Milmar Food Grp. II, LLC v. Applied Underwriters, Inc.

• Decision Date: 05 December 2017
• Parties: MILMAR FOOD GROUP II, LLC, Milmar Food Group, LLC and Milmar LLC, Plaintiffs, v. APPLIED UNDERWRITERS, INC., Applied Underwriters Captive Risk Assurance Company, Inc., Applied Risk Services, Inc., Applied Risk Services Of New York, Inc., North American Casualty Company, Continental Indemnity Company, And California Insurance Company, Defendants.
• Court: New York Supreme Court

58 Misc.3d 497

68 N.Y.S.3d 645

MILMAR FOOD GROUP II, LLC, Milmar Food Group, LLC and Milmar LLC, Plaintiffs,

v.APPLIED UNDERWRITERS, INC., Applied Underwriters Captive Risk Assurance Company, Inc., Applied Risk Services, Inc., Applied Risk Services Of New York, Inc., North American Casualty Company, Continental Indemnity Company, And California Insurance Company, Defendants.

Supreme Court, Orange County, New York.

Dec. 5, 2017.

Andrew S. Lewner, Esq., Westerman Ball Ederer Miller Zucker & Sharfstein LLP, Uniondale, for Plaintiffs.

Shand S. Stephens, Esq., Anthony P. Coles, Esq., Joseph Alonzo, Esq., DLA

Piper LLP (US), New York, for Defendants.

CATHERINE M. BARTLETT, J.

It is ORDERED that the motions are disposed of as follows:

Plaintiffs (collectively, "Milmar") are affiliated New York companies, engaged in the production and distribution of food products, which are required by New York law to provide workers compensation insurance for their employees. Defendants provide products and services in connection with workers compensation insurance coverage. Beginning in 2013, Milmar was covered under a workers compensation program (the "Equity Comp Program") created, patented and implemented by Defendants. There are essentially three components to this Program:

(1) Standard workers compensation insurance policies issued to Milmar by defendants Continental Indemnity Company ("Continental") and California Insurance Company ("California"), with rates and forms approved by New York's Department of Financial Services or its predecessor, the New York Insurance Department;

(2) A reinsurance agreement (the "Reinsurance Treaty") between defendant Applied Underwriters Captive Risk Assurance Company, Inc. ("AUCRA") and affiliates of defendant Applied Underwriters, Inc. ("AU"), including Continental and California; and

(3) A "Reinsurance Participation Agreement " ("RPA") between AUCRA and Milmar.

Paragraph "13" of the RPA between AUCRA and Milmar contains an arbitration agreement, which provides in pertinent part as follows:

(A) It is the express intention of the parties to resolve any disputes arising under this Agreement without resort to litigation in order to protect the confidentiality of their relationship and their respective businesses and affairs. Any dispute or controversy that is not resolved informally pursuant to sub-paragraph (B) of Paragraph 13 arising out of or related to this agreement shall be fully determined in the British Virgin Islands under the provisions of the American Arbitration Association.

(B) All disputes between the parties relating in any way to (1) the execution and delivery, construction or enforceability of this Agreement, (2) the management or operations of the Company, or (3) any other breach or claimed breach of this Agreement or the transactions contemplated herein shall be settled amicably by good faith discussion among all of the parties hereto, and, failing such amicable settlement, finally determined exclusively by binding arbitration in accordance with the procedures provided herein ... All disputes arising with respect to any provision of this Agreement shall be fully subject to the terms of this arbitration clause.

Milmar commenced this action, complaining that the RPA is illegal and fraudulent, and seeking inter alia a declaratory judgment that the RPA is void and unenforceable under the New York Insurance Law, equitable rescission of the RPA and money damages for sums paid under the RPA in excess of premiums due under the Continental and California insurance policies.

Defendants assert that all of Plaintiffs' claims are subject to binding arbitration under the broad arbitration agreement in the RPA, and accordingly move pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et seq., to compel arbitration and stay proceedings in this action.

Citing Paragraph "16" of the RPA, which provides that "[t]his Agreement shall be exclusively governed by and construed in accordance with the laws of Nebraska," Plaintiffs assert that (1) the arbitration agreement in the RPA, including the delegation of "arbitrability" issues to an arbitrator, is invalid under Nebraska Revised Statutes § 25–2602.01 ("Validity of arbitration agreement"); (2) the Supreme Court of Nebraska has held that § 25–2602.01 regulates the business of insurance, and hence by virtue of the federal McCarran–Ferguson Act it "reverse preempts" the Federal Arbitration Act; (3) the parties' arbitration agreement notwithstanding, this court and not an arbitrator must determine the threshold question of the arbitrability of the claims in Plaintiffs' complaint; and (4) since the arbitration agreement in the RPA is by virtue of § 25–2602.01 invalid and unenforceable, Defendants' motion to compel arbitration and stay proceedings in this action should be denied, and those Defendants which are unauthorized foreign insurers should be required to post security pursuant to Insurance Law § 1213.

I. DEFENDANTS' MOTION TO COMPEL ARBITRATION / STAY ACTION

A. The Federal Statutory Scheme

1. The Federal Arbitration Act

The Federal Arbitration Act ("FAA") provides that "[a] written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or inequity for the revocation of any contract." 9 U.S.C. § 2.

As the Court of Appeals explained in Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 26 N.Y.3d 659, 27 N.Y.S.3d 97, 47 N.E.3d 463 (2016) :

The FAA was enacted by Congress "in response to widespread judicial hostility to arbitration" [cit.om.], and it aims to "ensure judicial enforcement of privately made agreements to arbitrate" [cit.om.]. "[ 9 U.S.C. § 2 ]

reflects the overarching principle that arbitration is a matter of contract" and, "consistent with that text, courts must 'rigorously enforce' arbitration agreements according to their terms" [cit.om.]. Typically, "the FAA preempts state laws [that] 'require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration' " [cit.om.].

Id., 26 N.Y.3d at 665, 27 N.Y.S.3d 97, 47 N.E.3d 463.

2. The McCarran–Ferguson Act

The McCarran–Ferguson Act ("MFA") endows states with plenary authority over the regulation of insurance and, in certain instances, exempts state laws from FAA preemption. It provides that "[n]o 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. § 1012(b).

As the Court of Appeals explained in Monarch Consulting, Inc., supra:

"[W]hen Congress enacts a law specifically relating to the business of insurance, that law controls," but the McCarran–Ferguson Act precludes application of-or, in other words, reverse preempts-a federal law in the face of a state law regulating the business of insurance where "the federal measure does not 'specifically relate to the business of insurance,' and would 'invalidate, impair or supersede' the State's law" [cit.om.].

Id., 26 N.Y.3d at 666, 27 N.Y.S.3d 97, 47 N.E.3d 463.

3. The Interaction Between the FAA and the MFA

To determine whether the McCarran–Ferguson Act reverse preempts the FAA, courts apply a three-part test:

[T]he McCarran–Ferguson Act applies if: (1) the federal statute in question does not specifically relate to insurance; (2) the state law at issue was enacted to regulate the business of insurance; and (3) the federal statute at issue would invalidate, impair, or supersede the state law (see 15 U.S.C. § 1012 [b] ).

Monarch Consulting, Inc., supra, 26 N.Y.3d at 670, 27 N.Y.S.3d 97, 47 N.E.3d 463. The Court of Appeals therein recognized that "[t]he clearest example of a scenario in which reverse preemption occurs is where state law expressly prohibits arbitration of insurance related disputes (see e.g. McKnight v. Chicago Tit. Ins. Co., Inc., 358 F.3d 854, 857–859 [11th Cir.2004] ; Standard Sec. Life Ins. Co. of N.Y. v. West, 267 F.3d 821, 823 [8th Cir.2001] ; Mutual Reins. Bur. v. Great Plains Mut. Ins. Co., Inc., 969 F.2d 931, 934–935 [10th Cir.1992]... [cit.om.]." Monarch Consulting, Inc., supra, 26 N.Y.3d at 671, 27 N.Y.S.3d 97, 47 N.E.3d 463 ).

B. Neb. Rev. St. § 25–2602.01

Section 25–2602.01 (Validity of arbitration agreement) of the Nebraska Uniform Arbitration Act ("NUAA") provides in pertinent part:

(a) ...

(b) A provision in a written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, except upon such grounds as exist at law or in equity for the revocation of any contract, if the provision is entered into voluntarily and willingly.

(c) ...

(d) Contract provisions agreed to by the parties to a contract control over contrary provisions of the act other than subsections (e) and (f) of this section.

(e) ...

(f) Subsection (b) of this section does not apply to:

(1) A claim arising out of personal injury based on tort;

(2) A claim under the Nebraska Fair Employment Practice Act.

(3) Any agreement between parties covered by the Motor Vehicle Industry Regulation Act; and

(4) ..., any agreement concerning or relating to an insurance policy other than a contract between insurance companies including a reinsurance contract.

Construing § 25–2602.01, the Supreme Court of Nebraska in Kremer v. Rural Community Ins. Co., 280 Neb. 591, 788 N.W.2d 538 (2010), held that "under § 25–2602.01(f)(4), agreements to arbitrate future controversies concerning an insurance policy are invalid ..." Id., 280 Neb. at 603, 788 N.W.2d 538. See also, Speece v. Allied Professionals Ins. Co., 289 Neb. 75, 78, 853 N.W.2d 169 (2014).

Going on to consider whether § 25–2602.01(f)(4) was enacted for the purpose of regulating the "business of insurance" within the meaning of the McCarran–Ferguson Ac...