MUT. REINSURANCE BUREAU v. Great Plains Mut. Ins.
| Decision Date | 11 October 1990 |
| Docket Number | No. 89-1187-C.,89-1187-C. |
| Citation | 750 F. Supp. 455 |
| Parties | In the Matter of Arbitration of MUTUAL REINSURANCE BUREAU, Claimant, v. GREAT PLAINS MUTUAL INSURANCE COMPANY, INC., Respondent. |
| Court | U.S. District Court — District of Kansas |
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Paula J. Wright, King, Adrian, King & Brown, Salina, Kan., for claimant.
Norman R. Kelly, Norton, Wasserman, Jones & Kelly, Salina, Kan., for respondent.
This diversity of citizenship case comes before the court upon claimant Mutual Reinsurance Bureau's (MRB) motion, pursuant to 9 U.S.C. § 9, seeking to confirm the arbitration award entered on December 13, 1988, in its favor and against respondent Great Plains Mutual Insurance Company, Inc. (GPM).
MRB is an Illinois corporation which, at all times relevant to this matter, was the reinsurer for GPM. GPM is a general property casualty insurer; its principal place of business is Salina, Kansas.
MRB and GPM entered a reinsurance agreement entitled "First Excess Catastrophe Reinsurance Agreement # 5644." Under that agreement, GPM was responsible for the first $150,000 of the ultimate net loss on any one occurrence. MRB was liable "for the amount by which such ultimate net loss exceeds" $150,000, but not to exceed $427,500 (95% of the $450,000) in regard to any one loss occurrence.
The agreement defined "loss occurrence" as "the sum of all individual losses directly occasioned by any one disaster, accident, or loss, or series of disasters, accidents, or losses arising out of one event which occurs within the area of one state of the United States ..." When the loss entailed damage from wind, hail, or tornado, the duration and extent of any one loss occurrence was limited to "any period of 72 consecutive hours arising out of and directly occasioned by the same event." In the event of a dispute between the parties, the agreement contained an arbitration clause.
On August 17, 1987, Kansas was assailed by a storm. On August 19, 1987, either that same storm or another storm system struck Kansas. Those weather conditions damaged property insured by GPM. The damage was sufficient for GPM to make claims against MRB under the reinsurance agreement. Under the terms of the reinsurance agreement, a "one storm" theory favored GPM; a "two storm" theory favored MRB.
Pursuant to the reinsurance agreement, between October 9, 1987, and November 23, 1987, MRB made a series of payments to GPM totalling $275,401.09. On December 1, 1987, MRB sent a letter to GPM's attorney which stated, inter alia, that MRB was not waiving any of its rights under the reinsurance agreement. On January 4, 1988, MRB announced its intention to send the matter of whether the one or two storms had caused the damage to arbitration. In two subsequent payments, MRB paid a total of $166,669.92 to GPM. MRB conditioned those payments upon the ultimate decision rendered by the arbitrators.
On February 26, 1988, MRB informed GPM that it was initiating the arbitration procedure as outlined in the reinsurance agreement. On March 7, 1988, GPM informed MRB that it "has not, does not and will not consent to arbitration." It was and remains GPM's position that K.S.A. 5-401 prohibits the enforceability of an arbitration clause in any "contract of insurance."
Pursuant to the agreement, arbitrators were chosen.1 On October 21, 1988, an evidentiary hearing was conducted. The arbitration decision was journalized on December 13, 1988. Consistent with its March 7, 1988, letter, GPM took no part in the arbitration. GPM did not present evidence or otherwise participate in the arbitration evidentiary hearing.
The arbitration award was favorable to MRB. The arbitrators found that two storm systems had passed through Kansas on August 17 and August 19, 1987. The arbitrators also found that MRB's payments to GPM were conditional. The arbitrators concluded that MRB had overpaid GPM by $142,500. Under the arbitration decision, MRB was awarded $142,500, 50% of the arbitration costs, plus interest if GPM failed to reimburse in the time allotted.
MRB seeks to confirm the arbitration order. GPM challenges the arbitration award on several grounds. The court, having reviewed the memoranda filed by each party, is now prepared to rule on the matter.
The Federal Arbitration Act, 9 U.S.C. §§ 1-15, originally enacted in 1947, sets forth the general federal law relating to arbitration. "The Act was passed to ensure that courts would honor and enforce the contractual agreements of parties who choose to resolve their disputes through the informal process of arbitration." Hartford Lloyd's Ins. Co. v. Teachworth, 898 F.2d 1058, 1061 (5th Cir.1990). The Act embodies the federal policy favoring arbitration agreements. "`The preeminent concern of Congress in passing the Act was to enforce private agreements into which parties had entered,' a concern which `requires that we rigorously enforce private agreements to arbitrate.'" Mitsubishi Motors v. Soler Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221, 105 S.Ct. 1238, 1242, 84 L.Ed.2d 158 (1985).
The FAA is not an independent source of federal jurisdiction. "Under the FAA, federal jurisdiction is available only if otherwise available through some independent source such as 28 U.S.C. § 1331 or § 1332." Mesa Oper. Ltd. Part. v. Louisiana Intrastate Gas, 797 F.2d 238, 240 (5th Cir.1986); 9 U.S.C. § 4. Once federal jurisdiction is established, the FAA empowers the court, inter alia, to enter an order confirming the award. 9 U.S.C. § 9. Once an arbitration award has been rendered, the court may, under certain limited circumstances, vacate or modify the award. 9 U.S.C. §§ 10, 11.
Prior to the Supreme Court's decision in United States v. South-Eastern Underwriters Assn., 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944), it was assumed that "insurance" was not a transaction in commerce. See S.E.C. v. National Securities, 393 U.S. 453, 458, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969); R. Jerry II, Understanding Insurance Law, at 50-53 (1987). In response to that decision, Congress passed the McCarran-Ferguson Act. Section 1 of the Act contains the declaration of policy:
The Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States. 15 U.S.C. § 1011.
The operative language of the Act is contained in section 2:
Therefore, State laws regulating the "business of insurance" supersede federal laws that do not directly regulate the "business of insurance."
The phrase "business of insurance" is the key to determining whether federal law has been preempted by the states. The Act does not define "business of insurance." In National Securities, the Supreme Court commented:
The statute did not purport to make the States supreme in regulating all the activities of insurance companies; its language refers not to the person or companies who are subject to state regulation, but to laws "regulating the business of insurance." Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the "`business of insurance' does the statute apply." 393 U.S. at 459-60, 89 S.Ct. at 568. (Emphasis in original).
The court went on to say:
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 regulating the "business of insurance." 393 U.S. at 460, 89 S.Ct. at 568.
In Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 217, 99 S.Ct. 1067, 1076, 59 L.Ed.2d 261 (1979), the Court clarified the latter quote:
In Union Labor Life Insurance Co. v. Pireno Co., 458 U.S. 119, 102 S.Ct. 3002, 73 L.Ed.2d 647 (1982), the Court refined and articulated the Royal Drug three-part test for determining whether an insurer's activity is within the "business of insurance." Three questions must be asked: (1) Does the insurer's activity involve the transferring or spreading of a policyholder's risk; (2) Is the insurer's...
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