Mutual Reinsurance Bureau v. Great Plains Mut. Ins. Co., Inc., 91-3119

• Citation: 969 F.2d 931
• Decision Date: 13 July 1992
• Docket Number: No. 91-3119,91-3119
• Parties: In the Matter of the Arbitration of MUTUAL REINSURANCE BUREAU, Claimant-Appellee, v. GREAT PLAINS MUTUAL INSURANCE COMPANY, INC., Respondent-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 931

969 F.2d 931

In the Matter of the Arbitration of MUTUAL REINSURANCE BUREAU, Claimant-Appellee, v. GREAT PLAINS MUTUAL INSURANCE COMPANY, INC., Respondent-Appellant.

No. 91-3119.

United States Court of Appeals Tenth Circuit.

July 13, 1992.

Norman R. Kelly of Norton, Wasserman, Jones & Kelly, Salina, Kan., for respondent-appellant.

Clarence L. King, Jr. and Larry G. Michel of Hampton, Royce, Engleman & Nelson, Salina, Kan., for claimant-appellee.

Before SEYMOUR, SETH, and ALDISERT ^*, Circuit Judges.

SETH, Circuit Judge.

After examining the briefs and appellate record, this panel has determined unanimously that oral argument would not materially assist the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Cir.R. 34.1.9. The cause is therefore ordered submitted without oral argument.

This appeal arose from a diversity action to enforce an arbitration award in accordance with the Federal Arbitration Act, 9 U.S.C. § 1. Appellant Great Plains Mutual Insurance Company appeals from an order of the District Court for the District of Kansas confirming an arbitration award in favor of Appellee Mutual Reinsurance Bureau. 750 F.Supp. 455. Appellant contends that an arbitration clause in a reinsurance agreement between it and Appellee is unenforceable under K.S.A. § 5-401 and the McCarran-Ferguson Act, 15 U.S.C. *932s § 1011-1015. We agree and reverse the decision of the district court.

In January of 1987, Appellant, a Kansas mutual insurance company, contracted with Appellee to reinsure certain losses that might be sustained by Appellant. Under the reinsurance agreement, Appellant was responsible for the first $150,000 of the net loss attributable to any one occurrence and Appellee was liable for amounts over $150,000 not to exceed $427,500. A clause in the reinsurance agreement provided that in case of a dispute between the parties, either party could submit the dispute to binding arbitration.

On August 17, 1987, Kansas was struck by a storm which caused damage to property insured by Appellant. On August 19, 1987, either that same storm or a different storm struck Kansas and damaged property insured by Appellant. Appellant made a claim against Appellee under the reinsurance agreement claiming that the storms of August 17 and 19 were one occurrence. Initially, Appellee made payments to Appellant totaling $275,401.09. These payments were made based on Appellee's position that the storms were separate occurrences. On December 1, 1987, Appellee notified Appellant that it was not waiving any of its rights under the reinsurance agreement. On January 4, 1988, Appellee sent a letter to Appellant announcing its intention to send the matter of whether the storms were one event or two to arbitration pursuant to the agreement.

The matter proceeded to arbitration under the terms set forth in the reinsurance agreement. Appellant refused to participate in the arbitration proceedings asserting that the arbitration clause in the reinsurance agreement was not enforceable under K.S.A. § 5-401. After an evidentiary hearing, the arbitrators found that the storms which passed through Kansas on August 17 and 19 were the result of separate storm systems and therefore were separate occurrences. The arbitrators also ruled that because Appellee's payments were conditional, Appellee was entitled to reimbursement of $142,500 that it had overpaid Appellant.

Appellant refused to pay the award contending it was void and unenforceable. Federal jurisdiction existed independently and Appellee filed suit in the United States District Court for Kansas pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (the "FAA"), to confirm the award of the arbitrator. The district court entered judgment for Appellee and this appeal followed.

Appellant contends that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, precludes the application of the FAA to the reinsurance agreement. Appellant argues that the FAA would conflict with K.S.A. § 5-401 and, therefore, under the McCarran-Ferguson Act, K.S.A. § 5-401 controls.

The McCarran-Ferguson Act 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...." 15 U.S.C. § 1012(b). The district court held that K.S.A. § 5-401 did not regulate the "business of insurance" and, therefore, the FAA did not "invalidate, impair, or supersede" a law of the state of Kansas enacted for the purpose of regulating the "business of insurance."

Thus, the issue before us is whether K.S.A. § 5-401 is a law enacted for the purpose of regulating the "business of insurance" as that term is used in the McCarran-Ferguson Act. We hold that § 5-401 is a law enacted for the purpose of regulating the "business of insurance" and reverse the decision of the district court.

The version of K.S.A. § 5-401 in effect at the time the reinsurance agreement was executed provided:

"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...."

(Emphasis added.)

The McCarran-Ferguson Act does not define "business of insurance" either in its text or in its legislative history. We are guided, however, by a trilogy of Supreme Court cases construing the term.

In the first of these three cases, Securities and Exch. Comm'n v. National Sec., 393 U.S. 453, 460, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969), the Supreme Court emphasized that the relationship between the insurer and insured was of paramount importance in determining what constitutes the "business of insurance." The Court said:

"The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement--these were the core of the 'business of insurance.' Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was--it was on the relationship between the insurance company and the policyholder. Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws governing the 'business of insurance.' "

Id.

Later, in Group Life and Health Ins. Co. v. Royal Drug, 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), the Court again emphasized that Congress, in passing the McCarran-Ferguson Act, was primarily concerned with the relationship between the insurer and the insured. Id. at 215, 99 S.Ct. at 1075. The Court quoted from National Securities and noted that a common aspect of the "business of insurance" is the contract between the insurer and insured.

The Court's most recent opinion dealing with the "business of insurance" is Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982). After reviewing National Securities and Royal Drug, the Court identified three criteria relevant to determining whether a particular practice is part of the "business of insurance":

"first, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry. None of these criteria is necessarily determinative in itself...."

Pireno, 458 U.S. at 129, 102 S.Ct. at 3009.

Reviewing K.S.A. § 5-401 in light of the Supreme Court's decisions in National Securities, Royal Drug, and Pireno, we must conclude that K.S.A. § 5-401 is a statute regulating the "business of insurance." We also conclude that this "business of insurance" includes reinsurance.

The criterion that was the focus in National Securities and Royal Drug, and to a lesser extent in Pireno, was "whether the practice is an integral part of the policy relationship between the insurer and the insured." We are mindful of the Supreme Court's statement in National Securities 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...