404 S.W.3d 870
Ky. Ct. App.2013Background
- Louisville Bedding Company (Bedding), a self-insured employer, entered a Trust Agreement with United Re Trust and United Re AG (United Re Entities) that included an arbitration clause administered by the American Arbitration Association.
- Bedding submitted a claim for excess stop-loss payments after incurred medical expenses exceeded the Agreement’s aggregate limit; United Re Entities denied the claim and Bedding sued United Re Entities, Hugh Scott (president of United Re AG), and others alleging fraud, misrepresentation, breach of contract, and related claims.
- United Re Entities defaulted and a final default judgment was entered against them; Scott (who signed the Agreement as President of United Re AG) later moved to compel arbitration and/or dismiss; the trial court initially compelled arbitration but then amended and ultimately denied Scott’s motions.
- The trial court held the Agreement is an insurance contract exempting it from Kentucky’s arbitration statute (KRS 417.050), and concluded the Federal Arbitration Act (FAA) is reverse-preempted by the McCarran-Ferguson Act so the KUAA exemption stands; Scott appealed.
- The Court of Appeals concluded Scott, although a non-signatory, could enforce the arbitration clause because Bedding alleged Scott acted as the alter-ego/agent of United Re; but the Agreement is an insurance contract and KRS 417.050 exempts insurance contracts from mandatory arbitration, and that exemption is saved from FAA preemption by the McCarran-Ferguson Act.
Issues
| Issue | Bedding's Argument | Scott's Argument | Held |
|---|---|---|---|
| Whether Scott (non-signatory) can enforce the arbitration clause | Bedding: Scott is not a party and cannot enforce the clause | Scott: As United Re AG officer/agent, he can enforce the Agreement | Held: Scott may enforce arbitration because Bedding’s complaint treats Scott and United Re Entities as the same and claims arise from his employment/agency. |
| Whether the Agreement is an insurance contract | Bedding: Agreement obligates Trust to indemnify excess claims; it is insurance | Scott: Agreement merely mentions insurance and provides lines of credit; not true insurance | Held: Agreement is an insurance contract because it obligates indemnity for specified risks. |
| Whether Kentucky’s KUAA exemption for insurance (KRS 417.050) is preempted by the FAA | Bedding: KUAA exemption valid; McCarran-Ferguson saves it from FAA preemption | Scott: FAA preempts KUAA; McCarran-Ferguson doesn’t apply to arbitration rule | Held: McCarran-Ferguson reverse-preempts FAA here; KUAA exemption applies and invalidates arbitration for insurance contracts. |
| Whether the Convention on Foreign Arbitral Awards requires arbitration | Scott: United Re AG is foreign so Convention applies | Bedding: Convention does not overcome KUAA exemption; United Re Entities’ "nerve center" is U.S. | Held: Convention does not require arbitration because United Re Entities’ principal place of business is in the U.S., and 9 U.S.C. §202 does not preempt KRS 417.050. |
Key Cases Cited
- Conseco Finance Servicing Corp. v. Wilder, 47 S.W.3d 335 (Ky. Ct. App.) (standard of review on arbitration enforceability)
- AT & T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (U.S. 2011) (arbitration agreements enforced like other contracts)
- Hill v. Hilliard, 945 S.W.2d 948 (Ky. Ct. App.) (doubts about arbitration scope resolved in favor of arbitration)
- North Fork Collieries, LLC v. Hall, 322 S.W.3d 98 (Ky. 2010) (party cannot accept contract benefits then disavow arbitration provision)
- Arnold v. Arnold Corp.-Printed Communications for Business, 920 F.2d 1269 (6th Cir. 1990) (non-signatory employee may be bound where claims arise from employment)
- Kruse v. AFLAC Int’l, Inc., 458 F. Supp. 2d 375 (E.D. Ky. 2006) (related entities and employee enforce employer's arbitration agreement)
- Associated Industries of Kentucky, Inc. v. U.S. Liability Ins. Group, 531 F.3d 462 (6th Cir. 2008) (group self-insured fund treated as insurance; individual self-insurance not insurance)
- National Home Ins. Co. v. King, 291 F. Supp. 2d 518 (E.D. Ky. 2003) (McCarran-Ferguson saves KRS 417.050 from FAA preemption)
- Hertz Corp. v. Friend, 559 U.S. 77 (U.S. 2010) (definition of corporation’s principal place of business as "nerve center")