California Appellate Court Holds Arbitration Agreement and Delegation Clause Unenforceable for Failure to File with State Regulators
The California Court of Appeals became the latest court to determine that a common arbitration agreement related to the EquityComp workers’ compensation insurance program and accompanying reinsurance agreements is unenforceable because it was not filed with appropriate state regulatory authorities. This dispute arose from Luxor Cabs’s lawsuit over its workers’ compensation insurance, and the reinsurers’ motion to compel arbitration thereof pursuant to a reinsurance agreement it entered into with Luxor. Luxor challenged the enforceability of the arbitration agreement and delegation clause, and the trial court ultimately agreed and denied the motion to compel arbitration.
This case follows on the heels of a California insurance administrative decision declaring the EquityComp program violated state insurance laws and a reinsurance agreement (and arbitration clause) between the same reinsurers in this case and another insured were void and a case “essentially identical to this one” regarding arbitrability under a reinsurance agreement. On appeal, the court agreed with those recent precedents and the lower court, holding the arbitration clause was unenforceable.
First, the court upheld the trial court’s determination that the arbitration clause was unenforceable against claims that the arbitrability of the dispute should have been decided by the arbitrator pursuant to a delegation clause. The reinsurers argued that Luxor failed to “specifically and directly” challenge the delegation clause as required by the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson . The court dismissed that contention, finding Luxor sufficiently challenged the clause when it argued that the delegation clause was unfiled and unapproved by state regulators and that Nebraska law prohibited arbitration of insurance policy disputes. It likewise rejected the argument that Luxor’s challenge was insufficiently targeted at the delegation clause where Luxor made the same arguments against the delegation clause as against the arbitration clause more generally.
Second, the court agreed with the lower court that the reinsurance agreement (containing the arbitration and delegation clauses) should have been filed with state regulators and, because they weren’t, were unenforceable. The specifics of the agreement, and the arbitration and delegation clauses in particular, made clear that they were “collateral agreement[s]” that modified the underlying insurance policy’s dispute resolution procedures and therefore which required regulatory approval. In so concluding, the court referenced the recent precedents and how both reached similar conclusions with respect to “the specific RPA at issue in this case.”
Finally, the court concluded that the application of Nebraska substantive law provided an additional basis to hold the arbitration agreement unenforceable. Nebraska law, the law designated in the reinsurance agreement, explicitly prohibits arbitration of insurance policy disputes. Even though the lower court punted this issue, the court held that the Nebraska law reverse preempted the Federal Arbitration Act under McCarran-Ferguson.
Luxor Cabs, Inc. v. Applied Underwriters Captive Risk Assurance, Co., A147962 (Cal. Ct. App. Dec. 4, 2018).