United States: Court Finds State Law Barring Insurance Arbitrations Reverse-Preempts Federal Arbitration Act

The case involved a dispute between the parties to a Reinsurance Participation Agreement (RPA). Defendants moved to compel arbitration, citing the Federal Arbitration Act and a provision in the RPA agreeing to resolve "[a]ll disputes arising with respect to any provision of this Agreement" in arbitration. However, the RPA also contained a choice of law provision providing that "[t]his Agreement shall be exclusively governed by and construed in accordance with the laws of Nebraska." Plaintiffs argued that the Nebraska Uniform Arbitration Act (NUAA), which prohibits enforcement of an arbitration clause in any "agreement concerning or relating to an insurance policy," made the arbitration provision unenforceable.

In most cases, the FAA would preempt a state law regarding arbitration, but the McCarran-Ferguson Act allows state laws "regulating the business of insurance" to preempt any federal statute that is not specifically related to the business of insurance and impairs a state insurance law. Defendants argued that the FAA preempts the NUAA and that the RPA requires all questions concerning construction or enforceability of the arbitration clause, including the applicability of the NUAA, to be decided by the arbitrator.

The court rejected defendants' arguments, finding first that the question of whether the FAA preempts the NUAA is not a question of arbitrability that an arbitrator can decide. The court then determined that the FAA does not regulate the business of insurance, that the relevant portion of the NUAA was "enacted for the purpose of regulating the business of insurance," and that application of the FAA would operate to impair the NUAA. Thus, all of the conditions set by the McCarran Ferguson Act for a state law to preempt the FAA were met. As a result, the court found that the NUAA rendered the arbitration clause in the RPA unenforceable and denied plaintiffs' motion to compel arbitration. Citizens of Humanity v. Applied Underwriters, Inc., Case No. B276601 (Cal. Ct. App. Nov. 22, 2017).

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