S. Jersey Sanitation Co. v. Applied Underwriters Captive Risk Assurance Co.

• Decision Date: 25 October 2016
• Docket Number: No. 14-4010,14-4010
• Citation: 840 F.3d 138
• Parties: South Jersey Sanitation Company, Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., Appellant
• Court: U.S. Court of Appeals — Third Circuit

840 F.3d 138

South Jersey Sanitation Company, Inc.

v.Applied Underwriters Captive Risk Assurance Company, Inc., Appellant

No. 14-4010

United States Court of Appeals, Third Circuit.

Argued January 20, 2016

Opinion Filed: October 25, 2016

Susan Karlovich, Esq., Thomas F. Quinn, Esq. [ARGUED], Wilson, Elser, Moskowitz, Edelman & Dicker LLP, 200 Campus Drive, Florham Park, NJ 07932, Counsel for Appellant

Louis M. Barbone, Esq. [ARGUED], Jacobs & Barbone, P.A., 1125 Pacific Avenue, Atlantic City, NJ 08401, Counsel for Appellee

Before: JORDAN, HARDIMAN, and GREENAWAY, JR., Circuit Judges.

OPINION

GREENAWAY, JR.

, Circuit Judge.

I. INTRODUCTION

Applied Underwriters Captive Risk Assurance Company, Inc. (“Applied Underwriters”), a Berkshire Hathaway Company, appeals from the District Court's denial of its motion to compel arbitration in its contract-based dispute with Appellee South Jersey Sanitation Company, Inc. (“South Jersey”). Because we find that South Jersey's purported challenges to the arbitration agreement apply to the parties' contract as a whole, rather than to the arbitration agreement alone, the parties' dispute is arbitrable and we will reverse.

II. FACTUAL AND PROCEDURAL BACKGROUND

South Jersey is a trash-removal business with over eighty employees. On September 3, 2008, as its workers' compensation insurance policy neared expiration, South Jersey, through its insurance agent, entered into a Reinsurance Participation Agreement (“RPA”) with Applied Underwriters. The stated purpose of the RPA is to establish South Jersey's participation “in [Applied Underwriters's] segregated protected cell reinsurance program.”¹ (App. 96.)

The RPA, which has a three-year term, contains a one-and-one-half-page arbitration provision, according to which “any disputes arising under [the RPA]” would be arbitrated either in Tortola or in a location on which the parties agreed. (App. 98–100.) It also contains a choice-of-law provision, which indicates that the RPA “shall be exclusively governed by” Nebraska law. (App. 100.) The RPA and its attached tables of “Loss Development Factors,” “Exposure Group Adjustment Factors,” and “Loss Pick Containment Rates and Estimated Annual Amounts,” total ten pages.

In its complaint, South Jersey alleges that it entered into the RPA when its workers' compensation insurance was about to expire in the belief that the RPA was a replacement workers' compensation insurance policy. South Jersey argues that Applied Underwriters fraudulently presented the RPA as such an insurance policy. South Jersey contends that, in reality, the RPA is a retrospective rating or “retro” insurance policy pursuant to which South Jersey's premiums for each payment policy period would be based on claims paid during the previous period. South Jersey alleges that it was promised that it could “realize ‘huge rebates' at the end of the policy term in the event that premiums far outweighed the payouts required for worker's compensation benefits.” (App. 2.)

South Jersey also notes in its complaint that Applied Underwriters is “not an insurer defined under New Jersey statutes” and therefore cannot issue workers' compensation insurance policies in New Jersey. (App. 6.) Nevertheless, in its appellate brief, South Jersey posits that “the plain language of the RPA clearly relates to, concerns[,] and actually issues a workers' compensation policy to [South Jersey].”² (Appellee Br. 7.)

Before the District Court, Applied Underwriters represented that South Jersey purchased a primary workers' compensation insurance policy from Continental Indemnity Company (“Continental”). Like Applied Underwriters, Continental is a Berkshire Hathaway Company. Continental then entered into a pooling agreement with California Insurance Company (“California”), another Berkshire Hathaway Company. (App. 142–43.) This pooling agreement was a reinsurance treaty.³ Applied Underwriters, in turn, provided reinsurance to California and, derivatively, to Continental.

According to Applied Underwriters, the RPA was not a workers' compensation insurance policy, but rather an investment instrument. Applied Underwriters argues that the RPA “is simply not an ‘insurance policy,’ but rather a contract ‘relating [to] or concerning’ a reinsurance policy.” (Appellant Br. 30.) Applied Underwriters further contends that, under the RPA, if South Jersey “had low cost [workers' compensation] claims, it would receive a profit [-]sharing distribution under the RPA from its segregated protected cell. If its losses were high, it enjoyed the cap protection of the maximum threshold in the RPA.” (Id. at 6.) Essentially, the RPA would allow South Jersey to speculate as to its future performance under its actual workers' compensation policy with Continental by “financially shar[ing] in the underwriting results based on actual losses incurred and the size of its payroll.” (Appellee Br. 6.) Indeed, Paragraph Three of the RPA indicates that “Participant is participating in this Agreement for purposes of investment only.” (App. 96.)

For two years and ten months of the RPA's three-year period, South Jersey received and paid monthly invoices for premiums ranging from $40,000 to $50,000, with the expectation of receiving a rebate at the end of the policy period. South Jersey based its expected refund on the fact that it had “paid in excess of $1,200,000 in premiums” over the term of the RPA and that the workers' compensation claims paid on its behalf “totaled the approximate amount of $355,000 over three years.”⁴ (App. 3.) “In July of 2011[,] however, approximately two months before the calculation of [South Jersey's] rebate, [Applied Underwriters] sent a premium invoice in the amount of $218,887.04.” (Suppl. App. 23.) South Jersey alleges that, when it contacted Applied Underwriters about this amount, it was told that the premium was driven by loss history.

South Jersey asserts that it paid $60,000 to avoid cancellation of the RPA, but that Applied Underwriters nevertheless issued a “Notice of Cancellation effective August 1, 2011.” (App. 4.) South Jersey then secured a workers' compensation insurance policy with a different carrier, and Applied Underwriters continued to send South Jersey invoices for fluctuating amounts. Ultimately, Applied Underwriters declared that South Jersey owed $300,632.94 in an invoice dated September 26, 2012.⁵ South Jersey did not pay, and Applied Underwriters filed a demand for arbitration with the American Arbitration Association seeking this amount on September 26, 2013.

On October 31, 2013, South Jersey filed a complaint in the New Jersey Superior Court, Chancery Division, seeking declaratory relief as to the arbitration provision and rescission of the RPA (Counts One and Two), as well as damages for breach of contract (Count 3); fraud, intentional misrepresentation, and illegality (Count 4); and negligent misrepresentation (Count 5).

On November 4, 2013, Applied Underwriters removed the case to federal court on the basis of diversity jurisdiction. South Jersey moved to remand the case to state court one month later. Applied Underwriters responded by filing a motion to dismiss and to compel arbitration in lieu of an answer.

The District Court heard arguments on these motions on May 5, 2014, and denied South Jersey's motion to remand that day. On August 25, 2014, the Court denied the motion to compel arbitration and ordered Applied Underwriters to file an Answer. The District Court based its denial on the following findings: (1) Nebraska law governs the dispute pursuant to the RPA's choice-of-law clause; (2) Section 25–2602.01 of the Nebraska Revised Statutes

(“the Nebraska Statute”) “sets forth that all arbitration provisions ‘concerning or relating to an insurance policy,’ except those ‘between insurance companies,’ are unenforceable” (App. 33); (3) “the RPA is not a contract between insurance companies” (App. 34); (4) the Nebraska Statute preempts the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1 –16,⁶ through the McCarran–Ferguson Act (“M–FA”), 15 U.S.C. §§ 1011 –1015 ;⁷ and (5) the arbitration provision is therefore unenforceable.

Applied Underwriters filed a notice of appeal on September 19, 2014. It argues that the District Court erred in reaching the issue of reverse-preemption without first considering whether arbitrability is a question for the courts or the arbitrator; that arbitrability is, in fact, a question for the arbitrator under the terms of the RPA; that the Nebraska statute does not reverse-preempt t the FAA; and that, even if it did, the Nebraska Statute is inapposite, inasmuch as the RPA does not fall within its purview.

South Jersey counters that the District Court properly determined that the RPA falls within the scope of the Nebraska Statute, that the Nebraska Statute reverse-preempts the FAA, and that the RPA's arbitration provision is therefore unenforceable. South Jersey adds that Count Four of its Complaint, entitled “Fraud, Intentional Misrepresentation and Illegality” (App. 12.), “serves as an additional basis to invalidate the arbitration agreement, or the contract as a whole, without contravening the FAA” (Appellee Br. 5).

III. JURISDICTION & STANDARD OF REVIEW

The District Court had jurisdiction pursuant to 28 U.S.C. § 1332(a)

; this Court has jurisdiction pursuant to 9 U.S.C. § 16(a)(1)(C) and 28 U.S.C. § 1292(a)(1).

Our review of all facets of this appeal is plenary. First, “[w]e exercise plenary review over questions regarding the validity and enforceability of an agreement to arbitrate.” Puleo v. Chase Bank USA, N.A. , 605 F.3d 172, 177 (3d Cir. 2010)

(en banc). Second, because preemption determinations are questions of law, we review such determinations de novo. Horn v. Thoratec Corp. , 376 F.3d 163, 166 (3d Cir. 2004) (citations omitted). Finally, to the extent that this appeal requires construction of statutory or contractual provisions, our review is also plenary. Viera v. Life Ins. Co. of N. Am. , 642 F.3d 407, 413 (3d Cir. 2011) (contract...