A California lawmaker said Gov. Arnold Schwarzenegger sided with insurers in vetoing legislation that would have required workers compensation insurers to submit dispute-resolution clauses to the state's insurance commissioner for approval.

A.B. 2490 also would have required workers comp dispute-resolution clauses to specify that California law applies in coverage disagreements involving California employers.

The bill, sponsored by Assemblyman Dave Jones, D-Sacramento, additionally sought to mandate that policyholders and insurers with contracts containing such clauses, including arbitration language, settle any California disagreements in a venue within the state.

Employers and an attorney who brought the issue to Assemblyman Jones' attention said insurers regularly include dispute-resolution language in “side agreements,” or insurance program agreements, that are delivered to policyholders only after a policy contract has been agreed upon.

In one case, a California employer “executed” an insurance program agreement nine months after a large-deductible policy became effective, according to court records in Ceradyne Inc. vs. Argonaut Insurance Co. The agreement was retroactive to the policy's effective date and designated that New York would have exclusive jurisdiction over any arbitration dispute.

In an unpublished 2009 opinion, a California Court of Appeal upheld a lower court's denial of the insurer's request to compel arbitration in its dispute with Ceradyne.

The legislation is necessary because federal and state courts in California have split on whether workers comp policy arbitration clauses that have not been submitted to the insurance commissioner for approval are enforceable, said Nick Roxborough, a policyholder attorney at Roxborough, Pomerance, Nye & Adreani L.L.P. in Los Angeles.

Mr. Roxborough is the attorney who brought the issue to the attention of Assemblyman Jones, a spokesman for the lawmaker said.

California law currently requires workers comp insurers to get the insurance commissioner's approval of their policy forms but does not specifically require that side agreements be part of the filing, according to an analysis of A.B. 2490 prepared for California's Assembly Committee on Insurance.

Under current circumstances, employers may not realize that their contracts contain arbitration provisions limiting their due process rights, said Michael Tichon, general counsel for Pacific Hospital of Long Beach, who supported the legislation.

“The arbitration provisions in the contracts are something an employer needs to look at because there is certainly no due process in those provisions,” Mr. Tichon said.

While the legislation did not specifically say it applied only to large-deductible policies, most related disputes involved large-deductible policies.

The Washington-based American Insurance Assn. asked Gov. Schwarzenegger to veto the bill, arguing that the legislation would needlessly interfere with the ability of employers and insurers to negotiate large-deductible contracts.

In a Sept. 30 veto message, the governor agreed with the AIA's position.

The bill is unnecessary because there is no evidence a problem exists and it could reduce “the competitive market for workers compensation California now enjoys,” the governor said. “The high-deductible contract negotiations the bill seeks to impact are conducted by sophisticated participants on both sides of the table that are well-versed in all aspects of workers compensation and other insurance products.”

Supporters of the bill and the bill's author disagreed.

“California businesses should not be dragged to far-off states like New York to resolve disputes with their workers compensation insurer,” Assemblyman Jones said in a statement. “The governor had a chance to protect California businesses and provide for these disputes to be resolved in California. Instead, he sided with out-of-state insurers and against California businesses.”