In the Matter of MONARCH CONSULTING, INC., et al., Respondents, v NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Appellant. In the Matter of NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Appellant, v PRIORITY BUSINESS SERVICES, INC., Formerly Known as INLAND VALLEY STAFFING SERVICES and Another, Doing Business as PRIORITY STAFFING, Respondent. In the Matter of NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Appellant, v SOURCE ONE STAFFING, LLC, Respondent.
Court of Appeals of the State of New York
Decided February 18, 2016
Argued January 7, 2016
47 NE3d 463, 27 NYS3d 97, 26 NY3d 659
STEIN, J.
Sidley Austin LLP, Washington, D.C. (Peter D. Keisler, of the District of Columbia bar, admitted pro hac vice, and Paul J. Zidlicky, of the District of Columbia bar, admitted pro hac vice, of counsel), and Sidley Austin LLP, New York City (Andrew W. Stern, Nicholas P. Crowell, Eamon P. Joyce and Benjamin F. Burry of counsel), for appellant in the first, second and third above-entitled proceedings. I. Respondents’ basis for challenging arbitration affects the formation of the entire contract, and therefore must be decided by the arbitrators. (United States Fire Ins. Co. v National Gypsum Co., 101 F3d 813; Matter of Diamond Waterprоofing Sys., Inc. v 55 Liberty Owners Corp., 4 NY3d 247; Preston v Ferrer, 552 US 346; Buckeye Check Cashing, Inc. v Cardegna, 546 US 440; Rent-A-Center, West, Inc. v Jackson, 561 US 63; AT&T Technologies, Inc. v Communications Workers, 475 US 643; First Options of Chicago, Inc. v Kaplan, 514 US 938.) II. The McCarran-Ferguson Act does not “reverse-preempt” the Federal Arbitration Act in this case. (Humana Inc. v Forsyth, 525 US 299; Ojo v Farmers Group, Inc., 565 F3d 1175; Hamilton Life Ins. Co. of N.Y. v Republic Natl. Life Ins. Co., 408 F2d 606; In re Arbitration Between National Union Fire Ins. Co. of Pittsburgh, P.A. v Personnel Plus, Inc., 954 F Supp 2d 239; Preston v Ferrer, 552 US 346; Mitsubishi Motors Corp. v Soler Chrysler-Plymouth, Inc., 473 US 614; St. Paul Fire & Mar. Ins. Co. v Courtney Enters., Inc., 270 F3d 621; Kong v Allied Professional Ins. Co., 750 F3d 1295; Miller v National Fid. Life Ins. Co., 588 F2d 185.) III. There are substantial grounds for the arbitrators to conclude that section 11658 of the California Insurance Code does not invalidate the agreements to arbitrate. (AT&T Technologies, Inc. v Communications Workers, 475 US 643; Mitsubishi Motors Corp. v Soler Chrysler-Plymouth, Inc., 473 US 614; Commonwealth Coatings Corp. v Continental Casualty Co., 393 US 145.)
Anderson Kill, P.C., New York City (Jeffrey E. Glen, Edward J. Stein and Rene F. Hertzog of counsel), Roxborough, Pomerance, Nye & Adreani, LLP, Woodland Hills, California (Nicholas Roxborough, of the California bar, admitted pro hac vice, of counsel), Pillsbury Winthrop Shaw Pittman LLP, New York City (Alexander D. Hardiman of counsel), and Bond, Schoeneck & King PLLC, Syracuse (Clifford G. Tsan and Suzanne M. Messer of counsel), for respondents in the first, second and third above-entitled proceedings. I. California insurance law
Amy R. Bach, of the California bar, admitted pro hac vice, and Whiteman Osterman & Hanna LLP, Albany (Jean F. Gerbini of counsel), for United Policyholders, amicus curiae. The insurers’ Payment Agreements arе illegal under California insurance law and void as a matter of public policy. (Matter of New York Pub. Interest Research Group v New York State Dept. of Ins., 66 NY2d 444; California Automobile Assn. Inter-Insurance Bureau v Maloney, 341 US 105; Prudential Ins. Co. v Benjamin, 328 US 408; Osborn v Ozlin, 310 US 53; O‘Gorman & Young, Inc. v Hartford Fire Ins. Co., 282 US 251.)
Kamala D. Harris, Attorney General, Los Angeles, California (Stephen Lew, Edward C. DuMont, Kathleen A. Kenealy, Paul D. Gifford and Joshua A. Klein of counsel), for Dave Jones, amicus curiae. I. Because the Payment Agreements modified the parties’ policy obligations, National Union Fire Insurance Company of Pittsburgh, PA could not issue the Agreements in California without satisfying the prefiling requirements of California law. (Matter of New York City Council v City of New York, 4 AD3d 85; Employers Ins. of Wausau v Granite State Ins. Co., 330 F3d 1214; Washington v California City Corr. Ctr., 871 F Supp 2d 1010.) II. The McCarran-Ferguson Act requires general arbitration principles to give way in favor of the state‘s special, congressionally recognized power to regulate insurance. (Autry v Northwest Premium Servs., Inc., 144 F3d 1037; SEC v National Securities, Inc., 393 US 453; Merchants Home Delivery Serv., Inc. v Frank B. Hall & Co., Inc., 50 F3d 1486; Stephens v American Intl. Ins. Co., 66 F3d 41; Washburn v Corcoran, 643 F Supp 554; Group Life & Health Ins. Co. v Royal Drug Co., 440 US 205; Humana Inc. v Forsyth, 525 US 299; Mutual Reins. Bur. v Great Plains Mut. Ins. Co., Inc., 969 F2d 931; In re Arbitration Between National Union Fire Ins. Co. of Pittsburgh, P.A. v Personnel Plus, Inc., 954 F Supp 2d 239; St. Paul Fire & Mar. Ins. Co. v Courtney Enters., Inc., 270 F3d 621.)
STEIN, J.
In order to resolve whether the parties’ disputes pertaining to certain workers’ compensation insurance Payment Agreements should be submitted to arbitration, we must make a threshold determination of whether the McCarran-Ferguson Act (
I.
Three statutes are at the crux of this dispute—the FAA, the McCarran-Ferguson Act, and
The Federal Arbitration Act
The FAA was enacted by Congress “in response to widespread judicial hostility to arbitration” (American Express Co. v Italian Colors Restaurant, 570 US —, —, 133 S Ct 2304, 2308-2309 [2013]), and it aims to “ensure judicial enforcement of privately made agreements to arbitrate” (Dean Witter Reynolds Inc. v Byrd, 470 US 213, 219 [1985]). Under the FAA, an arbitration provision contained in any contract involved in interstate commerce “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract” (
The McCarran-Ferguson Act
In certain circumstances, however, the McCarran-Ferguson Act exempts state laws from FAA preemption (see
California Insurance Code § 11658
California law requires most employers to maintain workers’ compensation insurance (see
“[a] workers’ compensation insurance policy or endorsement shall not be issued by an insurer to any person in [California] unless the insurer files a copy of the form or endorsement with the rating organization [WCIRB] . . . and 30 days have expired from the date the form or endorsement is received by the commissioner from the rating organization without notice from the commissioner.”
Sometime before 2011, the Department became aware that workers’ compensation insurers were entering into agreements with their insureds after the initial policy agreements, and that these subsequent agreemеnts were not being filed with the WCIRB or the Department. As reflected in a February 2011 letter written by a Department staff attorney to the president of the WCIRB, the Department took the position that these agreements were required by law to be filed with the State. The Department also expressed its view that arbitration provisions contained in unfiled agreements may be considered unenforceable absent proof that the insured expressly agreed to arbitration when it initially entered into the policy agreement.
In apparent accordance with that view, in 2011, the California Legislature enacted
II.
Turning to the facts of the appeal before us, National Union Fire Insurance Company of Pittsburgh, PA, is an insurance company licensed in Pennsylvania, with its principal place of business in New York. At various times between 2003 and 2010, National Union issued workers’ compensation policies to three different California-based employers—Monarch Consulting, Inc.,1 Priority Business Services, Inc., and Source One Staffing, LLC. After the execution of the policies—which were filed with the WCIRB and the Commissioner of Insurance without objection—National Union and the insureds, respectively, entered into various “Payment Agreements.” In accordance with the Agreements, National Union would extend credit to the insureds by deferring payments due under the policies in rеturn for the provision of collateral on behalf of the insureds. The Payment Agreements set forth the particulars of that arrangement and what would occur in the event of a default. National Union concedes that these Payment Agreements were never filed with the State of California. Nevertheless, the parties operated under the Agreements for several years.
Central to this dispute, the Payment Agreements contained arbitration clauses requiring that disputes arising out of the Agreements, if not resolved internally, be submitted to arbitration before a panel of three аrbitrators with certain qualifications and experience in the insurance industry. Significantly,
By early 2011, disputes arose between National Union and each of the insureds under the Payment Agreements. Ultimately, three separate proceedings were initiated in Supreme Court, involving a petition or cross petition by Natiоnal Union to compel arbitration in each case, and a petition by Monarch Consulting to stay arbitration. In the Monarch Consulting and Priority Business proceedings, Supreme Court granted National Union‘s petitions to compel arbitration and denied Monarch Consulting‘s petition to stay arbitration. In the Source One matter, Supreme Court denied National Union‘s petition to compel arbitration, and held that the Payment Agreements were unenforceable.
National Union, Monarch Consulting, and Priority Business appealed their respective adverse orders. Consolidating the appeals, the Appellate Division, with two Justices dissenting, reversed the orders compelling Monarch Consulting and Priority Business to arbitrate, and affirmed the order denying arbitration in the Source One matter (123 AD3d 51, 54 [1st Dept 2014]). The Appellate Division majority determined that, under California law, National Union was required to file the Payment Agreements with the State and that the appropriate penalty for its failure to do so was to decline to enforce the arbitration provisions. In the majority‘s view, this result did not contravene the FAA because the McCarran-Ferguson Act precluded its applicаtion inasmuch as requiring arbitration would impair and undermine the goals of
The dissenting Justices would have compelled arbitration in each case. The dissent posited that the McCarran-Ferguson Act did not reverse preempt the FAA because the California Insurance Code did not regulate the use of arbitration clauses in workers’ compensation insurance policies and endorsements and, consequently, application of the FAA would not “impair” California law (id. at 79 [Gische, J., dissenting]). In addition, the dissent would have held that, under the FAA, the arbitra-
National Union now appeals to this Court as of right (see
In response, the insureds—joined by the California Commissioner of Insurance as amicus curiae—argue that the Payment Agreements and the arbitration clauses are illegal and unenforceable because National Union failed to file them in accordance with
III.
To resolve the parties’ contentions, we must first determine whether the McCarran-Ferguson Act reverse preempts the FAA. The relevant analysis is a three-part test, pursuant to which the McCarran-Ferguson Act applies if: (1) the federal statute in question does not specifically relate to insurance; (2) the state law at issue was enacted to regulate the business of insurance; and (3) the federal statute at issue would invalidate, impair, or supersede the state law (see
As the Supreme Court explained in Humana Inc., “[t]he term ‘invalidate’ ordinarily means ‘to render ineffective, generally without providing a replacement rule or law‘” and “the term ‘supersede’ ordinarily means ‘to displace (and thus render ineffective) while providing a substitute rule’ ” (525 US at 307 [citations omitted]). The Supreme Court has interpreted the term “impair” more broadly to mean ” ‘[t]o weaken, to make worse, to lessen in power, diminish, or relax, or otherwise affect in an injurious manner’ ” (id. at 309-310, quoting Black‘s Law Dictionary 752 [6th ed 1990]). Although the term “impair” broadens the reach of the McCarran-Ferguson Act beyond federal statutes that directly conflict with a state law regulating insurance, “when application of the federal law would not frustrate any declared state policy or interfere with a State‘s administrative regime, the McCarran-Ferguson Act does not preclude its application” (id. at 310).
Applying the above definitions here, the McCarran-Ferguson Act does not reverse preempt the FAA with respect to
As the insureds point out, California courts have consistently found the FAA to be reverse preempted by the McCarran-Ferguson Act with respect to arbitration agreements in health care service plans (see Zolezzi v PacifiCare of California, 105 Cal App 4th 573, 588 n 11, 129 Cal Rptr 2d 526, 539 n 11 [2003]; Imbler v PacifiCare of California, Inc., 103 Cal App 4th 567, 573, 126 Cal Rptr 2d 715, 719-720, 723 [2002]; Smith v PacifiCare Behavioral Health of California, Inc., 93 Cal App 4th 139, 143, 113 Cal Rptr 2d 140, 142 [2001]). However, the result in those cases was compelled by the existence of a California statute mandating that certain disclosures be contained in arbitration provisions in health care plans (see
Moreover, although
We disagree with the insureds’ assertion that application of the FAA would undercut the Department‘s authority to review insurance agreements and incentivize violations of the filing requirement. Significantly, the determinаtion of whether
Our conclusion that the McCarran-Ferguson Act does not reverse preempt the FAA is supported by the weight of the relevant precedent. At least two courts in California have held that the McCarran-Ferguson Act is not triggered by the interaction between the FAA and
Accordingly, we hold that the McCarran-Ferguson Act does not prevent application of the FAA to the Payment Agreements at issue in this case.
IV.
We must next address whether, under the FAA, the enforceability of the Payment Agreements and their arbitration clauses is a question that should be resolved by arbitrators, or by the court.
” ‘[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he [or she] has not agreed so to submit’ ” (AT&T Technologies, Inc. v Communications Workers, 475 US 643, 648 [1986], quoting Steelworkers v Warrior & Gulf Nav. Co., 363 US 574, 582 [1960]; see First Options of Chicago, Inc. v Kaplan, 514 US 938, 943 [1995]). As the United States Supreme Court has stated,
The Supreme Court has also held that arbitration agreements must be enforced according to their terms, and that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability’ ” (Rent-A-Center, West, Inc. v Jackson, 561 US at 68-69; see Nitro-Lift Technologies, L.L.C., 568 US at —, 133 S Ct at 503; Buckeye Check Cashing, Inc., 546 US at 445). Such “delegation clauses” are enforceable where “there is ‘clea[r] and unmistakabl[e]’ evidence” that the parties intended to arbitrate arbitrability issues (First Options of Chicago, Inc., 514 US at 944, quoting AT&T Technologies, Inc., 475 US at 649). “When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state-law principles that govern the formation of contracts” (First Options of Chicago, Inc., 514 US at 944).
Further, “courts treat an arbitratiоn clause as severable from the contract in which it appears and enforce it according to its terms unless the party resisting arbitration specifically challenges the enforceability of the arbitration clause itself” (Granite Rock Co. v Teamsters, 561 US 287, 301 [2010]; see Nitro-Lift Technologies, L.L.C., 568 US at —, 133 S Ct at 503; Rent-A-Center, 561 US at 71; Buckeye Check Cashing, Inc., 546 US at 445). This rule of severability extends to delegation clauses, which are severable from larger arbitration provisions (see Rent-A-Center, 561 US at 71-72; Parnell v CashCall, Inc., 804 F3d 1142, 1146 [11th Cir 2015]; Brennan v Opus Bank, 796 F3d 1125, 1133 [9th Cir 2015]). Thus, where a contract contains a valid delegation to the arbitrator of the
Here, the crux of the insureds’ challenge to the arbitration provisions is that National Union‘s failure to file the Payment Agreements in accordance with
V.
In sum, we hold that the FAA applies to the Payment Agreements because it does not “invalidate, impair, or supersede” the California Insurance Code or any insurance regulations and, consequently, the McCarran-Ferguson Act is not triggered (
The insureds’ remaining arguments are unpersuasive. Accordingly, the order of the Appellate Division should be reversed, with costs. In the first captioned proceeding, Monarch Consulting‘s petition to stay arbitration should be denied and National Union‘s cross petition to compel arbitration should be granted. In the second and third captioned proceedings, National Union‘s petitions to compel arbitration should be granted.
Judges PIGOTT, RIVERA, ABDUS-SALAAM and FAHEY concur; Chief Judge DIFIORE and Judge GARCIA taking no part.
Order reversed, with costs, and (1) in Matter of Monarch Consulting, Inc. v National Union Fire Insurance Company of Pittsburgh, PA, petition to stay arbitration denied and cross petition to compel arbitration granted; (2) in Matter of National Union Fire Insurance Company of Pittsburgh, PA v Priority Business Services, Inc., petition to cоmpel arbitration granted; and (3) in Matter of National Union Fire Insurance Company of Pittsburgh, PA v Source One Staffing, LLC, petition to compel arbitration granted.