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A recent court decision may have the potential to change the practice of side “deductible” agreements in workers’ compensation policies in California, a practice that some say often goes on under the regulatory radar.

The Insurance Journal reports that Zurich American Insurance Co. and American Zurich Insurance Co. had such a side agreement with Los Angeles, Calif.-based Country Villa Service Corp. Sometimes also called “deductible agreements,” or “program agreements,” they can retroactively alter an existing policy. The agreement between Zurich and Country Villa altered the deductible structure, among other things, in the policy. However, Zurich did not file it with the Workers’ Compensation Insurance Rating Bureau as required by Insurance Code 11658.

A dispute arose after the insured was sued by Zurich for breach of contract, and Country Villa challenged the policy under a case known as Zurich American Insurance Company v. Country Villa Service Corp. It went to the U.S. District Court for Central California, which ruled in favor of Country Villa on July 9 by granting the company partial summary judgment. With respect to the Incurred Deductible Agreement attached to the policy, the key finding was “The IDAs are illegal, void, and unenforceable in their entirety” since it violated Insurance Code 11658 that requires policies to be reviewed by the WCIRB and approved by the CDI.

The Zurich v. Country Villa decision is not a final determination, and is subject to years of additional litigation, but it may force insurers to file any side agreements with regulators before a policy is issued. Zurich was forced into a settlement in 2013 with the California Department of Insurance over a similar side agreement conflict. CDI eventually agreed to drop its prosecution over the “non-filing of Deductible Agreements” with the WCIRB and CDI, a settlement agreement shows. In that settlement Zurich admitted no liability or wrongdoing, but agreed to make the filings and agreed not to enter into or amend a deductible agreement with a California employer unless it has been submitted to the WCIRB and CDI for review.

The court in Zurich v. Country Villa cited that settlement, as well as a case in New York, Monarch Consulting, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburg, in which the New York Supreme Court Appellate Division ruled in 2014 that arbitration clauses in side agreements with an insurance carrier were unenforceable. That case is now headed for New York’s highest appellate court.