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

California Court of Appeals, Fourth District, First Division

May 3, 2018

NIELSEN CONTRACTING, INC. et al., Plaintiffs and Respondents,
APPLIED UNDERWRITERS, INC. et al., Defendants and Appellants.

          APPEAL from a judgment of the Superior Court of San Diego County No. 37-2017-00001814-CU-CO-CTL, Gregory W. Pollack, Judge. Affirmed.

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

          Larry J. Lichtenegger for Plaintiffs and Respondents.

          HALLER, J.

         Nielsen Contracting, Inc. and T&M Framing, Inc. (collectively Nielsen) sued several entities (defendants) alleging these entities fraudulently provided workers' compensation policies to Nielsen that were illegal and contained unconscionable terms. Defendants moved to compel arbitration and stay the litigation under an arbitration provision in one defendant's contract, titled Reinsurance Participation Agreement (RPA). Nielsen opposed the motion, asserting the arbitration provision and the provision's delegation clause were unlawful and void. After briefing and a hearing, the trial court agreed and denied defendants' motion.

         Defendants appeal. They contend: (1) the arbitrator, and not the court, should decide the validity of the RPA's arbitration agreement under the agreement's delegation clause; and (2) if the court properly determined it was the appropriate entity to decide the validity of the delegation and arbitration provisions, the court erred in concluding these provisions are not enforceable. We reject these contentions and affirm.


         We summarize the facts based on the complaint's allegations, and the materials submitted in support of and opposition to the motion to compel arbitration. We describe only those facts necessary to resolve the issues pertaining to the arbitration issue, and make no attempt to discuss all of the facts relevant to Nielsen's substantive allegations against defendants.


         In 2012, Applied Underwriters, Inc. (Applied) provided quotes to Nielsen for Applied's patented workers' compensation program known as "EquityComp." Based on Applied's representations about the program's low cost and profit-sharing benefits, Nielsen signed a "Request to Bind" with Applied. Under this agreement, Nielsen was initially issued a guaranteed-cost workers' compensation policy by California Insurance Company (CIC), one of Applied's subsidiaries.

         The Request to Bind also required Nielsen to sign a separate agreement (the RPA) with another one of Applied's subsidiaries, Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA). Nielsen and AUCRA signed the RPA in December 2012. The RPA had a three-year term.

         The RPA modified and supplanted many of the CIC policy terms, including adding an arbitration provision. As discussed in more detail below, this provision required arbitration of "[a]ny dispute or controversy" in the British Virgin Islands before "disinterested officials of insurance or reinsurance companies." The arbitration provision delegated to the arbitrator the authority to rule on disputes concerning the enforceability of the arbitration provision. This is known as a "delegation clause."


         In January 2017, Nielsen filed a complaint against Applied and its two subsidiaries (AUCRA and CIC) (collectively defendants). Nielsen sought a declaration that the RPA is void and its provisions are unconscionable, and sought damages for defendants' misrepresentations and breach of the implied covenant of good faith and fair dealing. Nielsen alleged the RPA is an adhesion contract with unfair and unconscionable terms; the RPA was written and structured to purposely mislead Nielsen and to intentionally avoid and circumvent California insurance laws; and the RPA is an illegal contract because it was not filed with or approved by the California Department of Insurance (Insurance Department), as required by Insurance Code section 11658 and title 10 of the California Code of Regulations section 2268.[1] Nielsen alleged "EquityComp is the brainchild of Applied, " which caused CIC to issue an approved guaranteed-cost workers' compensation insurance policy "to give the appearance of compliance with the California insurance regulations, although CIC is never responsible for making payment on claims using its own money."

         Several months before this complaint was filed, in June 2016, the California Insurance Commissioner (Insurance Commissioner) issued an administrative decision in a case involving a different insured (Shasta Linen Supply, Inc.) that had challenged the same EquityComp insurance program offered by these same defendants. (Matter of Shasta Linen Supply, Inc., Decision & Order, dated June 20, 2016, File No. AHB-WCA-14-31 (Shasta Linen).) In the 70-page decision, the Insurance Commissioner found the RPA to be unlawful and void as a matter of law for various reasons, including that it had not been filed and approved by the Insurance Department before it was issued. (Ibid.) In reaching this conclusion, the Insurance Commissioner also found the governing administrative regulations require workers' compensation insurers to obtain approvals for "side agreements, " including arbitration provisions that differ from the dispute resolution provisions in a previously approved insurance policy. (Id. at p. 43; See Regs., § 2268.)

         Two months after the Shasta Linen administrative decision was issued, the Insurance Department entered into a stipulated cease-and-desist order with Applied, CIC, and AUCRA. In this stipulation, defendants stated they disagreed with the Shasta Linen administrative decision, but acknowledged the decision "was made precedential" under Government Code section 11425.60, subdivision (b).[2] Defendants also agreed it would not issue any new RPA or renew any existing RPA unless the policy is filed with and approved by the Insurance Department.[3]

         Motion to Compel Arbitration

         In response to Nielsen's complaint, AUCRA moved to compel arbitration under the RPA's lengthy arbitration provision. Of relevance here, the provision states:

         "(A) It is the express intention of the parties to resolve any disputes arising under this Agreement without resort to litigation in order to protect the confidentiality of their relationship and their respective business and affairs. Any dispute or controversy... arising out of or related to this Agreement shall be fully determined in the British Virgin Islands under the provisions of the American Arbitration Association [AAA].

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

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

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

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

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

         In seeking arbitration under these provisions, AUCRA argued the italicized language in paragraph (B) requiring arbitration of disputes concerning the "enforceability of this Agreement" was a delegation clause that gave the arbitrator the sole and exclusive authority to rule on challenges to the enforceability of the arbitration agreement. AUCRA presented evidence that the AAA rules likewise delegate to the arbitrator the exclusive authority to rule on the arbitration clause's enforceability. AUCRA thus argued the court had no authority to rule on challenges to the enforceability of the arbitration agreement or its delegation clause.

         As explained in more detail below, AUCRA alternatively argued that if the court reached the arbitrability issues, the arbitration clause is valid and enforceable.

         Defendants Applied and CIC (not named parties in the RPA) joined in the motion to the extent AUCRA sought to stay the litigation pending the arbitration.

         Opposition to Motion to Compel

         In opposing the motion to compel arbitration, Nielsen argued that under settled authority a delegation clause is severable from the main contract and from the arbitration clause, and the court must first resolve challenges to the enforceability of the delegation clause if the party brings a specific challenge to the delegation clause. (See Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S 63 (Rent-A-Center).)

         Nielsen argued that its specific challenge to the delegation clause satisfied this test and therefore the court (and not the arbitrator) was required to rule on the enforceability of the delegation clause and the arbitration provision. In explaining this challenge, Nielsen argued that the RPA's arbitration provision and delegation clause materially changed the dispute resolution provisions in the approved CIC insurance policies, and therefore they were "collateral" agreements required to be filed with the Insurance Department under section 11658 and Regulations section 2268. Nielsen maintained that by not filing these provisions with the Insurance Department, the provisions were void and unenforceable.

         Nielsen also presented evidence showing the RPA was "virtually identical" to the agreement found to be unlawful and void in the Shasta Linen administrative decision.

         Reply to Motion to Compel

         In reply, defendants argued that because Nielsen's illegality challenge was "not specific" to the arbitration provision or its delegation clause, and instead "implicates" the RPA "as a whole, " the court must allow the arbitrator to decide if the delegation clause and arbitration agreement are enforceable. Defendants alternatively argued that even if the court were to consider Nielsen's challenge to the enforceability of the arbitration provisions (including the delegation provision), these provisions are enforceable under California law despite the failure to file them with the appropriate agency.

         Court's ...

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