Federal Law Requires Disputes Over Workers’ Comp Insurance Payment Agreements be Decided by Arbitration

The highest New York state court has ruled that disputes over workers’ compensation insurance payment agreements between National Union and three California-based employer insureds must be decided by arbitration under arbitration clauses of those agreements and the Federal Arbitration Act (the FAA). The case, filed on February 18, 2016, is In the Matter of Monarch Consulting, Inc. et al. v. National Union Fire Insurance Company of Pittsburgh, PA, 2016 N.Y. LEXIS 202.

In so holding, the court rejected the policyholders’ contention – joined by the California Commissioner of Insurance as “friend of the court” – that the 1945 federal McCarran-Ferguson Act (the Act) prevented either party from invoking the FAA, because it allegedly invalidated, impaired or superseded a California statute requiring an insurer to file with the state’s rating bureau copies of its workers’ compensation insurance policies and their endorsements before they are issued to policyholders. Although the workers’ compensation policies themselves were so filed, this was not true of certain payment agreements by which National Union deferred payments due it under the policies in exchange for the posting of collateral by or for the insureds. The payment agreements included arbitration clauses requiring that disputes arising from the agreements be submitted to arbitration. The parties agreed, too, that the arbitrators would have exclusive jurisdiction over the entire matter in dispute, including any question of its arbitrability, and that any court proceedings regarding arbitration be commenced in New York state.

Some background regarding the Act is necessary to understand the new court decision. In 1944 the United States Supreme Court decided that the federal government has the power under the Constitution to regulate the nation’s insurance industry. Congress, concerned that the ruling would interfere with state regulation of insurance, reacted by passing the Act to limit federal preemption of state law regarding insurance. The Act declared that Congress favored continued state regulation of insurance, and that silence by Congress must not be construed to impede such continued state regulation. The Act, therefore, stated that no act of Congress may be construed to invalidate, impair, or supersede any state law regulating the business of insurance, unless the federal enactment itself specifically relates to the business of insurance.

Put another way, under the Supremacy Clause of the Constitution, when Congress enacts a law specifically relating to insurance, that law controls over state law regulating insurance. But the Act prevents this from happening where the federal measure – here the FAA – does not specifically relate to the business of insurance.

The court applied a three part test to determine whether or not the Act leaves the FAA alone to fulfill its aim to insure judicial enforcement of privately made agreements to arbitrate. The Act would not reach that result here if only (1) the FAA does not specifically relate to insurance, (2) the state law at issue – the California state filing requirement – was enacted to regulate the business of insurance, and (3) the FAA, if applied, would invalidate, impair or supersede the state filing requirement.

The first two prongs of the test were satisfied. That is, the FAA does not specifically relate to insurance, and the California filing requirement was enacted to regulate the business of insurance. Thus, whether or not the Act applied turned on whether applying the FAA – assuming it mandated arbitration here – would invalidate, impair or supersede the California filing statute.

The court answered that final question with a firm “no,” because the California filing law would not be invalidated, superseded or impaired by applying the FAA to the parties’ dispute under the payment agreements. California law simply did not at the relevant time prohibit, limit or regulate the use or form of arbitration clauses in insurance contracts. (It may do so now under a 2011 statute – not relevant to the time frame of the events of this case – governing the use of dispute resolution or arbitration agreements in workers’ compensation insurance policies.)

The court distinguished cases involving arbitration agreements in California health care service plans. There, the court pointed out, the opposite result was compelled by a California statute requiring certain disclosures be made in arbitration clauses of such plans, and applying the FAA would have absolutely precluded enforcement of the statute regulating the wording and organization of arbitration clauses.

The court went on to address whether, under the FAA, the enforceability of the payment agreements and their arbitration causes should itself be resolved by arbitration or by a court. Following the lead of the United State Supreme Court, the New York court held that arbitration agreements must be enforced according to their terms, and that the parties may agree in their contracts to arbitrate what are known as “gateway” questions of “arbitrability.” Accordingly, the parties may delegate to the arbitrators the power to determine the legal questions pertaining to the breadth of their contractual arbitration clauses.

In summary, the could held that the FAA applies to the workers’ compensation insurance payment agreements of the parties, because the FAA does not invalidate, impair or supersede California’s workers’ compensation insurance policy filing requirement statute. Furthermore, the parties delegated to the arbitrators resolution of the enforceability of the payment agreements and their arbitration clauses, so those issues are to be resolved as part of the arbitration. Accordingly, the court expressed no view on whether National Union’s failure to file the payment agreements rendered the payment agreements or their arbitration clauses unenforceable. The arbitrators, the court said, can competently decide that question.