Flash Report: Applied Underwriters’ Can’t Force Arbitration

California’s First District Court of Appeal has joined the Fourth District Court of Appeal in finding that Applied Underwriters cannot compel arbitration. There are a ton of cases in which employers in or formerly in Applied Underwriters’ EquityComp program end up in disputes. Applied consistently spends money, according to one attorney, attempting to force arbitration, in part to keep its losses out of the public eye and because it is more expensive for the employer.

The court found in Luxor Cabs v. Applied that the delegation clause and the arbitration provision in the unfiled reinsurance participation agreement (RPA) are unenforceable.

Decisions All Over the Country

The court noted a litany of decisions from across the country that back up its decision. It cited cases from New Jersey, Virginia, and Vermont, as well as Insurance Commissioner Dave Jones’ precedential decision in the Shasta Linen case that held the RPA is void as a matter of law. The most recent case it cited was the Fourth District’s decision in Nielsen Contracting that it noted was virtually identical to the Luxor Cabs dispute.

The appeal stems from a San Francisco Superior Court finding that arbitration clause and the delegation clause were void and unenforceable “because they constituted endorsements to the [California Insurance Company] Policy that had not been appropriately filed and approved by the Insurance Commissioner as required by [Insurance Code] section 11658,” the court of appeal noted. The trial court refused to compel arbitration and, of course, Applied appealed. It frequently appeals decisions it doesn’t like.

“[O]ur own analysis of the RPA and related documentation presented for our review confirms these prior decisions,” the First District wrote. “In sum, since the delegation clause clearly purports to alter Luxor’s access to both administrative and judicial review under the CIC Policy, it, in its own right, is a collateral agreement that should have been filed and endorsed to the Policy.”

It wasn’t.

“The case is even stronger when the impact of the entire arbitration provision on the CID Policy is considered,” the court continued. “Pursuant to other clauses in the RPA’s arbitration provision, all arbitration proceedings are required to take place in the British Virgin Islands and are subject to enforcement under Nebraska law…we conclude – as did the court in Nielson – that the arbitration provision is also a collateral agreement under section 11658 and Regulations former section 2268 that should have been filed and endorsed to the Policy.”

The court of appeal also noted a recent decision by the Second District in Citizens of Humanity v. Applied Underwriters that provides additional support for denying the arbitration demand. There the court found that Nebraska law actually reverse preempted the Federal Arbitration Act and made the delegation and arbitration provisions unenforceable.

The First District’s decision was unanimous.

-30-