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September 2013

Federal Law Pre-empts State Law on Liability Insurance Chargebacks, But State Law Controls on Workers’ Compensation Insurance

The California Court of Appeal, Second Appellate District, affirmed in part, reversed in part, and remanded in part a decision over whether a trucking company’s practice of charging its drivers for liability insurance violated California’s Unfair Competition Law (UCL).  The trial court had found that the federal Truth-in-Leasing regulations and Federal Aviation Administration Authorization Act of 1994 (FAAAA) do not pre-empt applicable California insurance and labor laws, and awarded restitution and prejudgment interest under state laws.

The plaintiff is the class representative of “[a]ll persons and entities in California that provided trucking services, including the transport of cargo and freight, for RWA Trucking Co., Inc. … who had money deducted from their earnings by RWA Trucking Co., Inc.” to pay for various liability insurance.  Defendant RWA Trucking is a registered “for-hire interstate motor carrier” with the Federal Motor Carrier Safety Administration.

RWA contracted with the plaintiff class representative, Salvador Rodriguez, and other drivers who owned their own tractors.  RWA leased the tractors from the drivers and dispatched them to transport cargo.  The contract between RWA and the drivers characterized the drivers as independent contractors.

The contract required each driver to carry various types of liability insurance, including auto liability, physical damage, and workers’ compensation.  The drivers could obtain their own policies or elect coverage under RWA’s fleet policies.  If the driver elects the latter, RWA deducts the cost of workers’ compensation insurance from his or her earnings, also known as a “chargeback.”  The chargeback was in addition to an administrative fee RWA collected for arranging liability insurance for the drivers.  During certain years, RWA deducted more from its drivers than it paid in insurance premiums.  Additionally, RWA charged the cost of workers’ compensation insurance to the plaintiff and class members.

The plaintiff filed suit alleging, among other things, that RWA unlawfully “transacted insurance” within the meaning of Insurance Code section 1631 by charging administrative fees on the insurance RWA provided.  The plaintiff further alleged RWA failed to disclose the total premium it charged the plaintiff and class members in violation of Insurance Code section 381(f).  These violations formed the basis of the plaintiff’s allegations for unlawful and unfair business practices in violation of the UCL.  The plaintiff also alleged that RWA violated section 17200 by charging the plaintiff for workers’ compensation insurance in violation of Labor Code section 3751. 

The trial court found in favor of the plaintiff on both counts and ordered restitution.  In doing so, the trial court concluded these California laws were not pre-empted by federal laws.

In its review, the California Court of Appeal “assumed” that RWA’s activities – purchasing insurance for its drivers and then charging them an administrative fee – violated California law against transacting insurance without a license.  The Court of Appeal then proceeded to evaluate whether federal law pre-empts California law.

The appellate court first noted that the federal Truth-in-Leasing regulations (49 C.F.R. part 376, et seq.) not only permit motor carriers to charge back the cost of liability insurance to their drivers, but also permit motor carriers to profit from chargebacks.  Of the four “species” of federal pre-emption – express, conflict, obstacle, and field – the Court of Appeal applied the principles of obstacle pre-emption to determine whether state insurance laws were pre-empted. 

Obstacle pre-emption occurs when, under the circumstances of a particular case, the challenged state law “stands as an obstacle to the accomplishment and execution of” the federal Truth-in-Leasing regulations.  The court concluded that if state insurance laws prohibit RWA from charging back its liability insurance costs to its drivers, then those laws are pre-empted by federal law.  The Court of Appeal reversed the trial court and further reversed restitution awarded to the plaintiff under California law.

However, the Court of Appeal concluded the FAAAA does not pre-empt California law prohibiting employers from charging an independent contractor the cost of his or her workers’ compensation insurance.  (Labor Code §3751.)  The FAAAA only pre-empts state laws that “relate” to a “price, route, or service of any motor carrier.”  (29 U.S.C. §14501(c)(1).)  State law “relates” to federal law if it has “a connection with” or “reference to” the subject matter of the federal law.  But there is no pre-emption if the state law’s effect “is only indirect” or “tenuous, remote, or peripheral.”

The Court of Appeal concluded section 3751 does not “reference” motor carrier prices, routes, or services.  Section 3751 does not even apply exclusively to motor carriers, but is a “law of general application.”  It is an example of California’s “historic police powers.”  California does not require motor carriers to purchase workers’ compensation insurance.  And there is no evidence that section 3751 increases RWA’s operating expenses.  Thus, the Court of Appeal affirmed the trial court’s holding that section 3751 is not pre-empted by federal law.  The appellate court further affirmed the trial court’s award of restitution in favor of the plaintiff.  

The Court of Appeal remanded the case to the trial court to “exercise its discretion” with regard to an award of prejudgment interest consistent with its rulings.

Click here for the opinion.

The opinion in Rodriguez v. RWA Trucking Company, Inc.  (Sept. 12, 2013) ___ Cal.App.4th ___; 13 C.D.O.S. 10190 is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

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