Opinion
8:99CV94
October 21, 1999.
ORDER
This matter is before me pursuant to 28 U.S.C. § 636 and the general order of referral on defendant's motion to compel arbitration (#21). Having considered the briefs and evidence filed by both parties, I find that the motion should be denied. Accordingly, defendant will be required to answer or otherwise respond to the complaint by November 1, 1999, and the parties will be required to submit a revised Rule 26(f) planning report to the undersigned by November 15, 1999.
FACTUAL BACKGROUND AND ISSUES PRESENTED
On January 1, 1996, plaintiff ("Harbourton") purchased a mortgage protection insurance policy from defendant ("Travelers") covering the time period from January 1, 1996 through January 1, 1999. The policy (#22, Ex. A, p. 13) contains the following arbitration clause as a general policy condition:
All disputes between any Assured and The Travelers arising out of or related to this insurance (including disputes as to its construction, enforceability, or breach) shall be finally resolved by binding arbitration held under the Commercial Arbitration Rules of the American Arbitration Association. The arbitration panel shall consist of three persons, one to be appointed by [sic] jointly by all Assureds at interest in the dispute, one to be appointed by The Travelers, and the third to be appointed by the two arbitrators so appointed. The arbitration proceeding shall take place at the city and in the state shown in the Assureds mailing address in the Declarations of this policy but the arbitration panel may take evidence elsewhere if necessary for the convenience of the parties. The parties shall have those pre-trial discovery rights as are available under the Federal Rules of Procedure but all interim disputes pending the award of the arbitration panel shall be submitted to the arbitration panel for resolution. The award of the arbitration panel shall be final and shall assign all costs of the arbitration panel may be entered in the Federal District Courts located at the place of the arbitration proceeding [sic]. This arbitration provision shall be governed by the Federal Arbitration Act, but the construction of this insurance, and all disputes arising out of or related to this insurance, shall be governed by the law of the state shown in the Assureds mailing address in the Declarations of this policy [Nebraska].
Plaintiff alleges that, in early 1997, it became aware it would sustain certain losses covered by the policy. Plaintiff notified Travelers of the possibility two types of claims would be filed. The first group of claims (the "Mortgage Impairment Claims") are based on Harbourton's unintentional failure to obtain FHA insurance and/or VA guarantees for certain loans it originated, rendering Harbourton liable to repurchase such loans from third party purchasers of the loans. The second group of claims (the "Curtailment Claims") are based on Harbourton's unintentional failure to timely notify the FHA or VA that mortgage payments on certain loans insured or guaranteed by FHA and/or VA were in arrears, or otherwise failed to follow applicable instructions, rules or regulations of the FHA and/or VA.
Harbourton seeks, inter alia, a declaratory judgment pursuant to Neb. Rev. Stat. § 25-21,149 that the arbitration provision quoted above is invalid and unenforceable under Nebraska's version of the Uniform Arbitration Act, Neb. Rev. Stat. §§ 25-2601 et seq. ("UAA"), and the federal McCarran-Ferguson Act, 15 U.S.C. § 1012.
LEGAL ANALYSIS
The Federal Arbitration Act (FAA), 9 U.S.C. § 1-14, makes written arbitration provisions valid, irrevocable, and enforceable, except upon grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2. The FAA applies to any "contract evidencing a transaction involving commerce." 9 U.S.C. § 2. The FAA has preemptive effect and has been held to preempt state laws that preclude parties from submitting matters to arbitration.Perry v. Thomas, 482 U.S. 483 (1987); Southland Corp. v. Keating, 465 U.S. 1 (1984); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983); Dowd v. First Omaha Securities Corp., 242 Neb. 347, 495 N.W.2d 36 (1993).
In this case, the preemptive effect of the FAA is drawn into question by the operation of the McCarran-Ferguson Act, which provides, in part:
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . .15 U.S.C. § 1012(b). This legislation "precludes application of a federal statute in face of state law `enacted . . . for the purpose of regulating the business of insurance,' if the federal measure does not `specifically relat[e] to the business of insurance,' and would `invalidate, impair, or supersede' the State's law." Humana, Inc. v. Forsyth, 525 U.S. 299, ___, 119 S.Ct. 710, 716 (1999). "When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran-Ferguson Act does not preclude its application." Id. at 717.
The FAA does not specifically relate to the business of insurance. Thus, if Nebraska has a law that prohibits arbitration of coverage disputes between an insurance company and its insured, the FAA's preemptive effect may be precluded by operation of the McCarran-Ferguson Act. See Federated Rural Elec. Ins. Co. v. Nationwide Mut. Ins. Co., 874 F. Supp. 1204, 1206 (D.Kan. 1995). In this case, plaintiff argues that compelling arbitration pursuant to the FAA would "invalidate, impair, or supersede" the provision in the Nebraska UAA that exempts certain insurance disputes from arbitration.
Arbitration is a substantive, not procedural, matter. Dowd v. First Omaha Securities Corp., 242 Neb. at 354, 495 N.W.2d at 41 (citing Moses H. Cone Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). Under Nebraska law, statutes covering substantive matters in effect at the time of a transaction govern, not later enacted statutes. Shkolnick v. American Fam. Mut. Ins. Co., 506 N.W.2d 356, 361 (Neb.Ct.App. 1993) (citing Schall v. Anderson's Implement, Inc., 240 Neb. 658, 484 N.W.2d 86 (1992)). In this case, therefore, the Nebraska statutes effective on January 1, 1996, are controlling.
Defendant argues that, on January 1, 1996, Nebraska had no effective statute invalidating arbitration in an insurance setting as a result of State v. Nebraska Ass'n of Public Employees, 239 Neb. 653, 477 N.W.2d 577 (1991) ("NAPE"), where the Nebraska Supreme Court held that the provisions in the Nebraska UAA "authorizing binding arbitration of future disputes" violated Neb. Const. art. I, § 13. At that time, the Nebraska UAA, Neb. Rev. Stat. § 25-2602 (Reissue 1989) provided:
Validity of arbitration agreement. A written agreement to submit any existing controversy to arbitration is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract. A provision in a written contract to submit to arbitration any controversy thereafter arising between the parties, other than a claim arising out of personal injury based on contract or tort, is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract, if the provision (a) is entered into voluntarily and willingly and (b) is not a part of a contract of adhesion, such as a standard installment loan contract, a consumer credit application, a credit card application, or an insurance contract except as provided in section 44-811 . The Uniform Arbitration Act also applies to arbitration agreements between employers and employees or between their respective representatives. Contract provisions agreed to by the parties shall control over contrary provisions of the Uniform Arbitration Act. A claim for workers' compensation shall not be subject to arbitration under the Uniform Arbitration Act. When a conflict exists, the Uniform Arbitration Act shall not apply to sections 44-811, 54-404 to 54-406, 60-2701 to 60-2709, 70-1301 to 70-1329, and 86-408 to 86-410 and the Uniform Act on Interstate Arbitration and Compromise of Death Taxes.
(Emphasis added).
The plain language of the NAPE opinion invalidates only the provisions in the Nebraska UAA that authorized binding arbitration of future disputes. The clause at issue in this case exempted certain categories of cases from binding arbitration of future disputes and was not in conflict with the Nebraska Constitution. The clause was, therefore, severable from the objectionable portion of the statute and remained in effect during the time in question. See Teters v. Scottsbluff Pub. Sch., 256 Neb. 645, 652, 592 N.W.2d 155, 160 (1999) (factors bearing on severability). For this reason, the court does not reach Harbourton's argument that Neb. Rev. Stat. § 25-2621 makes the Nebraska UAA applicable to all contracts entered into after August 30, 1987. In any event, the Nebraska Supreme Court acknowledged in 1994 that the NAPE rule could not be enforced if it conflicted with the laws of the United States: "The Supremacy Clause of the U.S. Constitution dictates that state law, including constitutional law, is superseded to the extent it conflicts with federal law. . . . Therefore, this court's holdings that a predispute agreement to compel arbitration is void are preempted to the extent they conflicted with the FAA." Dowd v. First Omaha Securities, 242 Neb. at 347, 495 N.W.2d at 39.
The narrow question presented is whether the language of Neb. Rev. Stat. § 25-2602 (Reissue 1989) highlighted above was enacted for the purpose of regulating the "business of insurance," thus falling within the purview of the McCarran-Ferguson Act. Dicta inRawlings v. Amco Ins. Co., 231 Neb. 874, 877, 438 N.W.2d 769, 771 (1989), a homeowner's insurance coverage dispute, suggests that it was:
Amco's final suggestion, that the recent enactment of the Uniform Arbitration Act, Neb. Rev. Stat. §§ 25-2601 et seq. (Cum. Supp. 1988), evidences a public policy in support of the position Amco advances, is also devoid of substance. While that act purports to authorize executory agreements to arbitrate certain disputes, it specifically exempts from its contemplation insurance contracts such as is involved in this case. § 25-2602 . Whatever may be the import of that legislation, it is not before us, and, thus, nothing more need, should, or will be said about it.
In resolving whether a state law or regulation fits within the "business of insurance," the federal courts consider (1) whether the practice has the effect of transferring or spreading a policyholder's risk; (2) whether the practice is an integral part of the policy relationship between the insurer and the insured; and (3) whether the practice is limited to entities within the insurance industry. No one factor is determinative of whether a particular statute regulates the business of insurance, and a statute need not satisfy all three factors. See Unum Life Ins. Co. of America v. Ward, 119 S.Ct. 1380, 1386 (1999).
In Mutual Reinsurance Bureau v. Great Plains Mut. Ins. Co., Inc., 969 F.2d 931 (10th Cir.), cert. denied, 506 U.S. 1001 (1992), the Court of Appeals held that a provision of the Kansas Uniform Arbitration Act, K.S.A. § 5-401, was a law enacted for the purpose of regulating the business of insurance as that term is used in the McCarran-Ferguson Act. The statute provided, in part:
Validity of arbitration agreement. A written agreement to submit any existing controversy to arbitration or a provision in a written contract, other than a contract of insurance . . ., to submit to arbitration any controversy, other than a claim in tort, thereafter arising between the parties is valid, enforceable and irrevocable. . . ."
The court determined that the statute governed an integral part of the policy relationship between the insurer and the insured:
We are mindful of the Supreme Court's statement in [Securities and Exch. Comm'n v. National Sec., 393 U.S. 453, 460, 89 S.Ct. 564, 568 (1969)] that statutes aimed at protecting the relationship between the insurance company and the policyholder "directly or indirectly, are laws regulating the `business of insurance.'" National Securities, 393 U.S. at 460, 89 S.Ct. at 568-69. Section 5-401 directly regulates the relationship between the insurance company and its policyholder by stating that an agreement between the two to arbitrate a dispute is unenforceable. To expressly invalidate an agreement contained in the insurance contract touches the core of the "business of insurance" as explained in National Securities. Id.
With regard to the criterion identified in [Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S.Ct. 3002 (1982)] concerning the underwriting of risk, it should be noted that a contract of insurance is evidence of an agreement to spread risk. Section 5-401 has the effect of invalidating any arbitration provision included in such a contract. Simply put, the Kansas legislature has placed limits on the enforceability of an agreement to spread risk by enacting K.S.A. § 5-401.969 F.2d at 933.
I find that the applicable Nebraska statute, Neb. Rev. Stat. § 25-2602 (Reissue 1989), similarly governs an integral part of the policy relationship between the insurer and the insured. Thus, the statute was enacted for the purpose of regulating the "business of insurance" and falls within the purview of the McCarran-Ferguson Act. For this reason, the FAA does not have a preemptive effect and the arbitration clause in Harbourton's insurance policy is not enforceable. The motion to compel arbitration must, therefore, be denied.
IT IS ORDERED:
1. Defendant's motion to compel arbitration (#21) is denied.
2. The stay imposed by this court on October 7, 1999, is hereby dissolved.
3. Defendant shall answer or otherwise respond to the complaint on or before November 1, 1999. This deadline shall remain in effect even if defendant appeals this order to the district court, unless the district court expressly grants defendant an extension of time to answer or otherwise respond to the complaint.
4. The parties shall submit a revised Rule 26(f) planning report to the undersigned on or before November 15, 1999. This deadline shall remain in effect even if defendant appeals this order to the district court, unless the district court expressly grants defendant an extension of time to submit the report.
Pursuant to NELR 72.3 any appeal of this order shall be filed with the Clerk of the Court within ten (10) days after being served with a copy of this order. Failure to timely appeal may constitute a waiver of any such objection. The brief in support of any appeal shall be delivered to the district judge to whom this case is assigned at the time of filing such appeal. Failure to submit a brief in support of any appeal may be deemed an abandonment of the appeal.