D072393M
Cal. Ct. App.May 23, 2018Background
- Nielsen (insured) entered into Applied Underwriters’ "EquityComp" program: a CIC-guaranteed-cost policy and a separate Reinsurance Participation Agreement (RPA) with AUCRA that materially changed CIC policy terms and added broad arbitration and delegation clauses requiring arbitration in the British Virgin Islands.
- The RPA included a delegation clause assigning the arbitrator authority to decide challenges to enforceability of the arbitration agreement.
- Nielsen sued, seeking a declaration the RPA and its arbitration terms were void/unconscionable and alleging fraud and related claims; AUCRA moved to compel arbitration under the RPA.
- Nielsen argued the arbitration and delegation clauses were unenforceable because they were unfiled "endorsements"/"collateral agreements" required to be filed with and approved by the California Insurance Commissioner under Ins. Code §11658 and Cal. Code Regs. §2268.
- The trial court denied the motion to compel, finding Nielsen specifically challenged the delegation clause and that both the delegation clause and arbitration provision were void for failure to be filed/approved; the Court of Appeal affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Who decides enforceability of delegation clause? | Nielsen: she specifically challenged the delegation clause; court must decide such specific challenges. | AUCRA: Rent-A-Center means arbitrator decides unless delegation clause itself is specifically attacked. | Court: Nielsen did specifically attack the delegation clause; court properly decided enforceability. |
| Enforceability of delegation & arbitration clauses under state filing rules | Nielsen: clauses are collateral/endorsement terms that had to be filed/approved; unfiled clauses are unlawful and void. | Defendants: RPA/AUCRA not an insurer; clauses not endorsements; filing requirement inapplicable; even if applicable, statute doesn’t mandate voiding. | Court: clauses materially modified filed CIC policy and were unfiled endorsements/collateral agreements; therefore unenforceable. |
| Effect of prior administrative decision (Shasta Linen) and stipulation | Nielsen: Shasta Linen supports that RPA-type provisions are unlawful and void. | Defendants: Shasta Linen undermined by stipulated cease-and-desist; not controlling. | Court: Shasta Linen persuasive; stipulation did not undermine its reasoning. |
| Preemption/Federal arbitration (FAA) defense | Defendants: FAA favors arbitration; delegation clause enforceable under federal law. | Nielsen: state-law defenses (illegality) apply under FAA savings clause; FAA does not preempt state filing requirements here. | Court: FAA governs but state contract defense (illegality for failure to file) applies; court did not reach McCarran-Ferguson preemption claim. |
Key Cases Cited
- Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (Sup. Ct. 2010) (courts decide specific challenges to delegation clauses; delegation clauses are severable)
- Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (Sup. Ct. 2006) (challenges to the validity of the entire contract go to arbitrator when arbitration clause is separable)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (Sup. Ct. 1967) (doctrine of severability between arbitration clause and contract)
- Preston v. Ferrer, 552 U.S. 346 (Sup. Ct. 2008) (FAA establishes national policy favoring arbitration; arbitrability issues governed by contract/agreement)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (Sup. Ct. 2011) (FAA savings clause preserves generally applicable contract defenses)
- Peng v. First Republic Bank, 219 Cal.App.4th 1462 (Cal. Ct. App. 2013) (burdens on parties in motions to compel arbitration)
- Carmona v. Lincoln Millennium Car Wash, Inc., 226 Cal.App.4th 74 (Cal. Ct. App. 2014) (de novo review of arbitration agreement enforceability)
- McGill v. Citibank, N.A., 2 Cal.5th 945 (Cal. 2017) (FAA savings clause and state-law defenses to arbitration provisions)