A recent ruling by the New York State Court of Appeals underscores the Federal Arbitration Act’s(“FAA”) strong policy favoring enforcement of arbitration agreements—even in the insurance industry and despite federal policy generally favoring state regulation of the business of insurance. 

The case, In re Monarch Consulting, Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA, 26 N.Y.3d 659 (Feb. 18, 2016), involved the interplay of three statutes—the FAA, which establishes a federal policy in favor of enforcing arbitration agreements; the McCarran-Ferguson Act, which establishes a federal policy in favor of state regulation of insurance; and California Insurance Code § 11658, which requires workers’ compensation insurers of California employers to file copies of insurance policies, endorsements and related forms with the Workers’ Compensation Insurance Rating Bureau of California (“WCIRB”) for review before they are issued.  Applying the McCarran-Ferguson “reverse preemption” test, the New York State Court of Appeals ruled that, if a state statute regulating insurance expressly prohibits arbitration of insurance-related disputes, the FAA is reverse preempted and cannot be used to enforce agreements to arbitrate such disputes; conversely, if a state insurance statute is silent as to the enforceability of arbitration agreements, the FAA would apply and those agreements would generally be enforced.

The facts underlying the case are straightforward.  Between 2003 and 2010, National Union Fire Insurance Company issued workers’ compensation policies to several California-based employers, and also entered into related “Payment Agreements” with them.  The Payment Agreements contained provisions requiring arbitration of disputes, but they were never filed with the WCIRB, as required under California law.  In 2011, a dispute arose related to the Payment Agreements, and three separate proceedings were commenced in New York.  In support of its petitions to compel arbitration of these disputes, National Union relied on the arbitration provisions in the Payment Agreements.  The employers argued that the arbitration provisions were not enforceable because National Union never filed the Payment Agreements with the WCIRB.  26 N.Y.3d at 670.  After inconsistent rulings in the lower courts, the cases were taken to the New York State Court of Appeals.

As the Court of Appeals noted, McCarran-Ferguson nullifies application of a federal statute if three conditions are met:  “(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.”  26 N.Y.3d at 670.  The first two conditions were easily satisfied in this case, because the FAA does not specifically relate to insurance, and the California Insurance Code was enacted to regulate the business of insurance.  The Court found, however, that the third condition was not satisfied because the FAA would not “invalidate, impair, or supersede” the California statute.  That statute requires that policies and related forms (including the Payment Agreements) be filed with the WCIRB, but it is silent as to arbitration.  The Court contrasted this silence with other states’ statutes that expressly prohibit arbitration of insurance-related disputes.  In these other states, the third-prong of the McCarran-Ferguson test would be satisfied, and the FAA would be reverse preempted.  26 N.Y.3d at 672.  The Court left the question of the enforceability of the Payment Agreements and their arbitration clauses to be decided in arbitration.

The insurance company victory in this case may be short-lived.  California has amended its insurance law to require certain disclosures concerning dispute resolution provisions in insurance policies issued or renewed after July 1, 2012, and this amendment seems to preclude arbitration in the absence of compliance.

Employers in the insurance industry should consult with counsel on whether their own states’ statutes address arbitration of insurance disputes, and, consequently, whether arbitration provisions in their insurance policies are at risk.  We have written previously on the United States Supreme Court’s vigorous enforcement of the FAA (see here).  This recent New York decision bolsters this message and sets an important precedent for the insurance industry.

*Nicole Zolla is a law school intern currently attending Brooklyn Law School and also contributed to this article.