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Date: 10-04-2019

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

Case Number: B292915

Judge: Chaney, J.

Court: California Court of Appeals Second Appellate District, Division One on appeal from the Superior Court, County of Los Angeles

Plaintiff's Attorney: Hayes, Scott, Mark G. Bonino and Giuliana R. Ferrante

Defendant's Attorney: Frank E. Carbonara, Richard E. Guilford and Amy Sklar

Description: 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
7
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).

Outcome: 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.

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