Employers Preferred Insurance Company issued a workers’ compensation policy to Purchase Green Artificial Grass covering May 5, 2020 to May 5, 2021 (the 2020 policy), followed by a renewal policy covering May 5, 2021 to May 5, 2022 (the 2021 policy). Like most workers’ comp policies, the premium quoted was only an estimate; the final premium would be calculated later based on the insured’s actual payroll, verified through an audit. The 2021 policy required Purchase Green to keep and turn over payroll records on request and to give the insurer access to perform a “payroll verification audit.” A separate endorsement warned that if the insured failed to provide access within 90 days after a policy’s expiration, it would owe a penalty premium of three times the estimated annual premium, plus the insurer’s audit-related costs if it still failed to respond after a third request over at least 90 days; the insurer would then notify the insured of that failure by certified mail, after which the insured would owe the premium and costs within 30 days, while still retaining up to three years to provide records and have its premium corrected.

After the 2020 policy expired, Employers Preferred sent Purchase Green repeated letters and emails in May, June, and August 2021 requesting payroll records, followed by a certified letter on August 5, 2021 (delivered August 10) formally notifying Purchase Green of its failure to provide access. That same day, Employers Preferred sent a notice cancelling the 2021 policy effective September 14, 2021, citing Purchase Green’s failure to cooperate with the final audit. Purchase Green never responded with payroll records during this period; its owner later testified he did not recall receiving any of the communications, including the cancellation notice. On February 3, 2022, a Purchase Green employee was injured and filed a workers’ compensation claim; Purchase Green paid its outstanding audit-related charges on February 18, 2022, but Employers Preferred denied the claim in May 2022 on the ground that the 2021 policy had already been canceled before the injury occurred.

The issue of insurance coverage proceeded to arbitration consistent with the Workers’ Compensation Appeals Board Rules. The arbitrator ruled the cancellation was ineffective, reasoning that neither the policy nor the Insurance Code precisely defined what conduct amounts to a “failure to permit” a payroll audit, and that cancelling a policy outright should require something more concrete than silence following three notices and the passage of 90 days. On reconsideration, the arbitrator adhered to that view, and on June 13, 2025, the Board adopted the arbitrator’s recommendation and denied Employers Preferred’s petition for reconsideration. Employers Preferred then petitioned the Court of Appeal for a writ of review challenging the Board’s decision, and the court issued the writ.

In the unpublished decision of Employers Preferred Insurance Company v. Workers’ Compensation Appeals Board No. C104263 (Cal. Ct. App., 3d Dist., July 2026) — the Court of Appeal annulled the Board’s June 13, 2025 order and remanded the matter to the Board for further proceedings.

Writing for a unanimous panel, Justice Robie reviewed the policy’s interpretation de novo, since insurance policies are ordinary contracts subject to the usual rules of contract interpretation, citing Bank of the West v. Superior Court (1992) 2 Cal.4th 1254 and Bay Cities Paving & Grading, Inc. v. Lawyers’ Mutual Insurance Co. (1993) 5 Cal.4th 854. Under Insurance Code section 676.8, a cancellation notice is effective for an insured’s “[f]ailure to permit the insurer to audit payroll as required by the terms of the policy,” but the statute lets the policy’s own terms define what that failure looks like. The panel agreed with the arbitrator that neither the policy’s main audit provision nor Insurance Code section 11760.1 (which separately allows a premium penalty for failing to provide audit access) used the exact phrase “failure to permit an audit,” and that several different deadlines appeared in the audit provision — 90 days before a penalty premium attaches, a further period before costs are added, 30 days after a certified letter before the increased premium is enforceable, and up to three years to still provide records and have the premium corrected.

But the court held that gap was not decisive. Citing the general rule that a contract should be interpreted reasonably and need not spell out every term with precision, citing Quantification Settlement Agreement Cases (2011) 201 Cal.App.4th 758 and Civil Code section 1643, the panel explained that the audit provision used the word “fail” throughout — failure to provide access within 90 days, failure after a third request, failure to show a compelling business reason — and expressly described the certified-letter notice as informing the insured of its “failure to provide access.” The only reasonable reading, the court held, was that the parties intended the certified-letter stage, not the later three-year window, to mark the point of “failure” that could justify cancelling a subsequent policy; reading the provision otherwise would let an insured delay a new policy’s cancellation for roughly 1,000 additional days, an outcome the panel found unreasonable given the policy’s one-year term. Because Purchase Green never responded to any of the insurer’s requests and never offered a compelling business reason for its silence, the court held Employers Preferred’s cancellation, sent 35 days after the certified letter was delivered, satisfied both the 2021 policy and section 676.8. The panel added that not every contractual phrase must be independently defined to avoid ambiguity, citing Bay Cities Paving, and that courts should not manufacture ambiguity where a strained reading is the only way to find it.

The panel went on to reject Purchase Green’s three alternative arguments for invalidating the cancellation. It rejected the argument that the Insurance Code required Employers Preferred to conduct “personal outreach” rather than automated notices, because Purchase Green never showed the policy’s own language required anything beyond what the insurer did. It rejected the argument that Purchase Green’s failure to respond had to be shown to be intentional or willful, holding that the policy’s obligation was to affirmatively provide records once requested, regardless of motive. And it rejected Purchase Green’s equitable estoppel argument — based on a February 8, 2022 letter that incorrectly listed the 2021 policy’s coverage period as running through May 2022 — because equitable estoppel requires detrimental reliance, citing Honeywell v. Workers’ Compensation Appeals Board (2005) 35 Cal.4th 24, and that letter was sent five days after the employee’s injury, so Purchase Green could not have relied on it at the time coverage mattered. On that basis, the panel annulled the Board’s order and remanded for further proceedings, with costs to Employers Preferred.