Applied Appeals To Avoid Arbitration

By: Brad Cain

Applied Underwriters’ disputes with insureds in its SolutionOne and EquityComp workers’ comp programs typically follow a pattern: Applied attempts to enforce the arbitration provisions in its potentially illegal and controversial reinsurance participation agreement (RPA) and the employer seeking redress by the courts. A dispute between a Maine employer and Applied was on a similar track, but now the Berkshire Hathaway subsidiary has changed course, and it is the one that is seeking protection by the courts.

The about-face follows an independent arbitrator’s finding that the arbitration provision in Applied’s RPA is unenforceable. The decision came after a District Court held that the question of whether the underlying dispute was subject to arbitration should be decided by an arbitrator rather than the courts – a position that Applied supported at the time.

Attorney’s familiar with Applied’s legal tactics are not surprised by its legal maneuvering. They note that Applied has been known to file simultaneous motions to compel arbitration and to transfer a case to Nebraska at the same time to see if either will stick notes Carmel based attorney Larry Lichtenegger.

The employer in the subject case, Mountain Valley Property, is defending itself from a demand for payment under Applied’s SolutionOne program. Applied initially demanded arbitration to settle the dispute and Mountain Valley went to court to challenge the validity of the agreement and the arbitration provisions. The Maine District Court concluded that the question of whether the dispute should be settled in court or arbitration rightly belonged with an arbitrator.

Citing language in the RPA, federal Judge D. Brock Hornby held that “there can be no dispute that the parties agreed to submit their dispute, including the enforceability of any portion of the contract, to the arbitrator.” The key language in the RPA was that “all disputes between the parties relating in any way to the execution and delivery, construction or enforceability of the Agreement, the management or operations of the Company, or any other breach of the Agreement or the transaction contemplated herein shall be settled amicably by good faith discussion among all of the parties hereto, and, failing such amicable settlement, finally determined exclusively by binding arbitration in accordance with the procedures provided herein.”

Judge Hornby ordered the issue to arbitration and stayed Mountain Valley’s lawsuit pending the arbitrator’s decision. At arbitration, Applied lost.

Nebraska Prohibition

“The outcome of the case turns on the scope and effect of federal and state statutes, not on the intent of the contracting parties,” said arbitrator George F. Burns in the case, noting the RPA’s choice of law provision that subjected disputes to Nebraska law. Nebraska statute and supreme court case law both prohibit arbitration provisions in contracts when the contract is “an agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract.”

Here Burns found that the statute’s limitation on arbitration applies because the RPA is an agreement concerning or relating to the underlying workers’ comp insurance policy issued to Mountain Valley. Additionally, it does not qualify for the statute’s exception “because the RPA is not an agreement between ‘two insurance companies,’” Burns notes.

Additionally, Burns held that the Nebraska law is not usurped by the Federal Arbitration Act because it relates to the regulation of insurance, which under McCarren-Ferguson rests with the states. “The Nebraska statute regulates an integral part of the policy relationship by directing how certain disputes are resolved, and the Supreme Court of Nebraska has held that the Nebraska statute reverse preempts the FAA,” Burns held in finding Applied’s claim against Mountain Valley non-arbitrable. “In summary, McCarren-Ferguson means nothing if it does not trump the FAA in these circumstances.”

Applied is now asking the First Circuit Court of Appeal to overturn the lower court’s order denying its motion to vacate the arbitration award and to transfer the case to the Nebraska district court. Applied is also asking the court to reimpose a stay against Mountain Valley’s lawsuit seeking to recover what it paid into the SolutionOne program. Additionally, Mountain Valley is seeking a ruling that it owes nothing further under the contract.

Mountain Valley is opposing the requested move to Nebraska District Court. It points out that under Maine law where it operates and the policy was sold “no contract of insurance can include any provision depriving the courts of this state of jurisdiction in any case against a foreign insurer.” Mountain Valley alleges that none of the defendants in its lawsuit were registered with the Maine Superintendent of Insurance.

Applied Underwriters was once but is no longer an affiliate of Berkshire Hathaway. Applied’s management bought it. Berkshire Hathaway bears no responsibility for any of the events which have transpired involving Applied Underwriters’ or its subsidiaries including California Insurance Company.