the Insurance
Commissioner because both “were collateral side agreements that materially modified the
earlier approved CIC policies.” (Id. at p. 1116.) As described above, our own analysis of
the RPA and related documentation presented for our review confirms these prior
decisions. In sum, since the delegation clause clearly purports to alter Luxor’s access to
both administrative and judicial review under the CIC Policy, it, in its own right, is a
collateral agreement that should have been filed and endorsed to the Policy.9
       The case is even stronger when the impact of the entire arbitration provision on the
CIC Policy is considered. Pursuant to other clauses in the RPA’s arbitration provision,



       9
         In this regard, it is worthy of note that, although the RPA was not executed until
July 3, 2012, both the CIC Policy and the RPA became effective as of June 30, 2012, one
day before section 11658.5 became applicable in this state. (See § 11658.5, subd. (e)
[making section 11658.5 applicable to all workers’ compensation policies issued or
renewed on or after July 1, 2012].) That statute requires disclosure of dispute resolution
provisions and an opportunity to negotiate them in connection with any written quote for
the provision of workers’ compensation coverage. (Id., subd. (a).) Failure to comply
with the statute’s requirements results in default to California as the choice of law and
forum for resolution of California-based disputes. (Id., subd. (c).)


                                              14
all arbitration proceedings are required to take place in the British Virgin Islands and are
subject to enforcement under Nebraska law. Further, arbitrability is extended to all
disputes involving the “management or operations of AUCRA” and “any other breach or
claimed breach of this [RPA] or the transactions contemplated herein.” (Italics added.)
When taken as a whole, then, the RPA’s arbitration provision purports to effect even
more changes to the dispute resolution provisions in the underlying CIC policy than did
the contract’s separate delegation clause. Under these circumstances, we conclude—as
did the court in Nielsen—that the arbitration provision is also a collateral agreement
under section 11658 and Regulations former section 2268 that should have been filed and
endorsed to the Policy.10 (Nielsen, supra, 22 Cal.App.5th at pp. 1113–1117.)
       Appellants, however, argue that the RPA, with its attendant arbitration provisions,
cannot be viewed as an endorsement modifying the CIC Policy because it was executed
by AUCRA not CIC, and thus does not affect the rights or obligations of either CIC or
Luxor under the CIC Policy. Rather, AUCRA claims the RPA was a separate
arrangement between Luxor and AUCRA which permitted Luxor to share in both the
risks and profits associated with its claims history under the Policy. This argument has
been rejected both by the Insurance Commissioner in Shasta Linen and by the Nielsen
court. Specifically, the Insurance Commissioner opined that “the ‘affiliated entities’
(Applied, 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.” (Nielsen, supra, 22 Cal.App.5th at pp. 1113–1117, quoting Shasta Linen.)



       10
          Again, reference to Grove Lumber does not help appellants. In that case, the
insured conceded that the side agreement at issue was neither an insurance policy nor an
endorsement, and the court found section 11658 inapplicable on that basis. (Grove
Lumber, supra, 2008 U.S.Dist. Lexis 51752 at pp. *18–*19.) To the extent the district
court suggested in dicta that endorsements are limited to matters involving an insurer’s
“ ‘indemnity obligations for loss or liability’ ” we disagree with it, as has a subsequent
district court judge who directly considered the matter and the Insurance Commissioner.
(See County Villa, supra, 2015 U.S.Dist. Lexis 89452 at pp. *28–*33; Shasta Linen,
supra, at pp. 54–55.)


                                             15
The Nielsen court determined that its own record on appeal supported the Insurance
Commissioner’s findings (id. at pp. 1116–1117), and we reach the same conclusion based
on the evidence before us.
       As stated above, the Workers’ Compensation Program Proposal & Rate Quotation,
submitted for Luxor’s consideration by Applied, described EquityComp as a “seamlessly
integrated package providing nationwide workers’ compensation coverage and
sophisticated risk financing solutions.” (Italics added.) Indeed, the Request to Bind
executed by Luxor required Luxor to execute the RPA in order for Applied to “cause to
be issued” the CIC Policy. Moreover, as we have discussed in connection with the
RPA’s dispute resolution provisions specifically, the RPA clearly attempts to supplant the
basic, approved provisions of the CIC Policy in numerous respects. Indeed, the Insurance
Commissioner concluded that an RPA, in effect, essentially converts a guaranteed-cost
policy into a loss-sensitive, retrospective rating plan that returns risk to employer-
insureds without any regulatory oversight. (Shasta Linen, supra, at pp. 15–16, 22–24,
55–58, 60–62.) In the end, we find most compelling the adverse implications of reaching
the opposite conclusion on these facts. Obviously, allowing an insurer to circumvent the
comprehensive regulatory structure applicable to the issuance of workers’ compensation
insurance in this state simply by amending its approved policy forms through a side
agreement with a subsidiary is contrary to the public policy underlying California’s
workers’ compensation law and cannot be countenanced. (See Shasta Linen, supra, at p.
61 [concluding that the purpose of the EquityComp program was “to circumvent the
necessary regulatory checks-and-balances needed in a comprehensive state workers’
compensation system to protect insurers, employers, and injured workers and assure
financial accountability, fairness, and non-discriminatory treatment of insureds”].) We
thus view EquityComp as a single, integrated insurance program, despite the fact that the
Policy was issued by CIC and the RPA executed by AUCRA.
       We similarly reject appellants’ argument that, even if the delegation clause and
arbitration provision at issue constitute collateral agreements that should have been filed
under section 11658, this does not make them void as the trial court held, because the


                                             16
statute does not specifically provide for this remedy. Appellants’ initial assertion in this
regard—that “California’s workers’ compensation regime does not provide a private right
of action for employers seeking relief for non-compliance with Section 11658”—while
perhaps accurate, is misplaced. Luxor is not here suing for damages based on a violation
of section 11658; nor is it seeking to compel AUCRA’s compliance with that statute.
Instead, it is asserting, as a defense to AUCRA’s attempt to enforce the RPA, that the
contract is illegal and thus unenforceable. The existence of a private right of action is not
required under such circumstances. (Crusader Ins. Co. v. Scottsdale Ins. Co. (1997)
54 Cal.App.4th 121, 125 [the “use of statutes to establish elements of preexisting
common law causes of action presents an issue quite distinct from the issue of whether a
regulatory statute creates a wholly new private right to sue”]; see Kashani v. Tsann Kuen
China Enterprise Co. (2004) 118 Cal.App.4th 531, 552–554.)
       Moreover, the trial court’s conclusion that the delegation clause and arbitration
provision are void, and not merely voidable, is supported both by the language of section
11658 and by relevant precedent. As delineated above, section 11658, subdivision (a),
“states that a workers’ compensation insurance policy or endorsement ‘shall not be issued
by an insurer’ unless it is filed with the WCIRB and in one way or another approved by
the [Insurance] Commissioner, and [subdivision] (b) states that issuing an unapproved
policy or endorsement ‘is unlawful.’ ” (Country Villa, supra, 2015 U.S.Dist. Lexis
89452 at pp. *44–*45, italics added by Country Villa.) On this basis, the federal district
court in Country Villa concluded that an unfiled and unapproved collateral agreement to a
workers’ compensation policy was “void as a matter of law.” (Ibid.; see Malek v. Blue
Cross of California (2004) 121 Cal.App.4th 44, 70 [“a contract made in violation of a
regulatory statute is void”]; Smith v. Bach (1920) 183 Cal. 259, 262 [“[a] statute . . .
prohibiting the making of contracts, except in a certain manner, ipso facto makes them
void if made in any other way”].) Both the Insurance Commissioner and the Nielsen
court persuasively reached the same conclusion with respect to the specific RPA at issue
in this case. (Nielsen, supra, 22 Cal.App.5th at p. 1118; Shasta Linen, supra, at p. 66
[“[u]nfiled side agreements are prohibited and shall not be used without complying with


                                             17
[regulatory] requirements; otherwise, they are not permitted in this state and are void as a
matter of law”].)
       As a final matter, we note that in Citizens of Humanity, LLC v. Applied
Underwriters, Inc. (2017) 17 Cal.App.5th 806, the Second Appellate District recently
analyzed a similar EquityComp RPA and concluded that its arbitration provision was
unlawful because it violated Nebraska law, which reverse preempted the FAA under the
terms of McCarran-Ferguson. (Citizens of Humanity, at pp. 809, 816–821.) Like the
arbitration provision in this case, the RPA at issue in Citizens of Humanity provided that
it was to be “ ‘exclusively governed by and construed in accordance with the laws of
Nebraska.’ ” (Id. at p. 810.) As mentioned above, Nebraska law prohibits arbitration of
“any agreement concerning or relating to an insurance policy.” (Neb. Rev. Stat., § 25-
2602.01(f)(4)).) Moreover, under McCarran-Ferguson, “state laws ‘regulating the
business of insurance’ preempt any federal statute not specifically related to the business
of insurance and that impairs state insurance laws.” (Citizens of Humanity, at p. 810,
quoting 15 U.S.C. § 1012(b).) Applying the three-part test for determining whether
McCarran-Ferguson causes a state law to reverse preempt a federal statute—“(1) whether
the federal statute to be preempted specifically relates to the business of insurance, (2)
whether the state law was enacted for regulating the business of insurance, and (3)
whether application of the federal statute operates to invalidate, impair, or supersede the
state law”—the Citizens of Humanity court held that the Nebraska statute at issue was
enacted for the purpose of regulating the business of insurance and would be invalidated
through application of the FAA. (Citizens of Humanity, pp. 816–818.) Since the RPA’s
choice of law provision made the Nebraska statute applicable to the RPA, the state statute
reverse preempted the FAA and made the delegation and arbitration provisions in the
RPA unenforceable. (Citizens of Humanity, at pp. 818–821.) Although, as stated above,
the trial court declined to reach this issue, we find Citizens of Humanity persuasive, and it
provides a distinct, additional basis for upholding the trial courts arbitrability
determinations in this case.



                                              18
                           III. DISPOSITION
The judgment is affirmed. Respondents are entitled to their costs on appeal.




                                    19
                                                 _________________________
                                                 REARDON, J.**


We concur:


_________________________
STREETER, ACTING P. J.


_________________________
SMITH, J.*




*Judge of the Superior Court of California, County of Alameda, assigned by the Chief
Justice pursuant to article VI, section 6 of the California Constitution.

**Retired Associate Justice of the Court of Appeal, First Appellate District, assigned by
the Chief Justice pursuant to article VI, section 6 of the California Constitution.

A147962, Luxor Cabs, Inc. v. Applied Underwriters Captive Risk Assurance Co.


                                            20
Filed 1/3/19
                           CERTIFIED FOR PUBLICATION

               IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                              FIRST APPELLATE DISTRICT

                                        DIVISION FOUR


 LUXOR CABS, INC., et al.,
          Plaintiffs and Respondents,
                                                   A147962
 v.
 APPLIED UNDERWRITERS CAPTIVE                     (San Francisco City & County
 RISK ASSURANCE CO. et al.,                       Super. Ct. No. CGC 15-548928)
                                                  ORDER CERTIFYING OPINION
          Defendants and Appellants.              FOR PUBLICATION
                                                  [NO CHANGE IN JUDGMENT]


THE COURT:

        The requests for publication of this court’s December 4, 2018 opinion are granted,
and it is hereby ordered that said opinion be published in the Official Reports.



Dated:                                            ____________________________
                                                  Streeter, Acting P.J.




                                              1
Trial Court:                                     San Francisco City and County


Trial Judge:                                     Hon. Harold E. Kahn


Counsel for Appellants:                          DLA Piper LLP (US)
                                                 Shand S. Stephens
                                                 Erin Frazor

                                                 Wilson, Elser, Moskowitz, Edelman & Dicker
                                                 LLP
                                                 John Podesta
                                                 Laura E. Fannon


Counsel for Respondents:                         Roxborough, Pomerance, Nye & Adreani, LLP
                                                 Nicholas P. Roxborough
                                                 Joseph C. Gjonola
                                                 Ryan R. Salsig




A147962/Luxor Cabs v. Applied Underwriters Captive Risk Assurance Co.




                                                     2
