Cox v. Woodmen of World Ins. Co.

• Decision Date: 04 September 2001
• Docket Number: No. 3382.,3382.
• Citation: 347 S.C. 460,556 S.E.2d 397
• Court: South Carolina Court of Appeals
• Parties: Gerald COX, Vickie Cox, William Sulzer, Virginia Marie Sulzer, Thomas Mitchum, Sr. and Corine H. Mitchum, on behalf of themselves and all others similarly situated, Respondents, v. WOODMEN OF THE WORLD INSURANCE COMPANY, Jerry D. Rogers and James K. Dowey, Appellants.

347 S.C. 460

556 S.E.2d 397

Gerald COX, Vickie Cox, William Sulzer, Virginia Marie Sulzer, Thomas Mitchum, Sr. and Corine H. Mitchum, on behalf of themselves and all others similarly situated, Respondents, v. WOODMEN OF THE WORLD INSURANCE COMPANY, Jerry D. Rogers and James K. Dowey, Appellants.

No. 3382.

Court of Appeals of South Carolina.

Heard December 14, 2000.

Decided September 4, 2001.

Rehearing Denied December 20, 2001.

Evans Taylor Barnette, of McCutchen, Blanton, Rhodes & Johnson, of Columbia; and Charles R. Norris, of Nelson, Mullins, Riley & Scarborough, of Charleston, for appellants.

T.S. Stern, Jr., and Karen W. Creech, both of Covington, Patrick, Hagins, Stern & Lewis, of Greenville; and Paul J. Doolittle, Timothy E. Eble and Michael J. Brickman, all of Ness, Motley, Loadholt, Richardson & Poole, of Charleston, for respondents.

HUFF, Judge:

Woodmen of the World Insurance Company, Jerry D. Rogers and James K. Dowey appeal the trial court's denial of their motion to compel arbitration. Woodmen also appeals the trial court's denial of its motion to dismiss pursuant to Rule 12(b)(8), SCRCP. We reverse the denial of the motion to compel arbitration and affirm the denial of the motion to dismiss.

FACTS

Woodmen is a fraternal benefits society organized and existing under the laws of the State of Nebraska with its principal place of business in Omaha, Nebraska. Rogers is the State Manager for Woodmen in South Carolina. Dowey is an Area Manager for Woodmen. Gerald Cox, Vickie Cox, William Sulzer, Virginia Marie Suzler, Thomas O. Mitchum, Corine H. Mitchum (Respondents) are members of Woodmen who purchased Woodmen universal life insurance policies, surrendering life insurance policies with Woodmen.

On July 17, 1997, the Respondents, on behalf of themselves and all others similarly situated, brought this action against Woodmen, Rogers, and Dowey for violation of the Insurance Trade Practices Act, S.C.Code Ann. § 38-57-10, et seq. (1989 and Supp.2000), fraud, breach of contract accompanied by fraudulent acts, violation of the South Carolina Unfair Trade Practices Act, S.C.Code Ann. § 39-5-10 et seq. (1985 and Supp.2000), constructive fraud, negligent misrepresentation, conversion, and breach of fiduciary duties, and as to Woodmen alone, negligent supervision. They alleged Woodmen, Rogers, and Dowey induced them to replace their life insurance policies with universal life insurance policies.

Woodmen removed the case to the United States District Court for the District of South Carolina. It filed with the federal court a motion to dismiss or in the alternative for a stay of proceedings. In the motion it asserted that an Alabama class action, purported to be a national class action, had been conditionally certified and involved the same or substantially the same issues that are alleged in the South Carolina action. It also filed a motion to stay proceedings pending disposition to alternative dispute resolution and/or a petition to compel alternative dispute resolution. On September 23, 1997, the district court remanded the case to the Court of Common Pleas for Kershaw County without acting on the motions.

Woodmen subsequently filed a motion to dismiss or abate the action on the ground that another action was pending between the same parties for the same claims. The trial court denied the motion on February 6, 1998. It subsequently denied Woodmen's motion for reconsideration.

In an amended order filed April 14, 1999, the trial court denied Woodmen's motion to compel arbitration pursuant to the Federal Arbitration Act, (FAA), 9 U.S.C.A. § 1, et seq. (1999).¹ It found S.C.Code Ann. § 15-48-10(b)(4) (Supp.2000), which exempts "any insured or beneficiary under any insurance policy or annuity contract" from the South Carolina Arbitration Act, S.C.Code Ann. § 15-48-10 et seq. (Supp 2000) "reverse pre-empts" the FAA through the McCarran-Ferguson Act, 15 U.S.C.A. § 1011 et seq. (1997). In addition, it held section 15-48-10(b)(4) is not within the "general insurance laws of this state," and thus it applies to fraternal benefit associations such as Woodmen. This appeal followed.

DISCUSSION

1. McCarran-Ferguson "reverse pre-emption"

Woodmen, Rogers, and Dowey argue the trial court erred in concluding the FAA does not apply to the arbitration provision in the Woodmen constitution by virtue of the McCarran-Ferguson Act. We disagree.

On December 10, 1996, Woodmen adopted an amendment to its constitution to provide for "Problem Resolution Procedures" that include binding arbitration. The amendment is binding on Respondents as if it had been in force at the time of their applications for membership.²

In most instances, our state policy, like federal policy favors arbitrating disputes. Heffner v. Destiny, Inc., 321 S.C. 536, 537, 471 S.E.2d 135, 136 (1995) ("The policy of the United States and this State is to favor arbitration of disputes."). As an exception to this policy, § 15-48-10(b)(4) provides the South Carolina Arbitration Act, which favors arbitration, does not apply to "any insured or beneficiary under any insurance policy or annuity contract."

Generally, if the contract providing for arbitration involves interstate commerce, the FAA displaces the state arbitration statute.³Soil Remediation Co. v. Nu-Way Envtl., 323 S.C. 454, 459-60, 476 S.E.2d 149, 152 (1996) ("If the arbitration agreement in the instant controversy is covered by the FAA, then ... the FAA preempts S.C.Code Ann. § 15-48-10(a).... For the Federal Act to apply, the commerce involved in the contract must be interstate or foreign."). The McCarran-Ferguson Act, however, provides an exception to general federal pre-emption. The Act states 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, ... unless such Act specifically relates to the business of insurance...." 15 U.S.C.A. § 1012(b) (1997). It is undisputed the FAA does not specifically relate to insurance. Therefore, we must determine whether section 15-48-10(b)(4) was enacted for the purpose of regulating the business of insurance.

The United States Supreme Court has identified three factors in 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." Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982). The Court stated none of these factors is necessarily determinative of the issue. Id.

The trial court relied on Mutual Reinsurance Bureau v. Great Plains Mut. Ins. Co. Inc., 969 F.2d 931 (10th Cir.1992), in which the Tenth Circuit Court of Appeals considered the issue of whether the Kansas arbitration statute was a law enacted for the purpose of regulating the "business of insurance" as the term is used in the McCarran-Ferguson Act. The version of the Kansas arbitration statute, Kan. Stat. Ann. § 5-401,⁴ in effect at the pertinent time 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 arising between the parties is valid, enforceable and irrevocable.

The Tenth Circuit recognized that statutes aimed at protecting or regulating the relationship between the insurance company and the policyholder "directly or indirectly, are laws regulating the `business of insurance'" Mutual Reinsurance Bureau, 969 F.2d at 933 (quoting SEC v. Nat'l Sec., Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969)). It held Kan. Stat. Ann. § 5-401 directly regulated the relationship between the insurance company and the policy holder by declaring an agreement to arbitrate unenforceable. Id. It explained, "To expressly invalidate an agreement contained in the insurance contract touches the core of the `business of insurance....'" Id. at 933. The court noted that a contract of insurance is evidence of an agreement to spread risk and found the Kansas legislature had placed limits on the enforceability of an agreement to spread risk by enacting Kan. Stat. Ann. § 5-401. Id. In addition, the court found that the application of the McCarran-Ferguson Act did not require a state statute that "regulates the business of insurance" be in the form of an insurance code or an act relating only to insurance. Id. It held, "The application of the Kansas statute here concerned to insurance as an exception is clear and direct although included in an act relating basically to arbitration." Mutual Reinsurance Bureau, 969 F.2d at 934. Accordingly, it ruled that the Kansas statute combined with the McCarran-Ferguson Act prevented the application of the FAA. Id. at 935; see Friday v. Trinity Universal, 262 Kan. 347, 939 P.2d 869 (1997)

(while noting Mutual Reinsurance Bureau had been legislatively overruled due to amendment to Kan. Stat. Ann. § 5-401 providing reinsurance contracts are not to be considered contracts of insurance, applying the Tenth Circuit's reasoning to hold the McCarran-Ferguson Act precluded application of the FAA and arbitration clause was unenforceable because of Kan. Stat. Ann. § 5-401).

Woodmen, Rogers and Dowey urge this court to follow the reasoning employed by the Second Circuit Court of Appeals in Hamilton Life Ins. Co. v. Republic Nat'l Life Ins. Co., 408 F.2d 606 (2d Cir.1969). In Hamilton, the Second Circuit held, "It is quite plain that arbitration statutes, including those of Texas and New York, are not statutes regulating the business of insurance, but statutes regulating the method of handling contract...