Citizens of Humanity v. Applied Underwriters, Inc.
17 Cal. App. 5th 806
Cal. Ct. App. 5th
2017

Background

  • Plaintiffs (Citizens of Humanity, LLC and CM Laundry, LLC) bought a workers' compensation program (EquityComp) and signed a Reinsurance Participation Agreement (RPA) that contained a broad arbitration clause and a Nebraska choice-of-law clause.
  • The RPA arbitration clause delegated disputes about formation, construction, enforceability, and "any provision" to arbitration; the RPA also stated it "shall be exclusively governed by and construed in accordance with the laws of Nebraska."
  • Plaintiffs sued defendants (Applied Underwriters and affiliates) in California state court on various fraud, breach, and related theories and opposed defendants’ motion to compel arbitration under the RPA.
  • Plaintiffs argued Nebraska law (Neb. Rev. Stat. § 25-2602.01(f)) bars arbitration of agreements "concerning or relating to an insurance policy" and that the McCarran-Ferguson Act lets state insurance laws reverse-preempt the Federal Arbitration Act (FAA).
  • Defendants argued the FAA governs, preempts Nebraska law, and the RPA’s delegation clause requires the arbitrator to decide arbitrability.
  • The trial court denied the motion to compel arbitration; the appellate court affirmed, holding the court must decide whether the FAA is reverse-preempted and that Nebraska law (NUAA § 25-2602.01(f)) applies to render the RPA arbitration clause unenforceable.

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Who decides arbitrability (court vs. arbitrator)? Court should decide because the dispute raises whether the FAA is reverse-preempted by McCarran-Ferguson and NUAA — a threshold question of the court’s authority. Delegation clause in RPA is clear and unmistakable; arbitrator should decide arbitrability under FAA precedent. Court decides. When applicability of FAA is itself disputed (reverse-preemption by McCarran-Ferguson), that antecedent question is for the court.
Does McCarran-Ferguson reverse-preempt the FAA here? Yes — NUAA § 25-2602.01(f) regulates the insurer-insured relationship and was enacted to regulate the business of insurance, so McCarran-Ferguson preserves it from FAA preemption. No (or FAA governs) — FAA’s strong pro-arbitration policy should apply and preempt conflicting state law. McCarran-Ferguson applies; the Nebraska statute regulates the business of insurance and reverse-preempts the FAA.
Does NUAA § 25-2602.01(f) apply to this RPA (an ancillary/reinsurance participation agreement)? Yes — the RPA is integral to the insured program and concerns or relates to insurance policies (including reinsurance); evidence shows RPA is collateral to insured policies. No — the statute applies only to insurance policies themselves, not to collateral/derivative agreements like the RPA. NUAA § 25-2602.01(f) applies to the RPA and prohibits arbitration of agreements concerning or relating to an insurance policy.
Effect on delegation clause and enforceability of arbitration provision Because NUAA applies by McCarran-Ferguson, the arbitration clause (including delegation language) is unenforceable; court may adjudicate validity. Even if some state law applies, under Rent-A-Center the delegation clause is severable and a court should leave arbitrability challenges to the arbitrator. The delegation clause is not enforceable to vest arbitrability in the arbitrator when the FAA’s applicability is in dispute; the court properly adjudicated enforceability and denied the motion to compel.

Key Cases Cited

  • Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010) (delegation clauses can commit gateway arbitrability questions to arbitrators)
  • Howsam v. Dean Witter Reynolds, 537 U.S. 79 (2002) (distinguishes questions of procedural arbitrability from substantive arbitrability)
  • First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995) (parties must clearly and unmistakably agree to arbitrate arbitrability)
  • Van Dusen v. United States Dist. Court for the Dist. of Ariz., 654 F.3d 838 (9th Cir. 2011) (court must decide whether FAA §1 exemption applies before compelling arbitration)
  • Oliveira v. New Prime, Inc., 857 F.3d 7 (1st Cir. 2017) (same—court must determine threshold FAA applicability)
  • United States Dep’t of Treasury v. Fabe, 508 U.S. 491 (1993) (tests whether a state law is "enacted for the purpose of regulating the business of insurance" under McCarran-Ferguson)
  • Kremer v. Rural Comty. Ins. Co., 280 Neb. 591 (Neb. 2010) (Nebraska Supreme Court holding NUAA §25-2602.01(f) regulates the business of insurance and reverse-preempts FAA)
  • Southland Corp. v. Keating, 465 U.S. 1 (1984) (FAA creates federal substantive arbitration law applicable in state courts)
  • AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (FAA preempts state laws that prohibit arbitration of certain claims)
  • Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52 (1995) (choice-of-law clauses may incorporate state substantive principles but not necessarily state rules limiting arbitrators’ authority)
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