Citizens Of Humanity V. Applied Underwriters, Inc.


In Citizens of Humanity v. Applied Underwriters, Inc., ___ Cal. App. 5th __ (2017), the California Court of Appeal, Second Appellate District affirmed the trial court's denial of various defendants' petition to compel arbitration with plaintiffs Citizens of Humanity, LLC and CM Laundry, LLC (collectively, "Plaintiffs").

Plaintiffs purchased from the named defendants a workers' compensation insurance package and entered into a Reinsurance Participation Agreement ("RPA") with Applied Underwriters Captive Risk Assurance Company, Inc. ("AUCRA"), an affiliate of the other defendants. The agreement contains an arbitration provision that provides, in pertinent part, that disputes concerning the construction and enforceability of the provision are to be determined exclusively by binding arbitration. The agreement also contains a choice of law provision, stating that Nebraska law will govern without regarding to any conflict of laws. The other agreements between the parties do not contain an arbitration provision.

In February 2015, plaintiffs filed a complaint against defendants and AUCRA alleging causes of action against AUCRA for fraudulent inducement in entering into the arbitration agreement, breach of contract, and breach of the covenant of good faith and fair dealing; and against all of the defendants for fraud, false advertising, breach of fiduciary duty, professional negligence, and declaratory relief.

The parties filed competing motions to compel and to stay arbitration of their dispute. In their motion to stay the arbitration, plaintiffs argued that Nebraska law applied pursuant to the choice of law provision in the RPA and that the arbitration provision of the RPA was void under section 25-2602.01(f)(4) of the Nebraska Uniform Arbitration Act (NUAA), which prohibits arbitration of "any agreement concerning or relating to an insurance policy." Plaintiffs further argued that the Federal Arbitration Act (9 U.S.C. §§ 1-16) (FAA) did not preempt the NUAA because another federal statute, the McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015) mandates that state laws "regulating the business of insurance" preempt any federal statute not specifically related to the business of insurance and that impairs state insurance laws. (15 U.S.C. § 1012(b).) Defendants argued that the FAA governs and preempts the NUAA, and that under the RPA's broad delegation clause, any issue concerning arbitrability should be resolved by the arbitrator.

Before the hearing on defendants' motion to compel arbitration, plaintiffs dismissed AUCRA as a defendant. Plaintiffs then argued that the motion to compel arbitration should be denied because the only defendant that had signed the RPA had been dismissed. At the hearing on defendants' motion, the trial court requested supplemental briefing from the parties on a number of issues, including whether California or Nebraska law should be applied to determine whether defendants have the right to enforce the RPA's arbitration provision, whether Nebraska law bars arbitration of the parties' dispute, and whether the FAA or the McCarran-Ferguson Act applies.

In their supplemental brief, plaintiffs argued, among other things, that the McCarran-Ferguson Act displaced the FAA, that both California and Nebraska law applied to bar arbitration, and that the court, not the arbitrator, should determine the consequences of applying the McCarran-Ferguson Act. Defendants argued that the RPA's delegation...

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