NU Online News Service, Feb. 28, 3:49 p.m.EST

California has launched enforcement action against two units ofZurich American Insurance Company related to alleged use of aworkers' compensation insurance agreement known as a "largedeductible agreement" without obtaining prior approval.

The dispute deals with a provision of the contracts that requirearbitration of disputes in Illinois, where Zurich is domiciled.

The California Insurance Code requires submission of workers'compensation insurance policy forms and endorsements to thedepartment and to the Workers' Compensation Insurance Rating Bureaufor review to ensure they comply with California law, according toAdam Cole, California Insurance Department general counsel.

The large deductible agreements issued by the Zurich companiescontain fundamental policy terms regarding payment, expenses,collateral, default, arbitration, choice of law and other matters,Cole says.

"Despite having key terms, the Zurich companies did not submitthe agreements for review," he notes.

Zurichsays it is seeking to resolve the issue.

"We are currently reviewing the enforcement action and will lookto resolve with the Department any concerns contained therein,"says Steve McKay, media and public relations director for Zurich inNorth America and the Zurich American Insurance Company.

Cole says California law provides that policies that are notsubmitted shall not be issued. "The department's action seeks anorder requiring theZurichcompanies to immediately cease issuingagreements that have not been filed for review," he says.

A statement from the Department of Insurance says that if theZurich companies violate such an order, they could be suspended orbarred from transacting further business inCalifornia.

The administrative-law action also seeks an order that largedeductible agreements that the Zurich companies issued in disregardof the Insurance Code may not be enforced by Zurich.

"Whatever the insurer's motive, the effect of evading thedepartment's review is that Zurich will not be permitted to enforcethe agreements," Cole says. "Workers' compensation policies arecritical to California employers and employees, and the departmentwill not permit insurers to issue policies or endorsements that wehave not assured are in compliance with California law," hestates.