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Failure to Comply with California Insurance Law Rendered Arbitration Clauses in Agreements Issued by a California Workers’ Compensation Insurance Carrier Unenforceable

The First Department, in a full-fledged opinion by Justice Moskowitz, over a dissent, determined that the arbitration clauses within payment agreements issued by the California workers’ compensation insurance carrier were not enforceable because the clauses had not been reviewed as required by California law.  The agreements provided that any arbitration be under the auspices of the Federal Arbitration Act (FAA).  But the court determined California’s insurance law was not preempted by the FAA (pursuant to the McCarran-Ferguson Act) and, therefore, the failure to comply with California law rendered the arbitration clauses void and unenforceable:

…”[T]he McCarran-Ferguson Act was an attempt to . . . assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation” (…see 15 USC § 1011). Courts have established a four-part test to determine whether the McCarran-Ferguson Act precludes application of a federal statute (in this case, the FAA). Under this test, a federal statute is precluded if: (1) the statute does not “specifically relate” to the business of insurance; (2) the acts challenged under the statute constitute the “business of insurance”; (3) the state has enacted laws regulating the challenged acts; and (4) the state laws would be “invalidated, impaired, or superseded” by application of the federal statute ….

…[T]he FAA does not specifically regulate the business of insurance, and an act specifically relating to the business of insurance is the only type of federal legislation that can preempt state insurance law under McCarran-Ferguson. Furthermore, application of the FAA would modify California law because it would mandate arbitration even though [the insurer] did not, as required by California law, file the payment agreements, and the payment agreements, in turn, contained the arbitration clauses. Matter of Monarch Consulting Inc v National Union Fire Ins Co of Pittsburgh PA, 2014 NY Slip Op 06158, 1st Dept 9-11-14

 

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