Courts, Not Arbitrators, Decide Arbitrability of Dispute with Insurance Carrier: NY Appellate Division | Practical Law

Courts, Not Arbitrators, Decide Arbitrability of Dispute with Insurance Carrier: NY Appellate Division | Practical Law

In Monarch Consulting, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, the New York Supreme Court, Appellate Division voided an arbitration clause in agreements with an insurance company based on a California law requiring insurers to file their agreements with state agencies regulating insurance.The court held due to the McCarran-Ferguson Act, the state law is not pre-empted by the Federal Arbitration Act.

Courts, Not Arbitrators, Decide Arbitrability of Dispute with Insurance Carrier: NY Appellate Division

by Practical Law Arbitration
Published on 12 Sep 2014 • New York, USA (National/Federal)
In Monarch Consulting, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, the New York Supreme Court, Appellate Division voided an arbitration clause in agreements with an insurance company based on a California law requiring insurers to file their agreements with state agencies regulating insurance.The court held due to the McCarran-Ferguson Act, the state law is not pre-empted by the Federal Arbitration Act.
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The New York Supreme Court Appellate Division, First Department, by a majority of 3-2 in consolidated appeals, reviewed three lower court orders involving the same arbitration clause and determined the dispute was non-arbitrable.
The dispute was among three insureds and their workers' compensation insurance carrier. The insureds claimed that the arbitration agreements, contained in side agreements to the insurance policies, were invalid because the carrier failed to file them with California regulatory authorities as California law requires.
On appeal, the insurance company argued (and the dissent agreed) that the arbitrators, and not the court, should decide the gateway issue of whether the agreements containing the arbitration clauses are enforceable. In support of that argument, the insurance company noted that the agreements expressly provided that:
  • They were governed by the Federal Arbitration Act (FAA).
  • The arbitrators have exclusive jurisdiction over the matter in dispute, including the question as to its arbitrability.
The Appellate Division refused to enforce the arbitration agreement. The court held although state statutes barring enforcement of arbitration agreements usually are pre-empted by the FAA, there is an exception to the general rule when the state statute regulates the insurance business within the meaning of the federal McCarran-Ferguson Act. That act states that federal law "shall not be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance." (Monarch Consulting, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 993 N.Y.S.2d 275 (1st Dep't 2014), rev'd, (N.Y. Feb. 18, 2016).)
On September 11, 2014, in Monarch Consulting, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, the New York Supreme Court Appellate Division, First Department, ruled that arbitration clauses in an agreement with an insurance carrier were unenforceable because California state law required that the agreement be filed with the California regulators in order to be valid (993 N.Y.S.2d 275 (1st Dep't 2014), rev'd, (N.Y. Feb. 18, 2016)).
National Union Fire Insurance Company of Pittsburgh (National Union) issued workers' compensation insurance to employers that were either California companies or who had their principal place of business in that state. California law requires workers' compensation carriers, before issuing a workers' compensation insurance policy, to file copies of their insurance policies, endorsements and forms with the Workers' Compensation Insurance Rating Bureau and the California Department of Insurance. After National Union issued the policies, it sent each insured a series of additional agreements and addenda (the payment agreements). National Union failed to file the payment agreements with the regulators.
The payment agreements provided that:
  • Any dispute over payment obligations and any other dispute would be arbitrated in New York.
  • Arbitration would be governed by the Federal Arbitration Act (FAA).
  • The arbitrators have exclusive jurisdiction over the entire matter in dispute, including the question as to its arbitrability.
A dispute arose over payment with three employers and the employers refused to arbitrate. The insurance carrier brought separate proceedings against each employer to compel arbitration. The lower courts denied arbitration in two of the cases and compelled arbitration in the third.
The Appellate Division heard appeals from each lower court order together. Ruling on the appeals, the court decided that, while normally state statutes interfering with arbitration agreements are pre-empted by the FAA, there is an exception to the general rule when the state statute regulates the insurance business within the meaning of the federal McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015). That act states that federal law "shall not be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance." The court concluded that because the California state law voided agreements with insurance carriers that are not filed with the state agencies, the McCarran–Ferguson Act "reverse pre-empts" the FAA.
The two dissenting justices disagreed that under McCarran-Ferguson, California insurance law preempts the FAA, because no provision of California law provides an express or implied prohibition against arbitration of insurance disputes. The dissent would have applied the well-established rule that where a party's challenge is to the contract as a whole, and not specifically related to the arbitration clause, the arbitrators, and not the court, should decide the gateway issue of whether the payment agreements containing the arbitration clauses are enforceable. For more information, see Practice Note, Jurisdictional issues in international arbitration: Separability.
This case provides a rare example of an exception to the strong state and federal policies in favor of arbitration. According to the majority opinion, the FAA does not pre-empt state laws regulating "the business of insurance" because the McCarran–Ferguson Act protects these state laws from federal preemption.
Note: On February 18, 2016, the New York Court of Appeals reversed and ruled that an arbitration panel must decide whether the agreements are enforceable.