In Nebraska Supreme Court …

Applied Underwriters Loses Again

Applied Underwriters’ has consistently argued that questions about the construction and/or enforceability of its reinsurance participation agreements (RPAs) used in its Applied Underwriters EquityComp and SolutionOne programs should be resolved by an arbitrator, but the highest court in its home state of Nebraska disagrees. The Nebraska Supreme Court says that the question of arbitrability should be left up to the courts.

It isn’t the first time that Applied has lost on this exact issue.

The Nebraska Supreme Court’s decision in Citizens of Humanity v. Applied Underwriters Captive Risk Assurance Company follows a similar finding by a California Superior Court last fall and later a California Court of Appeal (see Applied Loses… for past coverage).

At issue is the Berkshire Hathaway (NYSE: BRK.A) subsidiary’s ability to force employers into arbitration under the rules it established instead of allowing the complaints to be heard in open court. Applied Underwriters’ continues to relitigate this issue in spite of multiple rulings against them.

The underlying case includes allegations of fraud, breach of contract and a host of other allegations.

In the California action, both a Los Angeles Superior Court and later a court of appeal ruled against Applied and its mandatory arbitration provision.

“… the FAA [Federal Arbitration Act] does not permit illegal or invalid agreements to arbitrate to be enforced,” —Nebraska Supreme Court

Both courts found that section 25-2602.01(f)(4) of the Nebraska Uniform Arbitration Act (NUAA) prohibits arbitration of any provision concerning or relating to an insurance policy. The courts found that under the federal McCarran-Ferguson Act, Nebraska’s state law regulating insurance prevails over the Federal Arbitration Act.

Comes now, the Nebraska Supreme Court to reach the same conclusion.

“[W]here applied, Section 25-2602.01 provides that agreements to arbitrate existing and future agreements are valid and enforceable except in specified circumstances sometimes referred to as ‘antiarbitration provisions,’” the Nebraska Supreme Court wrote. “Agreements to arbitrate ‘concerning or relating to an insurance policy’ are one such circumstance where arbitration is not permitted. Such agreements would be invalid, and contrary contract provisions agreed to by the parties do not control over this statutory bar to enforcement of arbitration.”

No Conflict

The Nebraska court rejected Applied’s argument that the Federal Arbitration Act trumps the other statutes. Instead, it found that they actually work in harmony with each other.

“As we read the statutes, there is no conflict between the McCarran-Ferguson Act and the FAA, because, although the FAA generally favors arbitration, through its savings clause – ‘save upon such grounds as exist at law or in equity for the revocation of any contract’ – the FAA does not permit illegal or invalid agreements to arbitrate to be enforced,” the court wrote. “It has been held that the FAA’s ‘saving clause permits agreements to arbitrate to be invalidated by generally applicable contract defenses.’ Illegality and inconsistency with statutorily prescribed public policy are widely recognized general contract defenses.”

Here, the court says Nebraska state law on the illegality of arbitration agreements concerning or relating to an insurance policy would constitute grounds to invalidate the agreement under the FAA. Additionally, Citizens challenged not only the arbitration agreement itself but also a clause in that agreement that delegates the question of arbitrability to an arbitrator.

The court also rejected Applied’s assertion that the RPA does not fall under the Nebraska law because “the RPA is not an insurance policy.” The court noted that it did not have to find that the RPA was an insurance policy itself only that it was an agreement concerning or relating to an insurance policy. “The phrase ‘relating to’ is to be read broadly and should be interpreted as being comprehensive of the subject indicated,” the court noted in citing past case law. “The RPA was an integral part of the EquityComp program, which provided workers’ compensation insurance to Citizens. We conclude that the RPA is an ‘agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract’ and that thus, section 25-2602.01(f)(4) applies.”

The court’s decision reverses a Nebraska trial court’s order granting AUCRA’s motion to stay the case so that an arbitrator could decide the issue of arbitrability.

This issue, it says, is one for the courts to decide, not an arbitrator.

Copies of the Nebraska Supreme Court’s decision in Citizens of Humanity v. Applied Underwriters Captive Risk Assurance Company (AUCRA) are available in our Resources section or by clicking here.