In an important citable decision, a California Court of Appeal rejected Applied’s arguments to compel arbitration and upheld a finding that the arbitration provision in the reinsurance participation agreement (RPA) is invalid. The decision is being sent and cited in at least seven other California courts where similar cases are pending.
“This issue,” says Monterey based attorney Larry Lichtenegger, “is pending in seven appellate cases that I am handling in which the lower court denied Applied’s motion to compel arbitration. It is also currently pending in five of my lower court/arbitration proceedings in which the determination of arbitrability is at issue. The Appellate Court’s decision is fatal to Applied ‘s continued attempts to force businesses into expensive arbitration.”
In the case upon which the Appellate decision is based a pair of California employers who are suing Applied Underwriters EquityComp workers’ comp program for fraud, breach of contract and a host of other allegations will, therefore, get their day in court not in arbitration.
The decision is a significant loss for Applied Underwriters. Its habit is to try to force cases into Arbitration. Arbitrations are not public like court trials so facts and outcomes can be kept from the media, other lawyers, and the public.
The businesses involved in the decision, Humanity LLC and CM Laundry LLC, successfully rebuffed Applied’s attempt to compel arbitration in their disputes. A trial court found that Nebraska law governed the issue of arbitrability as the EquityComp RPA calls for the parties to adhere to Nebraska law under the agreement. Applied is a Berkshire Hathaway (NYSE: BRK.A) subsidiary.
Section 25-2602.01(f)(4) of the Nebraska Uniform Arbitration Act (NUAA) prohibits arbitration of any agreement concerning or relating to an insurance policy. The trial court found that under the federal McCarran-Ferguson Act’s Nebraska’s laws regulating insurance prevailed over the Federal Arbitration Act.
“It’s called reverse preemption. McCarran-Ferguson overrides the federal arbitration laws under this theory,” notes Mark Webb of Prop 23 Advisors. “The key is that you have to find the RPA an insurance product. If it isn’t, as some courts have found in other states, then arbitration may be enforced notwithstanding the Nebraska anti-arbitration statute. The reference to the CDI cease and desist order underscored that this was an insurance product.”
Finding reverse preemption, the trial court denied Applied’s motion to compel arbitration. On appeal, the appellate court reached the same conclusion.
The court took judicial notice of the consent order that Applied Underwriters and California Insurance Company signed with the California Department of Insurance. In that agreement, Applied Underwriters’ agreed not to issue any new RPAs or renew existing ones until it filed the RPA with the Workers’ Compensation Insurance Rating Bureau and the Department for approval in compliance with Insurance Code section 11658 and 11735. The consent order followed Applied’s loss in the Shasta Linen case.
The court pointed out that this consent order “is further support that the RPA concerns or relates to the workers’ compensation insurance policies issued as part of defendants’ EquityComp program.”
The court of appeal notes that there was substantial evidence in the record that the RPA is an integral part of the workers’ comp insurance program that Applied sold to Citizens and CM Laundry and thus is subject to the Nebraska arbitration prohibition in the NUAA. “The NUAA applies in the instant case because the parties contractually agreed to its application,” the court wrote. “Application of the FAA would operate to invalidate or impair section 25-2602.01(f) of the NUAA. The trial court did not err by concluding that the McCarran-Ferguson Act applies and reverse preempts the FAA. Section 25-2602.01(f) of the NUAA applies to the RPA and renders the arbitration provision contained in the RPA unenforceable.”
The court of appeal affirmed the trial court’s order denying Applied’s petition to compel arbitration. It also awarded the employers their costs on appeal.
Click here for a copy of the opinion, which is also available in our Resources section.