Travelers Property Casualty Company pf America v. Worker's Compensation Appeals Board and California Insurance Guarantee Association

Two employers agreed that the general employer would

obtain workers’ compensation insurance for employees it leased

to the special employer.1

Relying on this agreement, the special

employer obtained workers’ compensation insurance for its own

employees with a “limiting endorsement” excluding coverage for

special employees. These agreements were in place for several

years when a special employee was injured on the job while

assigned to the special employer. The general employer’s insurer

thereafter became insolvent and California Insurance Guarantee

Association (CIGA)2

took over the administration of the claim.

1

“If one employer (the general employer) sends an

employee to work for another party (the special employer) and

both have the right to control the employee’s activities, a dual

employment exists.” (County of Los Angeles v. Workers’ Comp.

Appeals Bd. (1981) 30 Cal.3d 391, 405.) Both general and special

employers are liable for any injuries to the employee arising out

of and occurring in the course of employment. (Ibid.)

2

CIGA is an unincorporated association of insurers licensed

in California, which pays claims of insolvent insurers set forth by

Insurance Code section 1063 et seq. (Isaacson v. California Ins.

Guarantee Assn. (1988) 44 Cal.3d 775, 786-787.)

3

A regulation in effect at the time of the injury required that

in the instance of a limiting endorsement excluding coverage for

special employees, the special employer was required to “affirm[]

to the insurer in writing” that coverage had been otherwise

obtained. (Cal. Code Regs., tit. 10 (WCAB Rules), § 2259, subd.

(e), eff. up to April 1, 2016 (section 2259(e)).) Although there was

a written endorsement excluding coverage for special employees

and the special employee’s carrier was informed the general

employee had obtained the required workers’ compensation

insurance, the Workers’ Compensation Appeals Board (appeals

board) invalidated the limiting endorsement because the limiting

endorsement had not been signed by the special employer. Thus,

the insurer for the special employer was ordered to bear all

liability for compensation to the injured worker when the general

employer’s insurer became insolvent.

While the appeals board was correct that the limiting

endorsement had not been signed by the special employer, the

written affirmation required by the regulation then in effect is

not limited to a signature, as we explain below. Taking into

account the circumstances of the entire transaction and its

history, there was substantial compliance with the requirement

of a written affirmation. We therefore annul the decision of the

appeals board and remand the case with directions to find that

the special employer had a valid endorsement in its workers’

compensation insurance policy excluding coverage for special

employees. Accordingly, CIGA shall be liable for the claim as a

covered claim within the meaning of Insurance Code section

1063.1.

4

THE LEGAL FRAMEWORK

Insurance Code section 116633 sets forth the general

principle that, as between insurers of general and special

employers, it is the insurer of the general employer who is liable

for injuries of special employees. Labor Code section 3602,

subdivision (d) sharpens the focus by providing that a special

employer may enter into an agreement with a general employer

under which the latter agrees to obtain, and in fact obtains,

coverage for the special employees.4

The aforesaid legislative policies were (and are) carried into

execution by a standard endorsement in the workers’

compensation insurance contract between the special employer

3

“As between insurers of general and special employers,

one which insures the liability of the general employer is liable

for the entire cost of compensation payable on account of injury

occurring in the course of and arising out of general and special

employments unless the special employer had the employee on

his or her payroll at the time of injury, in which case the insurer

of the special employer is solely liable. For the purposes of this

section, a self-insured or lawfully uninsured employer is deemed

and treated as an insurer of his or her workers’ compensation

liability.” (Ins. Code, § 11663.)

4

“For the purposes of this division, including Sections 3700

and 3706, an employer may secure the payment of compensation

on employees provided to it by agreement by another employer by

entering into a valid and enforceable agreement with that other

employer under which the other employer agrees to obtain, and

has, in fact, obtained workers’ compensation coverage for those

employees.” (Lab. Code, § 3602, subd. (d)(1).)

Further statutory references are to the Labor Code unless

otherwise stated.

5

and its insurer that excludes from coverage special employees as

long as there is an assurance that the general employer has

agreed to obtain, and has obtained, coverage for special

employees.

In 2011, a customized limiting and restricting

endorsement, like the one at issue in this case, could be used

“[w]here the endorsement seeks to exclude only such liability of

the employer for compensation as the latter affirms to the insurer

in writing[

5

]

is otherwise secured or is lawfully uninsured (e.g.,

liability of the State and its political subdivisions and

institutions).” (WCAB Rules, § 2259, subd. (e), italics added.)

Using a customized endorsement under this regulation required

filing the endorsement and getting approval from the Insurance

Commissioner. (WCAB Rules, § 2266.)

As of April 1, 2016, WCAB Rules, section 2259 was

amended to add subdivision (a)(7), which provides that a limiting

and restricting endorsement may be used “[t]o exclude liability of

an employer for employees who are covered under another

employer’s workers’ compensation policy pursuant to an

agreement made under Labor Code Section 3602(d).” As noted,

subdivision (a)(7) became effective on April 1, 2016, and did not

delete or replace WCAB Rules, section 2259(e). In fact, WCAB

Rules, section 2259(e) was renumbered as section 2259,

subdivision (a)(5) and is still in effect.

Travelers Property Casualty Company of America

(Travelers), which was the special employer’s workers’

compensation insurer, obtained the Insurance Commissioner’s

5

It is the italicized phrase that is at issue in this case.

6

approval to use the standard limiting endorsement in its policies

that was based on the regulation in effect in 2011.

THE FACTS

A. Contract between StaffChex and Jessie Lord

The general employer, StaffChex, Inc. (StaffChex) and the

special employer, Jessie Lord Bakery LLC (Jessie Lord), entered

into a labor and service agreement on December 16, 2008. In

exchange for payments at a mark-up for StaffChex employees,

StaffChex was to pay all wages to the employees and all related

workers’ compensation insurance. The labor agreement

submitted into evidence was not signed by the parties to the

contract but was initialed and amended by handwritten

notations. Testimony from Gloria Knowles (Knowles), the human

resources manager at Jessie Lord, confirmed that Jessie Lord and

StaffChex performed the terms of the agreement, including

StaffChex obtaining workers’ compensation coverage for the

employees assigned to Jessie Lord.

StaffChex was insured for workers’ compensation by Ullico

Casualty Company (Ullico). Ullico was liquidated on May 30,

2013, and CIGA took over the administration of Ullico’s claims.

B. Contract between Jessie Lord and Travelers

Jessie Lord had workers’ compensation for its own

employees through Travelers (Travelers policy). The Travelers

policy was transmitted electronically by Jessie Lord’s broker.

Contained within the Travelers policy was an endorsement

agreement limiting and restricting the insurance (endorsement

WC 04 03 17 (00)), such that the policy did not insure “[a]ny

liability you [Jessie Lord] may have as the special employer of an

employee who is not on your payroll at the time of injury, based

upon your representation that: (1) you have entered into a valid

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and enforceable agreement pursuant to Labor Code Section

3602(d) with the employee’s general employer under which the

general employer agrees to secure the payment of compensation

for such employee and (2) the general employer has obtained

workers’ compensation coverage for the employee.”

The endorsement also provided that “[b]y signature below,

you affirm that, with respect to any employee who is also the

employee of a general employer, (1) you have entered into a valid

and enforceable agreement pursuant to Labor Code Section

3602(d) with the employee’s general employer under which the

general employer agrees to secure the payment of compensation

for such employee and (2) the general employer has obtained

workers’ compensation coverage for the employee.” The space

provided for a countersignature by Jesse Lord was blank.

However, nothing contained in the endorsement provides that the

endorsement is invalid without a countersignature.

C. The employee and his injury

The employee, Jose Luis Mastache (Mastache), worked at

Jessie Lord as a pallet handler as a StaffChex employee when he

was injured on August 3, 2011.

PERTINENT PROCEDURAL HISTORY

A. Underlying claims

CIGA petitioned the appeals board to join Jessie Lord and

Travelers as party defendants. CIGA’s position was that, because

Jessie Lord was the special employer at the time of Mastache’s

injury and was insured for workers’ compensation coverage

through Travelers, Travelers constituted “other insurance”

8

relieving CIGA of all liability.6 Jessie Lord and Travelers were

joined as party defendants on July 2, 2015.

Pursuant to section 5275, whether Travelers provided

workers’ compensation insurance coverage for Mastache’s

industrial injury was submitted to arbitration.

B. Arbitrator’s Decision

The arbitrator found the Travelers policy was not “other

insurance” available to Mastache and therefore did not relieve

CIGA of liability for Mastache’s claim. The arbitrator relied on

the unrebutted testimony of Knowles and found the labor

agreement between StaffChex and Jessie Lord, though not

signed, was in effect from 2008 through 2014. The arbitrator also

found there was no joint and several liability between Jessie Lord

and StaffChex.

The arbitrator rejected CIGA’s contention that the

endorsement was invalid because it was not signed. The

Travelers policy was accepted by StaffChex and Jessie Lord and

became a valid contract. The arbitrator found the failure to sign

the endorsement was not fatal. In support of his conclusion, the

arbitrator noted that the affirmation requirement was removed

from the regulation (WCAB Rules, § 2259) and would apply

retroactively as a procedural regulation.

6 CIGA is authorized by statute to pay only “covered

claims” of an insolvent insurer. (Industrial Indemnity Co. v.

Workers’ Comp. Appeals Bd. (1997) 60 Cal.App.4th 548, 557.)

Insurance Code section 1063.1, subdivision (c)(9) provides that

“ ‘Covered claims’ does not include (A) a claim to the extent it is

covered by any other insurance of a class covered by this article

available to the claimant or insured . . . .” (Hereinafter referred

to as “other insurance.”)

9

CIGA petitioned for reconsideration. CIGA also requested

permissive judicial notice of bulletins issued by the Workers’

Compensation Insurance Rating Bureau. Travelers’ answer also

sought judicial notice of the reasons for the proposed 2016

amendments, rulemaking file, and regulatory notice as to WCAB

Rules, section 2259.

The arbitrator recommended reconsideration be denied.

C. Appeals Board Opinion

The appeals board declined to take judicial notice of the

additional rulemaking documents not produced at the arbitration

hearing.

The appeals board granted reconsideration, rescinded the

arbitrator’s decision, and found that the Travelers policy provided

coverage for Jessie Lord. The appeals board identified two

incorrect premises for the conclusion that CIGA remained liable

for Mastache’s benefits. The first error was that an agreement

between a general employer and a special employer could

eliminate joint and several liability for their joint employees. The

second was that the Travelers policy excluded certain employees

based on a limiting and restricting endorsement that did not

comply with the Insurance Commissioner’s regulations in effect

at the time the insurance contract was formed.

The appeals board found that because both employers

remained jointly and severally liable, if either employer’s insurer

became insolvent, the remaining insurer would be responsible for

paying the claim unless the remaining insurer’s policy excluded

coverage for the claim. The appeals board found the endorsement

with space for countersignature was approved by the Insurance

Commissioner but the endorsement attached to the Travelers

policy did not have the required written affirmation of the special

10

employer by way of countersignature. The written affirmation

was required under WCAB Rules, section 2259(e) in effect at the

time the Travelers policy was written. The appeals board found:

“There is no evidence that Travelers obtained written affirmation

either by a countersignature on the endorsement or through a

separate document. [¶] Furthermore, by the terms of the

endorsement, it only excludes liability that the employer affirms

in writing is otherwise insured. Without a written affirmation,

the endorsement has no effect.”

The appeals board therefore concluded the Travelers policy

was not limited and restricted to exclude employees leased from

StaffChex and the Travelers policy was “other insurance”

relieving CIGA of liability for Mastache’s benefits.

Travelers petitioned for reconsideration. Travelers

requested judicial notice of the reasons for the proposed 2016

amendments, rulemaking file, and regulatory notice as to WCAB

Rules, section 2259.

The appeals board denied reconsideration relying on its

earlier opinion granting CIGA’s petition for reconsideration.

Travelers’ request for judicial notice was denied as a

supplemental pleading not requested by the appeals board. In

addition, the appeals board found the rulemaking file did not

contain proof that was relevant to the issue of whether the

addition of a new basis for limiting and restricting a policy was a

substantive or procedural change.

D. Amicus Curiae

On December 7, 2018, the California Workers’

Compensation Institute filed a motion for leave to file an amicus

curiae brief in support of Travelers’ petition. The sole purpose of

the amicus brief was to address whether the appeals board erred

11

in refusing to consider the regulatory intent evidence related to

the 2016 amendment of WCAB Rules, section 2259. The amicus

brief contended that Evidence Code section 451 requires judicial

notice be taken of all board and department rules, regulations,

and amendments, including the supporting rulemaking file.

Even if not mandatory, the amicus brief alternatively argued that

the appeals board abused its discretion under Evidence Code

section 452 in refusing to grant judicial notice and consider the

rulemaking file.

E. Grant of Petition for a Writ of Review

We granted Travelers’ petition for a writ of review. The

appeals board filed a response stating that the Insurance

Commissioner was within its power to require a written

affirmation to exclude leased employees and that WCAB Rules,

section 2259, subdivision (a)(7) was substantive and should not

be applied retroactively thus making the rulemaking file

unnecessary for determination of the present issue. Moreover,

section 3602, subdivision (d) and Insurance Code section 11663

did not relieve Travelers of liability because the unsigned

endorsement was not valid.

Travelers’ reply asserted that the requirement of a

countersignature contradicted the requirements of section 3602,

subdivision (d) and Insurance Code section 11663 and that a

countersignature is not required to form a valid and enforceable

electronically delivered contract. However, if a writing was

required, the labor agreement was a valid written affirmation.

Travelers also claimed WCAB Rules, section 2259, subdivision

(a)(7) should be applied retroactively, which made the

rulemaking file relevant and judicially noticeable for the first

time on appeal.

12

DISCUSSION

A. Standard of Review

Our review of an appeals board decision is limited to a

decision that is in excess of the appeals board’s jurisdiction, that

is procured by fraud or is unreasonable, or is not supported by

substantial evidence. (§ 5952.) A decision based on factual

findings which are supported by substantial evidence is affirmed

by the reviewing court. However, an appellate court is not bound

by factual findings that are unreasonable, illogical, improbable,

or inequitable when viewed in light of the entire record and the

overall statutory scheme. (Bracken v. Workers’ Comp. Appeals

Bd. (1989) 214 Cal.App.3d 246, 254.)

The standard of review for interpretation of a statute or

regulation is de novo but great weight is given to the appeals

board’s construction unless it is clearly erroneous. (Vera v.

Workers’ Comp. Appeals Bd. (2007) 154 Cal.App.4th 996, 1003.)

The question of whether Travelers is “other insurance,”

relieving CIGA of liability, turns on whether the endorsement in

the Travelers policy is valid. To the extent that the issue is one

of policy interpretation, the issue is a question of law and is

reviewed de novo under settled rules of contract interpretation.

(Ameron Internat. Corp. v. Insurance Co. of State of Pennsylvania

(2010) 50 Cal.4th 1370, 1377.) “The fundamental rules of

contract interpretation are based on the premise that the

interpretation of a contract must give effect to the ‘mutual

intention’ of the parties.” (Waller v. Truck Ins. Exchange, Inc.

(1995) 11 Cal.4th 1, 18.)

13

B. There were two separate documents that affirmed

that StaffChex would and did procure coverage for

the special employees

We begin with the observation that we are addressing a

commercial relationship between two relatively sophisticated

parties who embarked on a course of dealing that had been in

place for a number of years before Mastache was injured. That

relationship included an undertaking by StaffChex to provide

workers’ compensation insurance for persons it sent to work for

Jessie Lord, an undertaking for which StaffChex was duly

compensated by Jessie Lord. It is undisputed that both Jessie

Lord and StaffChex lived up to the terms of their agreement,

including StaffChex obtaining workers’ compensation coverage

for the employees assigned as special employees to Jessie Lord.

Obviously, StaffChex and Jessie Lord needed to comply

with existing laws and regulations, which they did first by

agreeing to specific provisions in the contract between them and

then by including the required limiting endorsement in the

contract between Jessie Lord and its workers’ compensation

carrier, Travelers. At this point, a third sophisticated party,

Travelers, entered the picture who appreciated the need for the

limiting endorsement, having obtained approval of that very form

from the Insurance Commissioner. Thus, a three-sided

relationship was put into place, the sole purpose of which was to

comply with existing statutes and regulations that were designed

to ensure that there was workers’ compensation insurance

coverage for injured workers under an employment scheme where

the worker was technically employed by one employer while

working for another.

14

This entire structure was set aside by the appeals board,

ostensibly over the absence of a signature by Jessie Lord on the

endorsement to the contract with Travelers, even though this

contractual structure had been functioning for three years when

Mastache was injured. As set forth below, the parties complied

with the applicable regulatory requirements and it is undisputed

that they complied with their contractual commitments to one

another. They performed these contractual commitments for

several years. We conclude that the appeal board’s decision was

thus unreasonable and inequitable.

The regulation in effect in 2011 required an affirmation “in

writing” that insurance had been obtained for the special

employees. Surely, the contract between Jessie Lord and

StaffChex, which required the latter to procure insurance for

special employees, qualifies as a “writing.” But this is not the

only writing that exists. The contract between Jessie Lord and

Travelers included the specific representation that Jessie Lord

had entered into a contract with the general employer under

which the latter would insure the special employees. This too

was a writing. Both writings were supported by the Ullico policy,

which was the insurance policy required by both writings.

Although the Ullico policy is not in the record, no one has argued

that the Ullico policy would not have covered Mastache’s injury.

Indeed, CIGA began administering Mastache’s claim.

The appeals board however found: “There is no evidence

that Travelers obtained the required written affirmation either

by a countersignature on the endorsement or through a separate

document.” There were in fact two “separate documents” that

affirmed that StaffChex would, and in fact did, procure coverage

for the special employees.

15

Nullifying a three-sided, sophisticated contractual

structure, under which all three parties performed their

obligations in good faith over the absence of a signature on an

endorsement to a contract disregards reality and is inequitable.

C. The requirement of a signature on the endorsement

was deleted by the parties

It is not the regulation, but the standard endorsement used

by Travelers that references a signature on the endorsement. In

2011, WCAB Rules, section 2259(e) merely required affirmance in

writing; it did not specify that any such affirmance must be by

the special employer’s countersignature for the endorsement to be

valid. Thus, the signature requirement at issue here was created

by contract and is subject to the law of contracts. As noted

earlier, nothing in the endorsement approved by the Insurance

Commissioner provided that the endorsement was invalid if a

countersignature was not included.

It is a time-honored principle that the conduct of the

parties is given great weight in the interpretation of a contract.

“Where an agreement involves repeated occasions for

performance by either party with knowledge of the nature of the

performance and opportunity for objection to it by the other, any

course of performance accepted or acquiesced in without objection

is given great weight in the interpretation of the agreement.”

(Rest.2d Contracts, § 202(4).) The principle is amply reflected in

our case law. (See cases collected in 1 Witkin, Summary of Cal.

Law (11th ed. 2017), Contracts, § 772(2), pp. 828-830.)

As one of these many decisions put it: “This rule of

practical construction is predicated on the common sense concept

that ‘actions speak louder than words.’ Words are frequently but

an imperfect medium to convey thought and intention. When the

16

parties to a contract perform under it and demonstrate by their

conduct that they knew what they were talking about the courts

should enforce that intent.” (Crestview Cemetery Assn. v. Dieden

(1960) 54 Cal.2d 744, 754.)

Here, the parties fully performed beginning in 2008 under

both contracts with an unsigned endorsement to the contract

between Jessie Lord and Travelers. That is, StaffChex complied

with its obligation to procure coverage for special employees and

Travelers provided the bargained-for insurance without requiring

a signature on the exclusionary endorsement. The reason for the

signature was to make sure that StaffChex had obtained

coverage for special employees. But, as it turned out, it was

never in doubt that StaffChex had done exactly that. In addition,

for three years, the three parties – Jessie Lord, StaffChex and

Travelers – performed their contractual commitments despite the

absence of a signature on the endorsement.

“If necessary to carry out the intention of a contract, words

may be transposed, rejected, or supplied, to make its meaning

more clear.” (Heidlebaugh v. Miller (1954) 126 Cal.App.2d 35,

38.) The signature was not an essential part of the endorsement.

What was important was that Jessie Lord would do all things

necessary and appropriate to ensure that StaffChex had covered

the special employees, not whether Jessie Lord had

countersigned an endorsement.

D. Mastache’s injury is a “covered claim”

Given our conclusion that the Travelers policy properly

excluded special employees working for Jessie Lord, the

Travelers policy does not constitute “other insurance” under

subdivision (c)(9) of Insurance Code section 1063.1. Mastache’s

17

injury is therefore a “covered claim” for purposes of Insurance

Code section 1063.1.

One case cited by all parties concluded that a special

employer’s insurance was “other insurance” when the general

employer’s insurer became insolvent. In Fireman’s Fund

Insurance Company v. Workers’ Comp. Appeals Bd. (2010) 189

Cal.App.4th 101 (Colomaria), the special employer argued based

exclusively on section 3602, subdivision (d) and Insurance Code

section 11663 that liability rested with the general employer

exclusively. (Colomaria, at p. 108.) The court held that if a claim

does not fall within the terms of the insuring clauses of an

insurance policy, coverage does not exist. (Id. at p. 111.)

However, an insurance policy may also have specific clauses

excluding coverage, which should be conspicuous and plain, clear,

and narrowly construed. (Ibid.) In Colomaria, there was no

endorsement or other exclusionary language in the policy

obtained by the special employer that excepted or excluded

coverage for special employees and the court held that joint and

several liability, which was not extinguished by the labor

agreement, left the special employer’s insurance policy “other

insurance.” (Id. at pp. 115-116.)

Colomaria does not stand for the proposition that, as

between joint employers, when one employer’s insurer becomes

insolvent, the other employer’s insurer becomes fully liable. The

result in the Colomaria opinion was the lack of an exclusion

within the special employer’s insurance policy of coverage for

special employees. The facts of Colomaria are undeniably

distinct from Mastache’s claim because Travelers and Jessie Lord

obtained an endorsement for the express purpose of excluding

18

employees like Mastache from coverage under the Travelers

policy.

In short, although the parties disposed of the contractual

obligation to sign the endorsement in the Travelers policy, WCAB

Rules, section 2259(e)’s requirement of a written affirmation was

satisfied by the labor agreement, the endorsement itself in the

Travelers policy, and the Ullico policy. Accordingly, the Travelers

policy is not “other insurance” within the meaning of Insurance

Code section 1063.1, subdivision (c)(9) and CIGA is liable to

provide coverage for Mastache’s injury claim.

Given our decision, we do not reach the issue of whether

WCAB Rules, section 2259, subdivision (a)(7) enacted in 2016

should have retroactive application.

Thus, we also do not address the issue whether the appeals

board should have taken judicial notice of WCAB Rules, section

2259, subdivision (a)(7).

The decision of the Workers’ Compensation Appeals Board entered on August 15, 2018 is annulled and the matter is remanded to the Workers’ Compensation Appeals Board for further proceedings consistent with this opinion.