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Citizens of Humanity, LLC v. Applied Underwriters Captive Risk Assurance Company, Inc.

Issue Discussed: Enforceability of Arbitration Provision and Delegation Clause

Submitted by Sylvia Kaminsky

Date Promulgated: April 6, 2018

Citizens of Humanity, LLC v. Applied Underwriters Captive Risk Assurance Company, Inc., 299 Neb. 545

Court:  Supreme Court of Nebraska

Issued Decided:  Whether the Nebraska district court whic properly concluded that in accordance with the arbitration clause of the Reinsurance Participation Agreement (RPA) required to be executed by the insured for workers’ compensation coverage, the parties are compelled to arbitrate their dispute over the amount the insurer claims were owed by the insured and  specifically,  whether the issue of arbitrability of such a dispute is one for the arbitrator(s) under the delegation clause of the arbitration provision.

This case involves whether a broad arbitration clause requiring that all disputes arising with respect to any provision of a Reinsurance Participation Agreement (“RPA”), which was required to be executed as a condition of obtaining workers’ compensation policies under an EquityComp program marketed by Applied Underwriters Captive Risk Assurance Company, Inc. (“AUCRA”), is enforceable under Nebraska statute Sec. 25-2602.01(f)(4).  The statute prohibits mandatory arbitration provisions in “any agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract.”  Citizens of Humanity (“Citizens”) challenged the enforceability of arbitration, including the delegation of arbitrability to an arbitrator and asked the district court to enjoin the arbitration.  AUCRA filed to dismiss the action.  The district court sustained the motion to stay the litigation pending arbitration.  It found that that the FAA governed its analysis and held that the broad and sweeping language of the arbitration provision, coupled with reference to the AAA’s rules and Citizens’ lack of a direct challenge to the delegation clause compelled the parties to arbitrate their dispute.

On appeal, the Supreme Court of Nebraska (“Supreme Court”) examined the district court’s decision which enforced the delegation clause in the RPA and referred the issue of arbitrability to an arbitrator.  The Supreme Court held that the Nebraska antiarbitration statute applied in that the RPA was an agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract and was not pre-empted from FAA pre-emption under the McCarran-Ferguson Act.  While AUCRA claimed that the agreement was not an insurance policy but a reinsurance agreement and therefore not within the purview of the Nebraska statute, the Court determined that the RPA is an agreement concerning or relating to an insurance policy whether or not the RPA is itself a policy.   It stated that despite its billing as a Reinsurance Participation Agreement, the RPA is a mandatory component of the insurance and its title did not for this case convert the agreement into a reinsurance contract.  The Court noted that it was not alone in rejecting AUCRA’s characterization of the RPA as a reinsurance contract.

Finding that the RPA was within the ambit of Nebraska’s antiarbitration statute wherein certain agreements to arbitration are prohibited, the Supreme Court reversed the district court’s decision referring the issue of arbitrability to the arbitrator and remanded the case for further proceedings including the enforceability of the arbitration provision.

In reaching its decision, the Supreme Court considered the interplay between the FAA, the McCarran-Ferguson Act and the Nebraska statute.  The Court acknowledged that the FAA was enacted to ensure judicial enforcement of privately made agreements to arbitrate and noted the existence of a policy favoring arbitration.   It then discussed McCarron-Ferguson and the narrow circumstance wherein the Act shall not invalidate any state law regulating the business of the insurance unless the Act specifically relates to the business of insurance.  Finally, it noted that the Nebraska statute did not permit arbitration of claims concerning or relating to an insurance policy and that any such agreement would be invalid.  Any contrary contract provision would not control over this statutory bar to enforcement of arbitration. Taking into consideration these various applicable laws,  the Supreme Court found that the FAA does not specifically govern insurance; that the state law was enacted to regulate insurance;  that the FAA if applied, would invalidate the state law; that the McCarron-Ferguson Act does not pre-empt the Nebraska statute and that the two federal statutes are not in conflict but co-exist given the FAA’s saving clause which does not permit invalid agreements to arbitrate to be enforced; and that there is no other applicable federal law which would reverse preempt the Nebraska antiarbitration statute.

In finding that the arbitration clause was not valid after interpreting the relevant federal and state laws applicable to the issue before it, the Supreme Court’s analysis did not end but went on to address the propriety of delegating the issue of arbitrability to the arbitrator and not deciding this matter in the first instance.  The question the Supreme Court faced was whether the insured specifically challenged the delegation provision.  The district court had ruled that this issue had not been raised until it was too late in the appellate litigation and therefore without such a challenge, the resolution of arbitrability was to be determined by the arbitrator.

The Supreme Court specifically noted that there were cases across the country challenging the delegation feature of the RPA on the grounds of various antiarbitration statutes similar to the one in Nebraska and found circuits split – the Third and Sixth Circuit ordering arbitration and the Fourth Circuit allowing the court to consider a challenge to the RPA’s delegation clause.  The Supreme Court sided with the Fourth Circuit and found that the insured’s challenge was a specific challenge to the validity of the delegation clause and not the contract as whole.  It thereby concluded that the district court should have considered the threshold arbitrability issue before it ordered arbitration.

In sum, the Nebraska antiarbitration statute applied and because the RPA was not within its ambit, the RPA arbitration provision which delegates arbitrability is an invalid agreement. The district court erred in allowing an arbitrator to decide this issue.  In so doing and in recognizing the parties’ choice of Nebraska law, it harmonized the FAA in conjunction with the McCarran-Ferguson Act and the Nebraska antiarbitration statute and held that the state law regulating insurance was not preempted by the FAA.

 

* Sylvia Kaminsky is an attorney and a certified ARIAS arbitrator and umpire.  She is a member of the ARIAS Board of Directors and is the co-chair of the ARIAS Law Committee.