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Court Gives States Say Over Arbitration Clauses In Policies

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Court Gives States Say Over Arbitration Clauses In Policies

By Allison Bell

A new federal court ruling could invalidate mandatory arbitration clauses in some Midwestern insurance policies.

The 8th Circuit Appeals Court recently held that the McCarran-Ferguson Act, the federal law that gives states the authority to regulate insurance, also gives states the authority to exempt insurance contracts from the Federal Arbitration Act.

In Missouri, the Missouri Arbitration Act, Mo. Rev. Stat. 435.350, states that contracts requiring arbitration, “except contracts of insurance and contracts of adhesion,” are valid.

The law appears to deal with many types of contracts, not just insurance contracts. But courts should treat the reference to insurance contracts in the Missouri statute as a law that is “limited to entities within the insurance industry” because “insurance is the only industry singled out,” the appellate court writes in an opinion explaining its ruling on the case, Devin West vs. Standard Security Life Insurance Company of New York.

Circuit Judges Pasco Bowman II and David Hansen supported both the ruling and the opinion.

Circuit Judge James Loken concurred only in the ruling. He did not provide an opinion of his own.

The ruling deals only with procedural issues, not with the merits of the case.

The 8th Circuit handles appeals for Arkansas, Iowa, Minnesota, Nebraska, North Dakota and South Dakota as well as Missouri.

Standard Security, the defendant, can ask all judges sitting on the 8th Circuit to review the decision of the three-judge panel, and it can also appeal to the U.S. Supreme Court.

If the ruling stands without undergoing Supreme Court review, it will have the force of law in the 8th Circuit, according to legal experts.

A representative for Standard Security, a subsidiary of Independence Holding Company, New York, declined to comment.

Christian Faiella, a Moberly, Mo., lawyer who represented the plaintiff, Devin West, welcomed the ruling.

If the ruling stands, “in the state of Missouri, mandatory arbitration laws in insurance policies are no longer valid,” Faiella says.

Arbitration is a process for resolving commercial disputes and other civil disputes out of court.

Supporters say arbitration is cheaper, faster and easier for consumers than going to court, but critics say the arbitration system can be more expensive, more complicated and less fair to consumers than the court system.

Some states, including Arkansas, explicitly allow insurers to include mandatory arbitration clauses in policies, but others forbid policy arbitration clauses or make no mention of them, according to an analysis by Citizens for Corporate Accountability & Individual Rights, Santa Monica, Calif., that was published on the Arkansas Trial Lawyers Association web site.

The plaintiff in the West case, Devin West, was a running back on the University of Missouri football team. He bought a Standard Security disability insurance policy in 1998. The policy was supposed to protect him against a permanent, total disability that would keep him from playing professional football, according to the appellate court opinion.

West notified Standard Security in June 1999 that a stress fracture on his right foot would keep him from playing professional football.

Standard Security denied the claim, contending that the fracture was the result of a cumulative injury, not the kind of sudden or accidental event that the policy was supposed to cover. It pointed out that a policy clause required West to resolve the dispute through arbitration, according to court documents.

West sued in state court, and Standard Security responded by suing in federal court. Standard Security also asked the federal court to compel arbitration under the Federal Arbitration Act.

A judge in the U.S. District Court in Kansas City, Mo., sided with West on the arbitration issue.

The appellate court is supporting the argument of the lower court judge.

The lower court judge wrote that, according to earlier Supreme Court decisions, a state law dealing specifically with insurance trumps a federal law that makes no mention of insurance if: the state law has the effect of spreading or transferring risk; the state law is a key part of the insurer-insured relationship; and the state law is limited to entities within the insurance industry.

A state law that forbids mandatory policy arbitration clauses transfers risk to the insurer by “introducing the possibility of jury verdicts into the process for resolving disputed claims,” the appellate court writes in its opinion.

A state law forbidding mandatory policy arbitration clauses is also an “integral part of the insurer-insured relationship,” because it “subjects all policy disputes to the possibility of a jury trial,” the court writes.

The appellate court adds that a state law that “clearly and directly” excepts insurance can be treated as a law that is “limited to entities within the insurance industry,” even if it is not officially part of the insurance code.

A ruling on a similar case in the 10th Circuit, which includes Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming, held that a Kansas arbitration statute that “clearly and directly excepted insurance” related to insurance.

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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