American Zurich Insurance Company et al v. Country Villa Service Corp.

Filing 87

ORDER re: Country Villa's Motion for Partial Summary Judgment 75 by Judge Ronald S.W. Lew. Based on the foregoing, the Court GRANTS CountryVilla's Motion for Partial Summary Judgment 75 . IT IS HEREBY ORDERED that Partial Judgment be ent ered in favor of Country Villa as to the Fifth Count of Country Villas Counterclaim 20 , and IT IS HEREBY DECLARED that the 2004 and 2005 Incurred Deductible Agreements, along with the 2004-2011 Specifications to the Incurred Deductible Agreements, all of which are attached as Exhibit B to Zurichs Complaint 1 , were, in their entirety, void ab initio and are unenforceable. SEE ORDER FOR FURTHER AND COMPLETE DETAILS. (jre)

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UNITED STATES DISTRICT COURT

9

CENTRAL DISTRICT OF CALIFORNIA

10
11
12 AMERICAN ZURICH INSURANCE
)
COMPANY and ZURICH AMERICAN )
13 INSURANCE COMPANY,
)
)
14
)
Plaintiffs,
)
15
)
v.
)
16
)
)
17 COUNTRY VILLA SERVICE CORP. )
dba COUNTRY VILLA HEALTH
)
18 SERVICES,
)
)
19
)
Defendant.
)
20
)
AND RELATED COUNTER-CLAIMS )
21 and THIRD PARTY ACTIONS
)
)
22
)
23

2:14-cv-03779-RSWL-AS
ORDER re: Country
Villa’s Motion for
Partial Summary Judgment
[75]

Currently before the Court is

24 Defendant/Counterclaimant Country Villa Service Corp.’s
25 (“Country Villa”) Motion for Partial Summary Judgment
26 [75], in which Country Villa requests partial summary
27 judgment in its favor as to Country Villa’s Fifth Count
28 for Declaratory Relief in Country Villa’s Counterclaim
1

1 [20] against Plaintiffs/Counterdefendants American
2 Zurich Insurance Company and Zurich American Insurance
3 Company (collectively, “Zurich”).

Country Villa’s Mot.

4 Part. Summ. J. Mem. P&A (“Mot.”), ECF No. 75-1.
5

The Court, having reviewed all papers submitted and

6 pertaining to Country Villa’s Motion for Partial
7 Summary Judgment [75], NOW FINDS AND RULES AS FOLLOWS:
8 The Court GRANTS Country Villa’s Motion [75].
9

I. FINDINGS OF FACT

10 1.

Plaintiff American Zurich Insurance Company is an

11

Illinois corporation engaged in the insurance

12

business with a principal place of business in

13

Illinois.

14 2.

Plaintiff Zurich American Insurance Company is a

15

corporation incorporated in either New York or

16

Illinois that is engaged in the insurance business

17

with a principal place of business in Illinois.

18

Compl. ¶ 4; Answer ¶ 4, ECF No. 19; Countercl. ¶ 4,

19

ECF No. 20; Ans. to Countercl. ¶ 3, ECF No. 69.

20 3.

Country Villa is a California corporation with a

21

principal place of business in California that is

22

in the business of managing skilled nursing care

23

facilities located in California.

24

Answer ¶¶ 5, 8 (undisputed); Countercl. ¶ 3.

25 4.

The amount in controversy exceeds $75,000.

26

¶¶ 1, 50; Countercl. ¶¶ 1-2.

27 5.

Zurich provided seven years of workers’

28

compensation insurance to Country Villa, beginning

Compl. ¶ 3, ECF No. 1.

2

Compl. ¶¶ 5, 8;

Compl.

1

January 31, 2004, and ending January 31, 2011.

2

Zurich’s Statement of Facts (“Zurich’s Facts”) ¶ 1,

3

ECF No. 79-1.

4 6.

Zurich and Country Villa (“the parties”) entered

5

into separate insurance policy contracts (“Policy”

6

or “Policies”) for each of the seven policy years.

7

Compl. ¶ 10, Ex. A at *10, *46, *82, *117, *154,

8

*193, *229, ECF No. 1-1; Stip. re: Program

9

Agreements (“Stip.”) ¶¶ 1-2, ECF No. 72.

10 7.

Each of the Policies contains a standard-form

11

provision that states: “The terms of this policy

12

may not be changed or waived except by endorsement

13

issued by us to be part of the policy.”1

14

Ex. A at *230; Zurich’s Facts ¶ 2 (undisputed).

15 8.

Each of the Policies issued to Country Villa

16

include an attached Large Deductible Endorsement,

17

which is two pages in length and sets forth two

18

definitions: “Allocated loss adjustment expense”

19

and “Claim.”

20

44; see Zurich’s Facts ¶ 3 (undisputed); id. ¶ 11

21

(dispute irrelevant).

22 9.

Under the Large Deductible Endorsements, Country

23

Villa agreed to reimburse Zurich, up to the

Compl.,

Compl., Ex. A at *62-63, *238, *243-

24
1

25
26
27
28

The Court took judicial notice of the existence and
content of the Policies, Incurred Deductible Agreements, and
Specifications to the Incurred Deductible Agreements, attached to
the Complaint [1] as Exhibits A-B, in the Court’s October 2,
2014, Order [59] regarding Zurich’s Motion to Dismiss Certain
Counts of Counterclaim. Oct. 2, 2014, Order re: Zurich’s Mot.
Dismiss 13:28-14:6, ECF No. 59.
3

1

deductible amount, the sum of (1) all covered

2

benefits and damages Zurich paid for the injured

3

workers’ benefit, (2) all “Allocated loss

4

adjustment expense,” and (3) all assessments

5

incurred by Zurich related to the deductible

6

amount.

7

¶ 13 (undisputed).

Compl., Ex. A, at *90-*91; Zurich’s Facts

8 10. Zurich and Country Villa entered into an Incurred
9

Deductible Agreement in 2004 and 2005, with the

10

2005 Incurred Deductible Agreement (“IDA”)

11

continuing such that the parties entered into

12

separate Specifications to the 2005 IDA each

13

subsequent policy year.

14

Zurich’s Facts ¶ 4 (undisputed).

Compl., Ex. B; see

15 11. The parties entered into the IDAs and
16

Specifications after the effective date of the

17

related Policy, but the IDAs and Specifications

18

are, by their terms, retroactively effective on the

19

start date of the related Policy.

20

*278, *286, *298, *331, *336; see Zurich’s Facts ¶

21

16 (undisputed).

Compl., Ex. B at

22 12. The IDAs without the Specifications are twelve
23

pages in length, and with the Specifications, are

24

around twenty pages in length.

Compl., Ex. B.

25 13. The IDAs state: “This Agreement governs the
26

structure and operation of and the duties and

27

obligations of each party to this Program and

28

supersedes any Deductible endorsements to the
4

1

Policy(ies), prior communications, negotiations,

2

participating plans or letters of election.”

3

Zurich’s Facts ¶ 5 (undisputed); Compl., Ex. B at

4

*267.

5 14. The IDAs state the “Policy(ies) . . . including all
6

endorsements, extensions, renewals and/or rewrites”

7

“stated in the Specifications” are “subject to this

8

Agreement.”

Compl., Ex. B at *267.

9 15. The IDAs state that the “purpose of this Agreement
10

is to outline (a) the scope, description and

11

structure of the Incurred Deductible Program

12

(“Program”) You and We have entered into and (b)

13

the duties and obligations of each party with

14

respect to this Program.”

Id.

15 16. The IDAs state in the “Program Description”
16

section: “Under the Program, We have selected a

17

Third Party Administrator (“TPA”) at Your request

18

to handle and pay the claims presented in

19

accordance with the provisions of the Policy(ies).

20

You assume the risk within the Deductible Amount

21

and We accept the risk transfer excess of the

22

Deductible Amount(s) and the Aggregate Deductible .

23

. . up to the limits of liability under the

24

Policy(ies).”

Id. at *268.

25 17. The IDAs explain: “The Specifications state the (1)
26

amount of Your initial payment to Us with respect

27

to the Deductible Premium and the expected Incurred

28

Losses within the Deductible Amount(s), as
5

1

determined by Us, plus related expenses and

2

assessments; and (2) the timing and method of Our

3

adjustment of the Incurred Losses, plus related

4

expenses and assessments.

5

remit to Us all amounts when due, as stated in the

6

Specifications.

7

obligations within the Deductible Amount(s) will be

8

held by Us in a Loss Reimbursement Fund.”

You agree to and shall

The amounts paid by You for Your

Id.

9 18. The IDAs set forth definitions for the following
10

terms, among others:

11

(1) “Allocated Loss Adjustment Expense” (“ALAE”),

12

which is “an expense directly allocable to a

13

specific claim”;

14

(2) “Aggregate Deductible,” which is “the greatest

15

amount for the Program term stated in the

16

Specifications of Paid Losses within the Deductible

17

Amount(s) and, if applicable in accordance with the

18

Specifications, Paid ALAE, You are obligated to

19

reimburse Us for under the Policy(ies)”;

20

(3) “Aggregate Deductible Charge,” which is “the

21

premium You pay Us for limiting the losses You are

22

obligated to reimburse Us for to an Aggregate

23

Deductible amount”;

24

(4) “Claim Administration Expenses,” which are

25

“expenses charged by the TPA in addition to Claim

26

Handling Fees that include but are not limited to .

27

. . any other expenses relating to the servicing,

28

management and reporting of the claims under the
6

1

Policy(ies)”;

2

(5) “Deductible Amount(s),” which “is the amount

3

You are obligated to reimburse Us for each

4

occurrence, accident or claim under the Policy(ies)

5

as stated in the Specifications”;

6

(6) “Excess Premium,” which is “the premium You pay

7

to Us for limiting the losses You are obligated to

8

reimburse Us for to the Deductible Amount(s) and

9

for Our assumptions of the risk transfer excess of

10

the Deductible Amount(s) up to the limits of

11

liability under the Policy(ies)”;

12

(7) “Incurred Loss,” which is “a Paid Loss plus a

13

Loss Reserve under the Policy(ies)”;

14

(8) “Loss Reimbursement Fund,” which “is a non-

15

interest bearing account where Your funds are held

16

by Us to provide for the payment of Your

17

obligations within the Deductible Amount(s) under

18

the Policy(ies)”;

19

(9) “Other Special Charges,” which “shall include

20

but not be limited to additional premium taxes, new

21

or modified assessment, premium and loss based

22

assessments, administrative, statutory or court-

23

ordered fines or penalties not the result of Our

24

negligence, any expenses We incur to collect from

25

You amounts past due and to enforce any of the

26

provisions of this Agreement”;

27

(10) “Paid ALAE,” which “is a payment made by Us

28

for ALAE under the Policy(ies)”;
7

1

(11) “Standard Premium”; and

2

(12) “Default.”

Id. at *269-72.

3 19. The IDAs state that “[i]n the event of a Default or
4

a material change in Your financial condition . .

5

., We may, out Our option, terminate the financing

6

portion of the Program” and “[t]he amount

7

immediately due and payable to Us will be

8

determined by Us using . . the full standard

9

Premium by converting the Program to a guaranteed

10

cost rating plan using Our manual rates in effect

11

as of the Program effective date.”

Id. at *276.

12 20. Specifications to the IDAs repeat the $500,000
13

large deductible amount set forth in the Large

14

Deductible Endorsement in the Policy(ies) and set

15

forth how “ALAE” “will be handled and paid.”

16

at *279-80.

Id.

17 21. Specifications to the IDAs set forth the
18

“Deductible Premium” amount, the “Premium

19

Surcharge” amount, and the “Unallocated Loss

20

Adjustment Expense per claim.”

Id. at *280-82.

21 22. Neither the Large Deductible Endorsements, nor the
22

Policies, contain any mention of the terms

23

Aggregate Deductible, ALAE Reserve, Default,

24

Incurred ALAE, Loss Development Factor, Loss

25

Reimbursement Fund, Loss Reserve, Paid ALAE, or

26

Arbitration.

Zurich’s Facts ¶ 15 (undisputed).

27 23. Zurich did not file the IDAs or Specifications with
28

the Workers’ Compensation Insurance Rating Bureau
8

1

(“WCIRB”) before they were issued or entered into

2

by Zurich and Country Villa.

3

(undisputed); Stip. ¶ 4.

Zurich’s Facts ¶ 6

4 24. The California Department of Insurance (“CDI”) did
5

not approve the IDAs or Specifications, or any

6

exemplars or copies thereof, before they were

7

issued or entered into by the parties.

8

Facts ¶ 7 (undisputed); Stip. ¶ 5.

Zurich’s

9 25. The California Insurance Commissioner
10

(“Commissioner”) has stated that when a side

11

agreement to a workers’ compensation insurance

12

contract “govern[s] integral aspects of the

13

insurance relationship stemming from the treatment

14

of deductibles,” the side agreement is required to

15

be filed under at least Cal. Ins. Code § 11658.

16

Appl. of Insurance Commissioner to File Amicus

17

Curiae Brief, DMS Serv.

18

Serv.”), No.B235819, 2011 WL 6345401, at *4 (Cal.

19

Ct. App. Dec. 14, 2011) (Appellate Brief); see id.

20

at *1-*11.

(“Commissioner Appl., DMS

21 26. The CDI’s February 2011 Directive explained that
22

collateral agreements affecting workers’

23

compensation insurance obligations “are prohibited

24

unless they are attached to the policy” under Cal.

25

Code Regs., tit. 10, § 2268.

26

Directive to WCIRB, at 2, ECF No. 20-2 (Exhibit 2

27

to Countercl.).

CDI Feb. 14, 2011,

28 27. It is undisputed that an actual controversy exists
9

1

between Zurich and Country Villa regarding the

2

enforceability of the IDAs under California law.

3

II. CONCLUSIONS OF LAW

4 1.

Summary judgment is appropriate when the movant

5

shows that there is no genuine dispute as to any

6

material fact and the movant is entitled to

7

judgment as a matter of law.

8

56(a).

9 2.

Under Rule 56, the party moving for summary

Fed. R. Civ. P.

10

judgment has the initial burden to show “no genuine

11

dispute as to any material fact.”

12

56(a); see Nissan Fire & Marine Ins. Co. v. Fritz

13

Cos., 210 F.3d 1099, 1102-03 (9th Cir. 2000).

14

burden then shifts to the non-moving party to

15

produce admissible evidence showing a triable issue

16

of fact.

17

1102-03; see Fed. R. Civ. P. 56(a).

18 3.

Disputed or unclear law or matters of law are not

19

genuine disputes “as to any material fact.”

20

Sarviss v. Gen. Dynamics Info. Tech., Inc., 663 F.

21

Supp. 2d 883, 899 n.16 (C.D. Cal. 2009) (stating

22

that “[d]espite Plaintiff’s assertion to the

23

contrary, unclear law is not a ‘genuine issue of

24

material fact’ that would preclude summary

25

judgment).2

Fed. R. Civ. P.

The

Nissan Fire & Marine Ins., 210 F.3d at

26
27
28

2

See also Hayes v. Cnty. of San Diego, 736 F.3d 1223, 1236
(9th Cir. 2013) (stating that the court “acknowledge[d] that the
district court’s summary judgment ruling ‘was undertaken at a
time when the law . . . was unclear’ and that the district court
10

1 4.

California law governs when a federal district

2

court is sitting in diversity and the issue

3

involves the substantive law of California.3

4

Conestoga Serv. Corp. v. Exec. Risk Indemnity,

5

Inc., 312 F.3d 976, 980-81 (9th Cir. 2002).

6 5.

When no published California opinion controls,

7

federal courts may consider unpublished California

8

opinions as persuasive authority.

9

Wausau v. Granite St. Ins. Co., 330 F.3d 1214, 1220

See

Emp’rs Ins. of

10

n.8 (9th Cir. 2003) (stating that the court “may

11

consider unpublished state decisions, even though

12

such opinions have no precedential value” and that

13

unpublished opinions, “while certainly not

14

dispositive of how the California Supreme Court

15

would rule,” may still “lend[] support” to a

16

certain position regarding California law);

17

Washington v. Cal. City Correction Ctr., 871 F.

18

Supp. 2d 1010, 1028 n.3 (E.D. Cal. 2012) (“The

19

Court may cite unpublished California appellate

20

decisions as persuasive authority.”).

21 6.

“A federal court applying California law must apply

22
23 could not be ‘clairvoyant or prescient’”); SEC v. Murphy, 626
F.2d 633, 653 (9th Cir. 1980) (noting, without rejection, that,

24 when law was unclear as to scienter requirement, the district
court properly ruled on summary judgment that scienter was

25 required); In re ATM Fee Antitrust Litig., 554 F. Supp. 2d 1003,
motion for
26 1007 (N.D. Cal. 2008) (granting athe darkest partial summary
judgment by determining “‘one of
corners of antitrust
27 law’” that was “unsettled, unclear, unwieldy, and unequivocally
complex” after “substantial rumination on the legal issues”).

28

3

It is undisputed that California law applies.
11

1

the law as it believes the California Supreme Court

2

would apply it,” and “[i]n the absence of a

3

controlling California Supreme Court decision, the

4

panel must predict how the California Supreme Court

5

would decide the issue, using intermediate

6

appellate court decisions, statutes, and decisions

7

from other jurisdictions as interpretive aids.”

8

Gravquick A/S v. Trimble Navigation Int’l, Ltd.,

9

323 F.3d 1219, 1222 (9th Cir. 2003).

10 7.

The interpretation of an insurance policy or

11

contract is a question of law.

12

at 981.

13 8.

In California, “the construction of a statute by

14

officials charged with its administration,

15

including their interpretation of the authority

16

invested in them to implement and carry out its

17

provisions, is entitled to great weight.”

18

for Retarded Citizens v. Dep’t of Developmental

19

Serv., 696 P.2d 150, 38 Cal.3d 384, 391 (1985).

20 9.

Section 11658 of the California Insurance Code

21

states in relevant part: “a) A workers’

22

compensation insurance policy or endorsement shall

23

not be issued by an insurer to any person in this

24

state unless the insurer files a copy of the form

25

or endorsement with the rating organization

26

pursuant to subdivision (e) of Section 11750.3

27
28
12

Conestoga, 312 F.3d

Ass’n

1

[i.e., the WCIRB]4 and 30 days have expired from

2

the date the form or endorsement is received by the

3

commissioner from the rating organization without

4

notice from the commissioner, unless the

5

commissioner gives written approval of the form or

6

endorsement prior to that time.

7

(b) If the commissioner notifies the insurer that

8

the filed form or endorsement does not comply with

9

the requirements of law, specifying the reasons for

10

his or her opinion, it is unlawful for the insurer

11

to issue any policy or endorsement in that form.”

12

Cal. Ins. Code § 11658.

13 10. California Code of Regulations, title 10, § 2268
14

states in relevant part that “[n]o collateral

15

agreements modifying the obligation of either the

16

insured or the insurer shall be made unless

17

attached to and made a part of the policy.”

18

Code Regs., tit. 10, § 2268.

Cal.

19 11. California Code of Regulations, title 10, § 2218
20

requires that “[a]ll workers’ compensation

21

insurance forms must be submitted in duplicate to

22

the Workers’ Compensation Insurance Rating Bureau

23

of California for preliminary inspection,” and that

24

the “Bureau shall review such forms and submit them

25

to the Commissioner for final action.”

Cal. Code

26
27

4

See Cal. Ins. Code § 11750.3; Ceradyne, Inc. v. Argonaut

28 Ins. Co., No. No. G039873, 2009 WL 1526071, at *5 (Cal. Ct. App.
Unpub. June 2, 2009).
13

1

Regs., tit. 10, § 2218.

2 12. An endorsement to an insurance policy “is an
3

amendment to or modification of an existing policy

4

of insurance” that “may alter or vary any term or

5

condition of the policy” and that “may be attached

6

to a policy at its inception or added during the

7

term of the policy.”

8

132 Cal. Rptr. 2d 24, 33 (Ct. App. 2003).

Adams v. Explorer Ins. Co.,

9 13. An endorsement to a workers’ compensation insurance
10

policy, for purposes of Cal. Ins. Code § 11658, may

11

concern “matters unrelated to the description of

12

[the insurer’s] indemnity and insurance

13

obligations.”

14

No. No. G039873, 2009 WL 1526071, at *7 (Cal. Ct.

15

App. Unpub. June 2, 2009); see Monarch Consulting,

16

Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh,

17

Pa., 993 N.Y.S.2d 275, 289 (App. Div. 2014).

Ceradyne, Inc. v. Argonaut Ins. Co.,

18 14. The IDAs are endorsements to the Policies between
19

the parties for purposes of Cal. Ins. Code § 11658,

20

and are “collateral agreements modifying the

21

obligation of either the insured or the insurer”

22

for purposes of Cal. Code Regs., tit. 10, § 2268.

23 15. The IDAs were required to be filed with the WCIRB
24

under Cal. Ins. Code § 11658 and “attached to and

25

made a part of the policy” under Cal. Code Regs.,

26

tit. 10, § 2268.

27 16. Because Zurich failed to file the IDAs with the
28

WCIRB under Cal. Ins. Code § 11658, and failed to
14

1

attach the IDAs to the Policies under Cal. Code

2

Regs., tit. 10, § 2268, the IDAs are illegal and

3

void as a matter of law.

4 17. Enforcing the illegal IDAs on equitable grounds is
5

inappropriate under the circumstances of this case.

6 18. The IDAs are illegal, void, and unenforceable in
7

their entirety.

8 19. The federal Declaratory Judgment Act provides that
9

“[i]n a case of actual controversy within its

10

jurisdiction . . . any court of the United States .

11

. . may declare the rights and other legal

12

relations of any interested party seeking such

13

declaration, whether or not further relief is or

14

could be sought.”

15

28 U.S.C. § 2201(a).5

III. BACKGROUND

16
17
18
19
20
21
22
23
24
25
26
27
28

5

Though district courts in the Ninth Circuit “have at times
applied the California Declaratory Relief Act when sitting in
diversity,” “the Ninth Circuit has indicated, although not
explicitly held, that the federal Declaratory Judgment Act should
apply,” and the U.S. Supreme Court “has emphasized the procedural
nature of the Declaratory Judgment Act,” but, either way,
“whether the state or federal statute applies makes little
difference as a practical matter, as the two statutes are broadly
equivalent.” In re Adobe Sys., Inc. Privacy Litig., Case No.
13–CV–05226–LHK, 2014 WL 4379916, at *1, –-F. Supp. 3d.-- (N.D.
Cal. Sept. 4, 2014); see 28 U.S.C. § 2201(a); Cal. Code Civ. P. §
1060; Market Lofts Cmty. Ass’n v. 9th St. Market Lofts, LLC, 166
Cal. Rptr. 3d 469, 474-75 (Ct. App. 2014) (stating that
California Code of Civil Procedure section 1060 requires merely
that there be an actual controversy relating to the legal rights
and duties of the respective parties”); see also In re
Arbitration Between Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.
v. Personnel Plus, Inc., 954 F. Supp. 2d 239, 247-48 (S.D.N.Y.
2013)(“Because there is no conflict, the McCarran–Ferguson Act
does not come into play, and the Court applies the FAA. Thus, the
question of the Payment Agreement's enforceability must be
submitted to arbitration.”).
15

1 A.

Factual Background

2

Zurich contracted with Country Villa to provide

3 workers’ compensation insurance to Country Villa for
4 seven consecutive policy years, from 2004 to 2011.
5 ¶ 10.

Id.

For each of the seven policy years, the parties

6 entered into insurance policy contracts (“Policy,”
7 “Policy(ies),” or “Policies”) and, later, separate
8 IDAs/IDA Specifications (“IDA” includes IDA and any
9 related Specifications).

Countercl. ¶¶ 11, 75, 76.

10 Zurich admits it did not file the IDAs with the WCIRB
11 and that the IDAs were not approved by the CDI prior to
12 their issuance.

Stip. ¶¶ 4-5.

13 B. Procedural Background
14

Zurich filed this Action [1] against Country Villa

15 on May 16, 2014, claiming breach of contract under
16 California law for Country Villa’s alleged breach of
17 insurance policies, related contracts, and a promissory
18 note.

On July 1, 2014, Country Villa filed a Counter-

19 claim [20] against Zurich for contract-related claims
20 and declaratory relief.

Country Villa filed the

21 present Motion for Partial Summary Judgment [75] on
22 April 6, 2015.
23 timely filed.
24

The Opposition [79] and Reply [80] were
See Dckt. ## 78-80.
IV. DISCUSSION

25 A.

Country Villa’s Evidentiary Objections

26

Country Villa objects to four declarations attached

27 to and in support of Zurich’s Opposition.
28

1.

Objection to Terzinski Declaration [80-1]
16

1

Country Villa objects to portions of the Terzinski

2 Declaration that relate to the “2013 filings” made by
3 Zurich to the WCIRB on grounds of irrelevance because
4 “any submission to the [WCIRB]. . . in July 2013 is not
5 a fact of consequence in determining the motion for
6 partial summary judgment.”

Country Villa’s Evid. Objs.

7 to Terzinski Decl. 2:7-14, ECF No. 80-1.

The Court

8 agrees; Zurich’s 2013 filings are irrelevant to whether
9 the IDAs are void under California law or whether the
10 IDAs should be enforced in equity if found void.

As

11 such, the Court SUSTAINS Country Villa’s objections to
12 the Terzinski Declaration.
13

2.

Objection to Bartell Declaration [80-2]

14

Country Villa objects on grounds of irrelevance to

15 portions of the Bartell Declaration that relate to the
16 “1995 filings” Zurich made with the CDI.

Zurich’s 1995

17 filings are irrelevant to the determination of Country
18 Villa’s Motion, as Zurich fails to show that its 1995
19 filings were the equivalent of submitting the IDAs to
20 the WCIRB, as required by Section 11658; or that its
21 1995 filings otherwise satisfy Cal. Ins. Code § 11658
22 and Cal. Code Regs., tit. 10, § 2268.

The 1995 filings

23 are also irrelevant to whether the IDAs, if found void,
24 should nevertheless be enforced.

The Court SUSTAINS

25 Country Villa’s objections to the Bartell Declaration.
26

3.

27

Country Villa objects to specific paragraphs of the

Objection to Knoebel Declaration [80-3]

28 Knoebel Declaration on grounds of irrelevance, best
17

1 evidence, and improper legal conclusion, among others.
2

The Court SUSTAINS Country Villa’s evidentiary

3 objections to the following portions of the Knoebel
4 Declaration on the basis of irrelevance, Best Evidence,
5 or improper legal conclusion: paragraphs 7-9 and 11-12,
6 all of paragraph 13 except the first sentence, and
7 paragraphs 14-16 and 19-26.
8

The Court OVERRULES the remainder of Country

9 Villa’s objections to the Knoebel Declaration either
10 because the evidence is relevant or because the Court
11 need not rely on the objected-to evidence to determine
12 the present Motion.
13

4.

Objection to Young Declaration [80-4]

14

Country Villa objects to the entire Young

15 Declaration on the basis of, among other grounds,
16 irrelevance.

The Court SUSTAINS Country Villa’s

17 objections to the following portions of the Young
18 Declaration on the basis of irrelevance:
19 1) Evidence related to Zurich’s two Rate Filings made
20 in 1995, Young Decl. Supp’g Opp’n ¶¶ 2-3, Exs. A-B, ECF
21 No. 79-4;
22 2) Evidence related the Bankruptcy Court filing, In re
23 Country Villa Nursing Center, Inc., Case No. 8:14-bk24 11364-CB, Young Decl. Supp’g Opp’n ¶ 5, Ex. C
25 3) Evidence related to the copied page from Accounting
26 Practices & Procedures Manual, Young Decl. Supp’g Opp’n
27 ¶ 9, Ex. G; and
28 4) Evidence related to the California Assembly
18

1 Committee Reports on Assembly Bill No. 2490 (2009-2010
2 Regular Session), Young Decl. ¶¶ 11-12, Exs. H-I, which
3 is irrelevant for several reasons, but primarily
4 because the Reports have nothing to do with any law
5 relevant to determining the present Motion.
6

The Court OVERRULES the remainder of Country

7 Villa’s objections to the Young Declaration.
8 B.

Zurich’s Rule 56(d) Request

9

Zurich requests a denial of Country Villa’s Motion

10 for Partial Summary Judgment so that Zurich may engage
11 in additional discovery, which, Zurich claims, “will
12 raise genuine issues of material fact.”
13 56(d) ¶ 10.

Young Decl.

Upon review of Zurich’s Rule 56(d)

14 Request, the Court finds that, even if the evidence
15 sought was discovered, such evidence would not raise a
16 “genuine issue of material fact” relevant to the
17 Court’s determination of the present Motion.

The Court

18 DENIES Zurich’s Rule 56(d) request.
19 C.

Parties’ Requests for Judicial Notice

20

In diversity cases, judicial notice is governed by

21 the Federal Rules of Evidence.

Alimena v. Vericrest

22 Fin., Inc., No. S-12-0901, 2012 WL 66512001, at *4 n.8
23 (E.D. Cal. Dec. 20, 2012); Wray v. Gregory, 61 F.3d
24 1414, 1417 (9th Cir. 1995).

A court “may judicially

25 notice a fact that is not subject to reasonable dispute
26 because it: (1) is generally known . . .; or (2) can be
27 accurately and readily determined from sources whose
28 accuracy cannot reasonably be questioned.”
19

Fed. R.

1 Evid. 201(b).

A court “must” take judicial notice “if

2 a party requests it and the court is supplied with the
3 necessary information.”

Fed. R. Evid. 201(c)(2).

4

1.

5

Country Villa requests judicial notice of the

Country Villa’s RJN [75-3]

6 following:
7 1) In re Matter of the Licenses and Licensing Rights of
8 American Zurich Insurance Company and Zurich American
9 Insurance Company of Illinois, File No. DISP-201110 00811, before the Insurance Commissioner of the State
11 of California, Notice of Hearing and Order to Show
12 Cause, dated February 27, 2012.

Country Villa’s RJN ¶

13 1, Ex. 1.
14 2) In re Matter of the Licenses and Licensing Rights of
15 American Zurich Insurance Company and Zurich American
16 Insurance Company of Illinois, File No. DISP-201117 00811, before the Insurance Commissioner of the State
18 of California, Settlement Agreement, dated July 11,
19 2013.

Id. ¶ 2, Ex. 2.

20 3) Notice of Proposed Action and Notice of Public
21 Hearing, Workers’ Compensation Policy Forms, California
22 Department of Insurance, Reg. File No. REF-2014-00014,
23 dated December 9, 2014.

Id. ¶ 3, Ex. 3.

24 4) Initial Statement of Reasons, Proposed Amendments to
25 Workers’ Compensation Policy Forms, California
26 Department of Insurance, Reg. File No. REF-2014-00014,
27 dated December 9, 2014.

Id. ¶ 4, Ex. 4.

28 5) Text of Regulation, Workers’ Compensation Policy
20

1 Forms, California Department of Insurance, Reg. File
2 No. REF-2014-00014, dated December 9, 2014.

Id. ¶ 5,

3 Ex. 5.
4

Because the fact of the existence and content of

5 the above documents is a fact “not subject to
6 reasonable dispute” because the fact of the above
7 documents “can be accurately and readily determined
8 from sources whose accuracy cannot reasonably be
9 questioned,” the Court GRANTS Country Villa’s Request
10 for Judicial Notice in its entirety, taking judicial
11 notice of the existence and content of the above
12 documents,6 attached as Exhibits 1 through 5 to Country
13 Villa’s Request for Judicial Notice.7
14

2.

15

Zurich requests judicial notice of nine documents,

Zurich’s RJN [79-2]

16 some of which are not relevant to the present Motion.
17

The Court DENIES Zurich’s request for judicial

18 notice of the following exhibits because they are
19
20
21
22
23
24
25
26
27
28

6

The Court previously took judicial notice of Exhibits 1
through 2, as well the underlying insurance policies and IDAs, in
the Court’s October 2, 2014, Order re: Zurich’s Motion to Dismiss
[59]. Zurich did not oppose judicial notice of these documents.
Dckt. # 59 at 12:25-15:10.
7

See Story v. Mammoth Mountain Ski Area, LLC, No.
2:14–cv–02422–JAM–DAD, 2015 WL 2339437, at *1 (E.D. Cal. May 13,
2015) (stating that “Federal Rule of Evidence 201 permits courts
to take judicial notice of matters that ‘can be accurately
verified and readily determined from sources whose accuracy
cannot be reasonably questioned,’” and noting that “[d]ocuments
that ‘are administered by[,] or publicly filed with[,] [an]
administrative agency’ are properly subject to judicial notice
under Rule 201”).
21

1 irrelevant to determining the present Motion,8 as
2 previously discussed above:
3 1) Zurich’s two Rate Filing Forms filed with the CDI in
4 1995.

Zurich RJN ¶¶ 1-2, Ex. A-B.

5 2) In re Country Villa Nursing Center Inc., Case No.
6 8:14-bk-11364-CB.

Zurich RJN ¶ 3, Ex. C.

7 3) Accounting Practices & Procedures Manual 65-8.
8 Zurich RJN ¶ 7, Ex. G.
9 4) California Committee Reports, Analysis of California
10 Assembly Bill No. 2490 (2009-2010 Regular Session).
11 Zurich RJN ¶¶ 8-9, Ex. H-I.
12

The Court GRANTS Zurich’s request for judicial

13 notice as to the following exhibits because their
14 existence and content are facts that can be accurately
15 and readily determined from sources whose accuracy
16 cannot reasonably be questioned:
17 1) “Civil Minutes-General,” Healthsmart Pac. Inc. v.
18 Zurich Am. Ins. Co., Case No. 08-cv-01207-JVS-RC (C.D.
19 Cal. Feb. 20, 2009), ECF No. 31.

Zurich’s RJN ¶ 4, Ex.

20 D.
21 2) “Ruling Motion to Compel Arbitration and Stay
22 Proceedings,” DMS Serv., LLC v. Zurich Am. Ins. Co.,
23 Case No. EC 055245 (Cal. Sup. Ct. Aug. 5, 2011).
24 Zurich’s RJN ¶ 5, Ex. E.
25 3) “Appeals Court Docket” for Monarch Consulting Inc.
26 v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., Case
27
8

See Story, 2015 WL 2339437, at *1 (denying a request for

28 judicial notice when the material underlying the request was
found not relevant to the issues presented by the motion).
22

1 No. APL-2014-00271 (N.Y. App. Div.), as of Apr. 17,
2 2015.

Zurich’s RJN ¶ 6, Ex. F.

3 D.

Partial Summary Judgment for Declaratory Relief

4

1.

5

A “court shall grant summary judgment” when the

Legal Standard

6 movant “shows that there is no genuine dispute as to
7 any material fact and the movant is entitled to
8 judgment as a matter of law.”

Fed. R. Civ. P. 56(a).

9 The party moving for summary judgment has the initial
10 burden to show “no genuine dispute as to any material
11 fact.”
12 1102-03.

Fed. R. Civ. P. 56(a); see Fritz, 210 F.3d at
The burden then shifts to the non-moving

13 party to produce admissible evidence showing a triable
14 issue of fact.

Fritz, 210 F.3d at 1102-03; see Fed. R.

15 Civ. P. 56(a).

Unclear law or disputed matters of law

16 are not genuine disputes “as to any material fact.”
17 Sarviss, 663 F. Supp. 2d at 899 n.16.
18

2.

19

County Villa’s Motion for Partial Summary Judgment

Analysis

20 [75] regards only the Fifth Count of Country Villa’s
21 Counterclaim, which requests a judicial declaration
22 that the IDAs “are void and unenforceable” under
23 California law because Zurich failed to file the IDAs
24 with the WCIRB, as required by at least Cal. Ins. Code
25 § 11658,9 and failed to attach the IDAs to the Policies,
26
9

similar side deductible27 relatedThe Commissioner has stated that filed under Section 11735
agreements were required to be
28 of the Insurance Code as well as Section 11658. Commissioner
23

1 as required by Cal. Code Regs., tit. 10, § 2268.
2 Countercl. ¶¶ 71-80, ECF No. 20.
3

Partial summary judgment is appropriate because

4 Country Villa has shown that there is no genuine issue
5 of material fact, and Zurich has failed to provide any
6 genuine issue of material fact, disputing only matters
7 of law.
8

Fed. R. Civ. P. 56(a).

To declare the rights and obligations of the

9 parties, the Court must determine three issues:
10 1) Are the IDAs subject to Cal. Ins. Code § 11658 or
11 Cal. Code Regs., tit. 10, § 2268?;
12 2) If so, did Zurich violate Sections 11658 or 2268?;
13 3) If so, what is the appropriate remedy for Zurich’s
14 violation of California law?
15

a.

Are the IDAs Subject to Cal. Ins. Code §

16

11658 or Cal. Code Regs., tit. 10, § 2268?

17

California Insurance Code § 11658 (“Section 11658”)

18 states that “[a] workers’ compensation insurance policy
19 or endorsement shall not be issued by an insurer to any
20 person in this state unless the insurer files a copy of
21 the form or endorsement with the rating organization
22 [i.e., the WCIRB] . . . and 30 days have expired from
23 the date the form or endorsement is received by the
24 commissioner from the rating organization without
25 notice from the commissioner, unless the commissioner
26 gives written approval of the form or endorsement prior
27
28 Appl., DMS Serv., 2011 WL 6345401, at *3-*8.
24

1 to that time.”
2

Cal. Ins. Code § 11658(a).

Section 11658 “requires workers’ compensation

3 carriers, before issuing a workers’ compensation
4 insurance policy, to file copies of their insurance
5 policies, endorsements and forms with WCIRB; after a
6 preliminary inspection, the WCIRB then sends the filed
7 documents to the CDI for approval,” and the CDI “has 30
8 days in which to reject the filed form or endorsement.”
9 Monarch, 993 N.Y.S.2d at 279-80.

Under Section 11658,

10 “two regulatory agencies must review and approve all
11 workers’ compensation insurance forms,” but the
12 Commissioner “has the exclusive authority to regulate,
13 accept, and reject workers’ compensation insurance
14 plans.”
15

Id. at 280.

Section 2268 of title ten of the California Code of

16 Regulations (“Section 2268”) states in relevant part
17 that “[n]o collateral agreements modifying the
18 obligation of either the insured or the insurer shall
19 be made unless attached to and made a part of the
20 policy.”
21

Cal. Code Regs., tit. 10, § 2268.

Country Villa argues that the IDAs are subject to

22 Section 11658 because they are ““[a] workers’
23 compensation insurance policy or endorsement” and that
24 the IDAs are subject to Section 2268 because they are
25 “collateral agreements modifying the obligation of
26 either the insured or the insurer.”

Zurich disagrees

27 and argues that the IDAs are not subject to either
28 Section 11658 or 2268 because the IDAs are mere
25

1 financial agreements with the “primary purpose” of
2 securing Country Villa’s deductible obligations under
3 the Large Deductible agreements attached to the
4 insurance policies.
5
6

i.

Opp’n 6:4-5.

Authority

There is no controlling California or Ninth Circuit

7 authority determinative of Country Villa’s request for
8 declaratory relief.

The most analogous cases are an

9 unpublished California appellate decision, Ceradyne10; a
10 published New York appellate decision, Monarch,11 which
11 is currently on appeal; and an unreported trial-level
12 New York State opinion, National Union Fire.12

Most

13 helpful is material issued by the California Insurance
14 Commissioner interpreting Sections 11658 and 2268 in
15 analogous situations.13
16

Zurich argues that a published California appellate

17 decision, DMS Services,14 should govern.

However, the

18 court in DMS Services did not analyze or reach the
19 issue of whether the collateral agreements in that case
20
21

10

Ceraydne, Inc. v. Argonaut Ins. Co., No. G039873, 2009 WL
1526071 (Cal. Ct. App. June 2, 2009).

22
11

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

23 Pittsburgh, Pa., 993 N.Y.S.3d 275 (App. Div. 2014).
12
24
Nat’l Union Fire Co. of Pittsburgh, Pa. v. Source One
Staffing, LLC, 36 Misc.3d 1224(A), 2012 N.Y. Slip Op. 51462(U),
25
2012 WL 3156438 (Sup. Ct. 2012) (Unpub. Disp.).

26
27
28

13

Commissioner Appl., DMS Serv., 2011 WL 6345401; Feb. 14,
2011, CDI Directive to WCIRB, ECF No. 20-2.
14

DMS Serv., Inc. v. Sup. Ct., 140 Cal. Rptr. 3d 896 (Ct.
App. 2012).
26

1 were invalid under Section 11658, and DMS Services does
2 not discuss Section 2268 at all.

See DMS Serv., 140

3 Cal. Rptr. 3d at 905-06.
4

Zurich also cites for support Grove Lumber15 and

5 HealthSmart16, two cases17 from this District that found
6 enforceable arbitration provisions in collateral
7 agreements to workers’ compensation insurance despite a
8 Section 11658 argument.

Id. at 8:26-9:4.

Country

9 Villa argues that Grove Lumber and HealthSmart are
10 distinguishable and unpersuasive.

The following is a

11 discussion of the relevant case law.
12
13

Grove Lumber
In the earlier 2008 case, Grove Lumber, the

14 district court compelled arbitration pursuant to an
15 arbitration provision in a collateral agreement to a
16
17
18
19
20
21
22
23
24
25
26
27
28

15

Grove Lumber & Bldg. Supply, Inc. v. Argonaut Ins. Co.,
No. SA CV 07-1396 AHS(RNBx), 2008 WL 2705169 (C.D. Cal. July 7,
2008).
16

HealthSmart Pac. Inc. v. Zurich Am. Ins. Co., No. 08-cv01207-JVS-RC, at *4-*5 (C.D. Cal. Feb. 20, 2009) (In-Chambers
Order Granting Defendant Zurich’s Motion to Stay Case Pending
Action and Compelling Arbitration, ECF No. 31).
17

Both cases were decided prior to Ceradyne, 2009 WL
1526071 (Cal. Ct. App. Unpub. June 2, 2009), the only California
opinion on the issue. The California appellate court in Ceradyne
“accepted amicus curiae briefs from general counsel for
HealthSmart Pacific, Inc., and counsel for Grove Lumber &
Building Supply, Inc.,” which the court described as “involved in
similar litigation/arbitration disputes with their workers’
compensation insurers regarding large deductible policies” and
“[h]aving similar claims and contracts” as those in Ceradyne.
2009 WL 1526071, at *4. After considering those amicus briefs,
the court agreed that the challenged arbitration clause in the
side program agreements “executed months after the inception of
the actual policy” was “void” under Section 11658. Id.
27

1 workers’ compensation insurance policy despite a
2 Section 11658 argument because the insured failed to
3 prove that the collateral agreement was subject to
4 Section 11658.

Grove Lumber, 2008 WL 2705169, at *7

5 (C.D. Cal. July 7, 2008).

The court explained that

6 because the insured had “concede[d] in its proposed
7 statement of facts and conclusions of law . . . that
8 the [collateral agreement] [was] a ‘financial
9 agreement’ and not an insurance policy or endorsement,”
10 Section 11658 did not apply because Section 11658
11 requires the filing of only an “insurance policy or
12 endorsement.”

Id. at *7.

The court also found that,

13 under the FAA, the Section 11658 issue had to be
14 decided by the arbitration panel.
15

Id. at *6.

Grove Lumber is distinguishable, unpersuasive in

16 its reasoning, and ultimately unhelpful to the Court’s
17 determination of Country Villa’s Motion.
18

First, the determinative facts of Grove Lumber are

19 distinguishable from the facts of this case.

Unlike

20 the insured in Grove Lumber who conceded that the
21 program agreements were mere financial agreements,
22 Country Villa disputes such a contention and provides
23 evidence and argument that the IDAs are insurance
24 policies or endorsements subject to the filing
25 requirements of Section 11658.

Additionally, while the

26 program agreements in Grove Lumber expressly stated
27 they did not alter or affect the underlying policy or
28
28

1 attached endorsements,18 the IDAs here expressly state
2 they do alter or affect the underlying policy and
3 endorsements.19
4

Second, the court in Grove Lumber did not analyze

5 the Section 11658 issue,20 but preliminarily found that,
6 due to the insured’s concession and under the FAA,21 the
7 Section 11658 argument could not prevent the Court from
8 compelling arbitration in that case.
9

Id. at *6-*7.

Zurich emphasizes Grove Lumber’s idea that because

10 the program agreements did not “address [the insurance
11 company’s indemnity obligations for loss or liability,”
12 the program agreements were “not an insurance policy or
13 endorsement.”

Id. at *7.

The Court finds such an idea

14 unpersuasive, especially in light of California’s
15 comprehensive workers’ compensation insurance
16 regulatory scheme and the California Insurance
17 Commissioner’s interpretation of Section 11658.
18

In California, “‘[w]orkers’ compensation insurance

19
20

18

21

19

22
23
24
25
26

2008 WL 2705169, at *2 ¶¶ 12-13.

Compl., Ex. B at *267 (IDA) (stating that the
“Policy(ies) . . . including all endorsements, extensions,
renewals and/or rewrites” “stated in the Specifications” are
“subject to this Agreement”); id. (IDA) (“This Agreement . . .
supersedes any Deductible endorsements to the Policy(ies), prior
communications, negotiations, participating plans or letters of
election.”); see Compl., Ex. A at *230 (Policy) (stating that
“[e]ach of the Policies contains a standard-form provision that
states: “The terms of this policy may not be changed or waived
except by endorsement issued by us to be part of the policy”).

27

20

Grove Lumber does not discuss Section 2268.

28

21

There is no FAA issue here.
29

1 programs are to be closely scrutinized and are highly
2 regulated.’”

Monarch, 993 N.Y.S.2d at 291 (quoting

3 Ceradyne, 2009 WL 1526071, at *11).22

The California

4 “Legislature has created a highly regulated
5 compensation system for injured workers with the twin
6 goals of providing prompt medical treatment and
7 containing costs.”

Adventist Health v. Workers’ Compl.

8 Appeals Bd., 149 Cal. Rptr. 3d 406, 412 (Ct. App.
9 2012).

Section 11750.3 explains that the “rating

10 organization,” which is the WCIRB, was created “[t]o
11 examine policies, daily reports, endorsements or other
12 evidences of insurance for the purpose of ascertaining
13 whether they comply with the provisions of law and to
14 make reasonable rules governing their submission.”
15 Cal. Ins. Code § 11750.3.

Section 2218 of the

16 California Code of Regulations title 10 states that
17 “[a]ll workers’ compensation forms must be submitted in
18 duplicate to the [WCIRB] of California for preliminary
19 inspection.”
20

Cal. Code Regs. tit. 10, § 2218.

In light of such a comprehensive regulatory scheme,

21 it is unreasonable to limit Section 11658’s filing
22
23

22

See also Commissioner Appl., DMS Serv., 2011 WL 6345401,

24 at *4-*5 (stating that “[w]orkers’ compensation insurance is a
highly regulated area of insurance” and that the “regulation of

25 rates is subject to an ‘open’ rating system that involves a
complex analysis of multiple interrelated factors” and involves
26 “an open rating system” where “employer can negotiate in the
27 market place the deductible amounts best suited to their
28

particular needs [such as offering] larger deductible amounts . .
. and lower premiums for large employers who are able to assume a
portion of the risk of loss”).
30

1 requirements to the narrow sliver of an insurance
2 agreement regarding only the insurers “indemnity
3 obligations for loss or liability.”
4 WL 2705169, at *7.

Grove Lumber, 2008

Nothing in the language of Section

5 11658, or the language of any other related statutes or
6 regulations, requires such a stingy interpretation of
7 Section 11658.
8

On the contrary, Section 11658 itself clearly

9 states that not only the insurance policy itself, but
10 also endorsements to the insurance policy must be
11 filed.

Cal. Ins. Code § 11568.

An endorsement “is an

12 amendment to or modification of an existing policy of
13 insurance,” that “may be attached to a policy at its
14 inception or added during the term of the policy,” and
15 that “‘may alter or vary any term or condition of the
16 policy.’”

Adams v. Explorer Ins. Co., 13 Cal. Rptr.

17 4th 438, 450-51 (Ct. App. 2003) (emphasis added).

As

18 such, an endorsement, which must be filed, is not
19 limited to provisions addressing the insurer’s
20 indemnity obligations, but may be any agreement that
21 alters or adds to any term or condition of an insurance
22 policy.
23

See id.

The California Insurance Commissioner has

24 interpreted Section 11658.23

With regard to an

25
26
27
28

23

The CDI, and ultimately the Commissioner, is charged with
enforcing the statutes regulating the workers’ compensation
insurance industry. Commissioner Appl., DMS Serv., 2011 WL
6345401, at *1-*5; see Ass’n for Retarded Citizens v. Dep’t of
Developmental Serv., 696 P.2d 150, 38 Cal.3d 384, 391 (1985)
31

1 agreement analogous to the IDAs here, where the insured
2 “agree[d] to reimburse or otherwise pay the insurer for
3 loss adjustment expenses and/or other claims or policy
4 related expenses,” and where the agreement included
5 terms pertaining to “indemnity/loss obligation, payment
6 or reimbursement obligation, allocated loss adjustment
7 expenses (ALAE), other expenses or fees, the timing of
8 reimbursements or payments to the insurer, collateral,
9 circumstances that constitute a default by the insured,
10 choice of law, arbitration, and other matters that are
11 material to the insured’s and insurer’s obligations
12 under a workers’ compensation insurance policy,” the
13 Commissioner concluded that such an agreement was
14 subject to the filing requirements of Section 11658.
15 In the Matter of Zurich Am. Ins. Co., File No. DISP16 2011-00811, Notice of Hearing and Order to Show Cause
17 (“CDI OSC re: Zurich”) 4:23-5:23 (Feb. 27, 2012), ECF
18 No. 75-3.

The Commissioner’s position flies in the

19 face of Grove Lumber’s interpretation of Section 11658.
20
21

HealthSmart
In HealthSmart, Zurich moved to stay the action and

22 compel arbitration under the FAA, a situation analogous
23 to Grove Lumber.

HealthSmart Pacific, Inc. v. Zurich

24 Am. Ins. Co., No. 08-cv-01207-JVS-RC, at *1-*2 (C.D.
25 Cal. Feb. 20, 2009) (In-Chambers Order Granting
26
(“[T]he construction of a statute by officials charged with its

27 administration, including their interpretation of the authority
invested in them to implement and carry out its provisions, is
28 entitled to great weight.”).
32

1 Defendant Zurich’s Motion to Stay Case Pending Action
2 and Compelling Arbitration, ECF No. 31).

Healthsmart

3 blindly relied on Grove Lumber, citing no California
4 law, and did not analyze the Section 2268 argument.

As

5 such, the Court finds that Healthsmart is, like Grove
6 Lumber, distinguishable, unpersuasive, and unhelpful.
7
8

Ceradyne
Ceradyne, an unpublished California appellate

9 opinion, is the only California opinion directly on
10 point.24

In Ceradyne, the insurance company provided a

11 workers’ compensation insurance plan to a large
12 corporation.

2009 WL 1526071, at *1.

Several months

13 after the insurance policy took effect, the parties
14 entered into an Insurance Program Agreement (“IPA”),
15 which had not been disclosed to or pre-approved by the
16
24

California Court Rule 8.1115(a) states that “an opinion

17 of a California Court of Appeal . . . that is not certified for
18 publication or ordered published must not be cited or relied on
19
20
21
22
23
24
25
26
27
28

by a court or a party in any other action. District courts in
this District generally decline to consider an unpublished
California decision when there is other published persuasive or
binding authority on which to rely. See, e.g., Negrete v.
Allianz Life Ins. Co. of N. Am., 927 F. Supp. 2d 870k 892 (C.D.
Cal. 2013) (rejecting unpublished California court opinions
because the unpublished opinions were contrary to published
California court opinions). However, when there is no other
binding authority on which to rely, federal courts may consider
unpublished California opinions as persuasive authority. Emp’rs
Ins. of Wausau v. Granite St. Ins. Co., 330 F.3d 1214, 1220 n.8
(9th Cir. 2003) (stating that the Court “may consider unpublished
state decisions, even though such opinions have no precedential
value” and that unpublished opinions, “while certainly not
dispositive of how the California Supreme Court would rule,” may
still “lend[] support” to a certain position regarding California
law); Washington v. Cal. City Correction Ctr., 871 F. Supp. 2d
1010, 1028 n.3 (E.D. Cal. 2012) (“The Court may cite unpublished
California appellate decisions as persuasive authority.”).
33

1 Insurance Commissioner or the WCIRB.

Id.

The IPA

2 contained, among other clauses, arbitration and forum
3 selection clauses.

Id.

The New York state trial court

4 refused to stay or dismiss the case pursuant to the
5 arbitration and forum selection clauses in the IPA
6 because the court found that “the entire IPA was void
7 because it had not been disclosed or approved as
8 required by section 11658.”

Id.

The appellate court,

9 in a thorough and well-reasoned analysis,25 found that
10 the arbitration and forum selection clause challenged
11 by the insured was void for failure to file the IPAs
12 under Section 11658.
13

Id. at *11-*12.

The insurance policies and IPAs in Ceradyne are

14 similar in relevant aspects to the policies and IDAs
15 here.

See id. at *2-*3.

The parties here also make

16 similar arguments to those considered by Ceradyne.
17 Significantly, the insurer in Ceradyne argued, as
18 Zurich argues here, that the IPA was a mere financial
19 document because it did not address the insurer’s
20 indemnity obligations for loss or liability.

Id.

The

21 Ceradyne court “disagree[d] with this narrow
22 interpretation of the disclosure requirements for
23
24
25
26
27
28

25

The appellate court accepted amicus curiae briefs from
HealthSmart Pacific, Inc. and Grove Lumber & Building Supply,
Inc., which the Ceradyne court described as companies “involved
in similar litigation/arbitration disputes . . . [h]aving similar
claims and contracts.” 2009 WL 1526071, at *4. Ceradyne’s
robust, clear, and well-reasoned analysis, and consideration of
these amicus briefs, makes Grove Lumber and HealthSmart further
unpersuasive.
34

1 purposes of section 11658.”

Id.

The court pointed out

2 that “a standard workers’ compensation policy includes
3 more than just a statement of the indemnity
4 obligations,” and “[t]o adequately and efficiently
5 regulate and monitor rates and insurance companies, the
6 Commissioner and the WCIRB must review more than
7 indemnity and liability terms,” as employers in
8 California “have no choice but to secure workers’
9 compensation insurance . . . and, consequently, the
10 entire system is highly regulated.”
11

Id. at *11.

The Ceradyne court found that the IPAs were subject

12 to Section 11658’s filing requirements because the
13 language of both the policy and the IPAs made it clear
14 that the IPAs “contain[ed] significant details
15 regarding the terms of insurance.”

Id. at *8; see also

16 id. at *10 (“[T]he IPA looks very much like part of an
17 insurance contract,” as its “primary function is
18 related to Argonaut’s ability and obligation to provide
19 insurance.”).

Specifically, the IPA, like the IDA

20 here, repeated terms found in the policy, and “defined
21 itself” “as part of” the insurance program.

Id. at *7.

22 The IPA also “contained several new items regarding how
23 payments are to be made and maintained for the policy
24 to continue in effect,” including requests for
25 security, $500,000 in collateral, and a “Loss Deposit
26 Fund . . . to pre-fund the payment of Paid Losses and
27 [Allocated Loss Adjustment Expenses].”

Id.

The court

28 concluded: “[t]o accept [the] claim the IPA is purely a
35

1 . . . financial document would require us to ignore the
2 actual terms of the agreement.”

Id. at *10.

3 were unenforceable under Section 11658.
4
5

The IPAs

Id. at *11.

Source One
A related opinion, National Union Fire Co. of

6 Pittsburgh, Pa. v. Source One Staffing, LLC, 36 Misc.3d
7 1224(A), 2012 N.Y. Slip Op. 51462(U), 2012 WL 3156438
8 (Sup. Ct. 2012) (Unrep. Disp.), was issued in 2012 by a
9 trial-level New York state court.

In Source One, the

10 insurance company and the insured entered into
11 insurance policies and a separate Payment Agreement,
12 which required the insured “to provide significant
13 collateral to cover losses on claims under the Policies
14 within the deductible” where the “amount of deductible
15 required under the Payment Agreement was to be
16 calculated in part based on respondent’s loss history
17 for claims under the Policies.”
18 *1.

2012 WL 3156438, at

The insurer argued that the arbitration clause in

19 the Payment Agreement was unenforceable because it had
20 not been filed with the WCIRB, as required by Section
21 11658.

Id.

The insurer argued that the Payment

22 Agreement was not a policy or endorsement required to
23 be filed within the meaning of the Insurance Code.
24

Id.

The court in Source One concluded that the Payment

25 Agreement was required to be filed under Section 11658,
26 and attached to the policies under Section 2268,
27 because it was “clear” by the terms of the Payment
28 Agreement “that the Payment Agreement forms a part of
36

1 the workers compensation policies.”

Id. at *5-*7.

The

2 court declined to apply the rationale of Grove Lumber
3 and found that Ceradyne was “consistent with a
4 directive issued by the California Department of
5 Insurance on February 14, 2011 to the [WCIRB] . . .
6 regarding the kind of workers compensation collateral
7 agreements that are at issue in this matter,” in which
8 the Commissioner stated that “under California law,
9 such agreements were required to be filed with the
10 WCIRB.”

Id. at *5-*6.

Because the Payment Agreement

11 was not filed or attached, it was void and
12 unenforceable under California law.

Id. at *5-*7.

13

Monarch

14

The only analogous published opinion is Monarch

15 Consulting, Inc. v. Nat’l Union Fire Ins. Co. of
16 Pittsburgh, Pa., 933 N.Y.S.2d 275 (App. Div. 2014), an
17 opinion by a New York state lower-appellate-level
18 court.

In Monarch, the appellate court had “to decide

19 whether three insureds are compelled to arbitrate their
20 disputes with their workers’ compensation insurance
21 carrier even though the carrier failed to file the
22 arbitration agreements, contained inside agreements to
23 the insurance policies, with the California Department
24 of Insurance as California law requires.”
25 at 279.

933 N.Y.S.2d

The facts of Monarch are analogous.

After the

26 insurance company issued the policies, it sent to the
27 insured additional agreements regarding, among other
28 things, credit issues, payment obligations, deductible
37

1 loss reimbursement terms, terms of default, and dispute
2 resolution procedures.
3

Id. at 280.

The Monarch court considered the February 14, 2011,

4 Directive issued to the WCIRB by the CDI and the CDI’s
5 enforcement action against Zurich.

Id. at 280-82.

The

6 court agreed with the CDI’s rejection of Zurich’s
7 argument that the payment agreements were mere
8 financial agreements.

Id.

The court stated: “We note

9 that the CDI order to show cause and settlement make
10 clear that the CDI does, in fact, believe that side
11 agreements are subject to regulatory statutes, and
12 therefore, that those agreements are void if insurers
13 fail to file them,” and that “the CDI’s interpretation
14 of the Insurance Code receives weight under” California
15 law.

Id. at 287.

The Monarch court also found

16 Ceradyne, though unpublished, to be persuasive
17 authority which the court “consider[ed] [for] its
18 reasoning without relying on it as controlling
19 authority.”

Id. at 288.

The court concluded that the

20 payment agreements “qualif[ied] as policy endorsements
21 or agreements collateral to the policies” and thus
22 “should have [been] submitted . . . to the CDI for
23 approval.”26

Id. at 289.

24
25
26
27
28

26

See also Monarch, 993 N.Y.S.2d at 290 (“[T]he payment
agreements modify the parties' obligations under the policies in
even more substantive ways. For example, as the Monarch court
noted, the agreements provide that if the insureds defaulted
under the agreements, National Union had the right unilaterally
to “change any or all unexpired Policies” from deductible to
non-deductible plans, and to concomitantly increase the premiums.
38

1
2

ii. Analysis
In light of the statutory and regulatory language;

3 the highly regulated nature of California’s workers’
4 compensation insurance scheme; the language of the
5 Policies and IDAs; the analogous facts and persuasive
6 reasoning of Ceradyne, Source One, and Monarch; and the
7 Commissioner’s interpretation of Sections 11658 and
8 2268, the Court finds that the IDAs are subject to
9 Section 11658’s filing requirements and Section 2268’s
10 attachment requirements.
11

Section 11658

12

Section 11658 states in relevant part that “[a]

13 workers' compensation insurance policy or endorsement
14 shall not be issued by an insurer to any person in this
15 state unless the insurer files a copy of the form or
16 endorsement with the rating organization . . .

and 30

17 days have expired from the date the form or endorsement
18 is received by the commissioner from the rating
19 organization without notice from the commissioner,
20 unless the commissioner gives written approval of the
21 form or endorsement prior to that time.”

Cal. Ins.

22 Code § 11658(a).
23

The IDAs have the same determinant characteristics

24
25 The insureds' payment obligations also included “any amount paid
by [National Union] to a claimant on [the insureds'] behalf.”

26 These changes directly alter the policies, and indeed, directly
implicate the insureds' reasons for obtaining the policies in the

27 first place. To accept National Union's claim that the payment
agreements are simply secondary financial documents would require
28 this court to ignore the actual terms of the agreements.”).
39

1 as the side agreements in Ceradyne, Source One, and
2 Monarch, which were subject to Section 11658’s filing
3 requirements.

Most significantly, the language of the

4 Policies and the IDAs establish that the IDAs are part
5 of the insurance program created by the Policies.
6 Specifically, the Policies state that a later issued
7 endorsement may “change[] or waive[]” the “terms of
8 th[e] policy, and the IDAs state that the “Policy(ies)
9 . . . including all endorsements, extensions, renewals
10 and/or rewrites” stated in the IDA’s Specifications are
11 “subject to” the IDA.
12 Ex. B at *267.

Compl., Ex. A at *230; Compl.,

The IDAs contain terms related to

13 Country Villa’s deductible and cost obligations under
14 the Policies; create a new Aggregate Deductible; and
15 define terms clearly tied to the Policies.
16 B at *268-*84.

Compl., Ex.

The IDAs constantly refer to the

17 Policy(ies) and fill out several policy terms.

Id.

18 The IDAs simply cannot be understood as a stand alone
19 financial agreement separate from the related Policy.27
20

The Commissioner’s interpretation of Section 11658

21 further convinces the Court that the IDAs are subject
22 to Section 11658’s filing requirements.

See

23 Commissioner Appl., DMS Serv., 2011 WL 6345401, at *624 *9.

The Commissioner, in its Application to File an

25 Amicus Curiae Brief in DMS Services, stated that
26
27

The language of the IDAs (even the title, “Incurred

27 Deductible Agreement”) makes clear that the IDAs are “part of the
insurance contract, not a separate side financial agreement.”
28 Ceradyne, 2009 WL 1526071, at *7.
40

1 similar side deductible agreements issued by Zurich to
2 DMS Services were required to be filed under Section
3 11658 because the agreements “govern integral aspects
4 of the insurance relationship stemming from the
5 treatment of deductibles,” and “[n]one of the
6 deductible agreements . . . are stand alone documents;
7 each can be understood only by reference to the
8 underlying policies.”

Id. at *3-*4; see id. at *1-*11.

9 The Commissioner also noted that the sheer length of
10 the agreements, as well as their complex terms related
11 to the underlying insurance policy, made it clear that
12 they were “not simply the ‘mechanics of payment.’”

Id.

13 at *7 n.2.
14
15

Section 2268
Section 2268 of the California Code of Regulations,

16 title 10, requires that “[n]o collateral agreements
17 modifying the obligation of either the insured or the
18 insurer shall be made unless attached to and made a
19 part of the policy.”

Cal. Code Regs., tit. 10, § 2268.

20 The IDAs, as endorsements, clearly “modify[] the
21 obligation of either the insured or the insurer” and
22 are thus subject to Section 2268’s attachment
23 requirements.

Cal. Code Regs., tit. 10, § 2268; see

24 Feb. 14, 2011, CDI Directive to WCIRB, ECF No. 20-2
25 (“The Insurance Commissioner has prohibited the use of
26 collateral agreements, which is synonymous with the
27 term ‘side-agreement,’ concerning workers’ compensation
28 insurance unless they are attached to the policy.”).
41

1
2

b.

Did Zurich Violate California Law?

Zurich admits that it did not file the IDAs with

3 the WCIRB, as required by Section 11658, and that the
4 IDAs were never approved by the CDI in any other
5 manner.

Stip. ¶¶ 4-5; Zurich’s Facts ¶¶ 7-8

6 (undisputed).

Zurich thus violated Section 11658 by

7 failing to file the IDAs with the WCIRB before issuing
8 the IDAs.
9

Cal. Ins. Code § 11658.

Zurich does not dispute the fact that the IDAs were

10 not attached to the Policies, as the IDAs were entered
11 into after the Policies were issued.
12 B.

See Compl., Ex.

As such, Zurich also violated Section 2268 by

13 failing to attach the IDAs to the related Policy at the
14 time the Policy was issued.

Cal. Code Regs., tit. 10,

15 § 2268; see Feb. 14, 2011, CDI Directive to WCIRB, at
16 2, ECF No. 20-2.
17
18

c.

Proper Remedy

Section 11658(a) states that a workers’

19 compensation insurance policy or endorsement “shall not
20 be issued by an insurer” unless it is filed with the
21 WCIRB and in one way or another approved by the
22 Commissioner, and subsection (b) states that issuing an
23 unapproved policy or endorsement “is unlawful.”
24 Ins. Code § 11658 (emphasis added).

Cal.

Section 11658 is

25 clear: the unfiled and unapproved IDAs are illegal
26 under Section 11658 and therefore void as a matter of
27 law.

Kremer v. Earl, 27 P. 735, 736 (Cal. 1891)

28 (stating that “[i]t is not necessary that the act
42

1 itself . . . declare in express words” that a contract
2 in violation of the act is “void”); see Monarch, 993
3 N.Y.S.2d 275, 290-92; Ceradyne, 2009 WL 1526071, at
4 *11-*12.
5

Zurich argues that the IDAs, though illegal and

6 void under California law, should nevertheless be
7 enforced in equity.
8
9

i.

Equitable Enforcement

Under California law, “[n]o court will lend its aid

10 to give effect to a contract which is illegal, whether
11 it violates the common or statute law.”
12 at 736 (Cal. 1891).

Kremer, 27 P.

“If, upon a review of all the

13 state legislation upon the subject, . . . a contract
14 appears to contravene the design and policy of the
15 laws, a court of equity will not enforce it.”
16

Id.

Yet, in “compelling cases,” California courts have

17 enforced illegal contracts “in order to avoid unjust
18 enrichment and a disproportionately harsh penalty upon
19 the plaintiff.”

Malek v. Blue Cross of Cal., 16 Cal.

20 Rptr. 3d 687, 707 (Ct. App. 2004) (internal quotation
21 marks and alterations omitted).

“[T]he extent of

22 enforceability and the kind of remedy granted depend[s]
23 upon a variety of factors, including the policy of the
24 transgressed law, the kind of illegality[,] and the
25 particular facts.”
26

Id.

Under the relevant equitable factors, the illegal

27 IDAs should not be enforced.
28

First, there is no risk of Country Villa’s unjust
43

1 enrichment because an insurer’s issuance of an illegal
2 contract, even if it results in enrichment to the
3 insured, does not result in unjust enrichment because
4 the insured did nothing wrong, and the insurer should
5 have known its own legal duties.
6 1526071, at *11-*12.

See Ceradyne, 2009 WL

Furthermore, as Country Villa

7 explains in its Reply, if the IDAs are void, Country
8 Villa is still liable to Zurich under the actual
9 insurance policies and attached large deductible
10 endorsement, as well as by statute, to reimburse Zurich
11 for claims paid within the deductible.
12

Reply 18:15-20.

Second, refusing to enforce the IDAs is not an

13 unduly harsh penalty on Zurich, because Zurich knew or
14 should have known its filing requirements under
15 California law, and enforcing the IDAs would encourage
16 illegal activity.

Furthermore, because Country Villa

17 remains liable to Zurich under the policies, attached
18 endorsements, and California law, refusing to enforce
19 the IDAs is not unduly harsh.

See Monarch, 993

20 N.Y.S.2d at 291.
21

Third, the policy behind “the transgressed law”

22 strongly counsels against enforcing the IDAs, as
23 enforcing the IDAs “would defeat the statutory purpose”
24 of Sections 11658 and 11735 by “allow[ing] an insurance
25 company to bypass the governmental review process by
26 simply waiting . . . after the policy has gone into
27 effect to introduce additional or modified terms to its
28 insurance program.”

Ceradyne, 2009 WL 1526071, at *11.
44

1 As the Ceradyne court noted, “[i]t cannot be overlooked
2 that workers’ compensation coverage is not optional for
3 the employer.”
4

Id.

Fourth, Zurich is the party at fault in this

5 situation, as Zurich knew or should have know of its
6 filing requirements under California law; it would not
7 be equitable to allow the party who created the
8 illegality to enforce the illegal contact.
9

See id.

Finally, the IDAs should not be enforced under

10 California’s “settled rule” that a contract in
11 violation of a statute enacted for the protection of
12 the public should not be enforced.
13 Co., 28 Cal. App. at 478-79.

Napa Valley Elec.

The IDAs violate Sections

14 11658 and 2268, which are laws and regulations “enacted
15 for the protection of the public,” as California’s
16 workers’ compensation insurance scheme protects the
17 public workforce, as well as the insured employers who
18 are required by law to purchase workers’ compensation
19 insurance.28

See id. (stating that, with regard to such

20 a contract, “the court will refuse the plaintiff any
21 relief and will leave the parties where it finds them,”
22 “not to help the defendant . . .; not for the sake of
23 either party, but for the sake of the law itself”).
24

ii. Severability

25
26
27
28

28

See Monarch, 993 N.Y.S.2d at 291 (“[T]he ‘review and
preapproval safeguards [in California’s workers’ compensation
insurance regulatory scheme] were created to protect both
employers and employees.’”); see Ceradyne, 2009 WL 1526071, at
*11.
45

1

Zurich argues that certain portions of the IDA

2 should be severed, rather than voiding the entire IDA.
3 The Court agrees that this argument is, as Country
4 Villa states, “nonsensical,” Reply at 23:1-2, because
5 the entire IDA, not merely certain portions of the IDA,
6 is required to be filed with the WCIRB, and Country
7 Villa challenges the IDAs in their entirety.

See Cal.

8 Ins. Code § 11658; Cal. Code Regs., tit. 10, § 2268.
9 As such, the IDAs, along with their Specifications, are
10 void as a matter of law and unenforceable in their
11 entirety.
12

V. CONCLUSION

13

Based on the foregoing, the Court GRANTS Country

14 Villa’s Motion for Partial Summary Judgment [75].
15

IT IS HEREBY ORDERED that Partial Judgment be

16 entered in favor of Country Villa as to the Fifth Count
17 of Country Villa’s Counterclaim [20], and
18

IT IS HEREBY DECLARED that the 2004 and 2005

19 Incurred Deductible Agreements, along with the 200420 2011 Specifications to the Incurred Deductible
21 Agreements, all of which are attached as Exhibit B to
22 Zurich’s Complaint [1], were, in their entirety, void
23 ab initio and are unenforceable.
24

IT IS SO ORDERED.

25 DATED: July 9, 2015
26

HONORABLE RONALD S.W. LEW
Senior U.S. District Judge

27
28
46