Publications

(Article from Insurance Law Alert, November 2016)

For more information, please visit the Insurance Law Alert Resource Center.

The Third Circuit granted a motion to compel arbitration, finding that an arbitrator should address challenges to the arbitration agreement and the applicability of a Nebraska statute barring arbitration of insurance disputes.  South Jersey Sanitation Co., Inc. v. Applied Underwriters Captive Risk Assurance Co., 840 F.3d 138 (3d Cir. 2016).

South Jersey, a garbage collection company, entered into a Reinsurance Participation Agreement (“RPA”) with Applied Underwriters.  The parties disputed the purpose and effect of the contract; South Jersey contended that the RPA provided coverage for workers’ compensation claims whereas Applied Underwriters argued that it operated only as an investment instrument.  South Jersey sued Applied Underwriters seeking rescission of the RPA and alleging breach of contract, negligent misrepresentation and fraud.  Applied Underwriters moved to compel arbitration based on an arbitration provision in the RPA.  A New Jersey federal district court denied the motion and ruled that under the RPA’s choice-of-law clause, Nebraska law governed the dispute and that a Nebraska statute barring arbitration of insurance disputes (Neb. Rev. Stat. Section 2602.01) reverse preempts the Federal Arbitration Act pursuant to the McCarran-Ferguson Act.  The Third Circuit reversed.

The Third Circuit explained that under the Federal Arbitration Act, fraud-based challenges to an arbitration provision may be resolved by a court.  However, “[i]f the challenge encompasses the contract as a whole, the validity of that contract, like all other disputes arising under the contract, is a matter for the arbitrator to decide.”  The court concluded that South Jersey’s fraud claims must be resolved in arbitration because they contest the validity of the RPA as a whole, rather than only the arbitration provision.  The court also rejected the district court’s reverse-preemption ruling.  It reasoned that it is unclear whether the RPA falls within the scope of the Nebraska anti-arbitration statute and that South Jersey’s contention that the RPA “clearly relates to, concerns and actually issues a workers’ compensation policy” is insufficient to establish that the RPA is “an agreement concerning or relating to an insurance policy,” as required by Section 2602.01.  The court therefore concluded that the arbitration panel must decide whether the RPA falls within the ambit of Section 2602.01 so as to give rise to a reverse preemption issue.