New York Court Rejects Arbitration Clause Used in Chartis Workers Comp Policies

Judge Eileen Bransten in the Supreme Court of New York has reaffirmed a decision that may have a wide-ranging effect on the ability of workers compensation insurance companies to enforce the arbitration clauses contained in their workers compensation insurance policies. In National Union Fire Insurance Co. et al. v. Source One Staffing, LLC., Index No. 652366/2010 (N.Y.Sup.Ct., July 25, 2012), Judge Bransten denied Chartis subsidiary National Union Fire Insurance Company’s petition to compel arbitration of a dispute with Source One Staffing, LLC regarding amounts owed under a workers compensation program.

Reaffirming her July 27, 2011 decision after extensive briefing and argument, Judge Bransten cited a California Department of Insurance directive to the effect that workers compensation collateral agreements are required to be filed with the state’s Workers Compensation Insurance Review Board. Since the collateral agreement at issue in this case was not so filed, Judge Bransten found that its arbitration provisions, requiring arbitration in New York, are unenforceable.

Judge Bransten decisively rejected Chartis’ argument that the Payment Agreement at issue was not part of the workers compensation policy it pertains to and so was not required to be filed with the state. Judge Bransten cited an addendum to the Payment Agreement that stated explicitly that “This Agreement together with the Schedules, Addenda, Policies and any related agreement…constitute the basis for a program of insurance coverage.”

The underlying decision hinged on whether state law in a dispute over the validity of the arbitration clauses was preempted by the Federal Arbitration Act (FAA). The court found that in this case the McCarran-Ferguson Act, which leaves insurance regulation to the states, precluded preemption of California state law by the FAA.

The payment agreement that was part of the workers compensation insurance program Chartis provided to Source One, like the payment agreements that are part of thousands of workers compensation insurance programs in California and other states, directs that all disputes arising under the payment agreement are subject to arbitration, including questions as to the arbitrability of the dispute, and that “any action concerning arbitrability may be brought only in a court of competent jurisdiction in City, County, and State of New York.”

Source One argued that the arbitration and forum selection clause were invalid under California state law because state law required all workers comp policies, including any payment agreements, to be filed with the CA insurance department, and Chartis had failed to do so. Chartis argued that under US Supreme Court precedent, the FAA preempts any state law that conflicts with the FAA, and that under the FAA the arbitration and forum selection clauses were valid.

Judge Bransten found that because the McCarran-Ferguson Act leaves the regulation of insurance to the states, the FAA could not preempt California state laws regulating insurance, including the law at issue regarding the filing of polices with the state. Therefore, the Court held that unless Chartis could demonstrate that the payment agreements at issue do not constitute an insurance form, the arbitration and forum selection clauses might be invalid.

The ruling noted that California courts, as Chartis itself pointed out, determine whether an agreement constitutes an insurance policy by considering “whether the agreement confirms the indemnity obligations of risk by the insurer.” The payment agreement in question, Judge Bransten noted, “appears to confirm the parties respective obligations, including Petitioners indemnity obligations” (sic). Alex D. Hardiman of Anderson Kill & Olick, P.C., counsel to Source One, stated, “This decision provides vital support to a concerted effort by the California Department of Insurance to bring workers compensation side agreements under its purview. It will be harder now for insurance companies to force workers comp insurance disputes into arbitrations in their favored venues.”