South Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co.
2016 U.S. App. LEXIS 19245
| 3rd Cir. | 2016Background
- South Jersey Sanitation (employer) entered a three-year Reinsurance Participation Agreement (RPA) with Applied Underwriters in 2008; the RPA contains a broad arbitration clause and a Nebraska choice-of-law provision.
- Parties dispute the RPA’s nature: South Jersey says it was presented/relied on as a workers’ compensation policy (with promised end-of-term rebates); Applied Underwriters says the RPA is an investment/reinsurance participation instrument, not a primary insurance policy.
- Billing disputes arose: South Jersey paid large monthly invoices for ~34 months expecting a rebate; Applied Underwriters later invoiced much larger sums and cancelled the RPA; Applied Underwriters filed for arbitration seeking unpaid amounts; South Jersey sued in state court seeking rescission, declaratory relief, and tort claims including fraud.
- Applied Underwriters removed to federal court, moved to compel arbitration; the District Court denied the motion, holding Nebraska law (Neb. Rev. Stat. § 25-2602.01(f)(4)) bars arbitration provisions "concerning or relating to an insurance policy" and that the Nebraska statute reverse-preempts the FAA under the McCarran-Ferguson Act.
- On appeal, the Third Circuit considered whether South Jersey’s challenges targeted the arbitration clause specifically (for the court) or the contract as a whole (for the arbitrator), and whether the Nebraska statute applies to the RPA.
- The Third Circuit reversed: because South Jersey’s fraud and statutory arguments attack the contract as a whole (not the arbitration clause specifically) and the RPA’s arbitration clause delegates questions of arbitrability to the arbitrator, arbitrability issues (including whether the Nebraska statute applies) must be decided by the arbitrator.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the court should decide defenses to arbitration (fraud in inducement) or the arbitrator | South Jersey: fraud and misrepresentation induced the whole contract; arbitration clause unenforceable as part of whole-contract fraud/illegality | Applied: fraud claim attacks the contract generally; under Prima Paint and Rent-A-Center such claims go to arbitrator unless they target the arbitration clause specifically | Held: Fraud alleged attacks the contract as a whole; arbitrator decides it. |
| Whether Nebraska Rev. Stat. § 25-2602.01(f)(4) (invalidating arbitration provisions "concerning or relating to an insurance policy") prevents enforcement of arbitration | South Jersey: RPA "relates to/actually issues" a workers’ compensation policy, so the Nebraska statute applies and, under McCarran-Ferguson, reverse-preempts FAA | Applied: RPA is an investment/reinsurance participation agreement, not an insurance policy; statute does not clearly apply | Held: Whether the Nebraska statute applies implicates the RPA’s nature and thus is for the arbitrator to decide under the parties’ broad delegation clause. |
| Whether the Nebraska statute reverse-preempts the FAA | South Jersey: Nebraska statute regulates insurance and thus reverse-preempts FAA under McCarran-Ferguson | Applied: Contests application because RPA is not an insurance policy; questions of preemption depend on arbitrator’s determination of the RPA’s nature | Held: Court did not decide reverse-preemption; left the issue for the arbitrator because applicability of the Nebraska statute is a substantive question for arbitration. |
| Whether the District Court erred by refusing to compel arbitration | South Jersey: District Court correctly applied Nebraska law and denied arbitration | Applied: District Court erred by reaching reverse-preemption and arbitrability instead of enforcing the parties’ delegation to arbitrator | Held: District Court erred; vacated and remanded with instruction that arbitrability issues be submitted to arbitrator (or referred to arbitration if panel finds agreement to arbitrate in New Jersey). |
Key Cases Cited
- Puleo v. Chase Bank USA, N.A., 605 F.3d 172 (3d Cir.) (en banc) (standard of review for arbitration-agreement validity)
- Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63 (2010) (challenges to entire contract go to arbitrator; only clause-specific challenges go to court)
- Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) (distinguishes fraud-in-the-inducement of arbitration clause from fraud-in-the-inducement of the contract generally)
- Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79 (2000) (party seeking to avoid arbitration bears burden to show statutory preclusion)
- Suter v. Munich Reins. Co., 223 F.3d 150 (3d Cir.) (McCarran-Ferguson reverse-preemption framework)