In a case involving a reinsurance participation agreement (RPA), a California trial court has examined the interplay between two seemingly irreconcilable contract provisions: one that provided for the arbitration of any disputes thereunder, and another that chose Nebraska law for purposes of construction, pursuant to which agreements to arbitrate disputes implicating certain insurance contracts are invalid.
Plaintiffs were a set of affiliated companies that entered into a series of agreements with defendants, including a set of workers' compensation insurance policies, a reinsurance treaty, and the RPA. The RPA (1) provided that any disputes would be arbitrated and delegated issues of arbitrability to the arbitrator, and (2) provided that it should be construed in accordance with Nebraska law. Plaintiffs filed suit seeking a declaration that the RPA was void and unenforceable, and defendants moved to compel arbitration. Plaintiffs argued that the arbitration provision was unenforceable under Nebraska Revised Statute § 25-2602.01(f)(4), which prohibits agreements to arbitrate future disputes regarding "any agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract."
Under the McCarran Ferguson Act, a state law may prohibit arbitration otherwise required by the FAA (known as "reverse preemption") if that statute "regulates the business of insurance." The court determined that § 25-2602.01(f)(4) regulates the business of insurance and thus reverse preempts the FAA. The court went on to note that while parties may generally agree to delegate the power to determine issues of arbitrability to the arbitrator, if the very validity of the agreement to arbitrate is challenged, the court must consider this challenge before compelling arbitration. Finding that plaintiffs had made such a challenge, the court found that it was required to determine whether the RPA was the type of agreement covered by § 25-2602.01(f)(4).
Defendants argued that the RPA was an investment contract, not an insurance policy, and thus not covered by § 25-2602.01(f)(4), but the court disagreed, finding that the RPA was sufficiently related to the relevant workers' compensation policies to merit such coverage. As such, it was the kind of agreement for which § 25-2602.01(f)(4) prohibits arbitration agreements, and the court denied defendants' motion to compel arbitration. Parties drafting insurance-related contracts containing arbitration provisions would thus be well advised to consider the impact of applicable state laws on the enforceability of such provisions.
Milmar Food Group II, LLC et al. v. Applied Underwriters, Inc. et al., EF003101-2017 (Orange Cty. Sup. Ct. Dec. 5, 2017)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
