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    NEBRASKA: A Good Home for Berkshire Hathaway, but not for Reinsurance Agreements

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    A Cornhusker by birth, I’ve always had a special affinity for Nebraska, and particularly Omaha, where I was raised. My only regret is that I was neither old nor rich enough to participate in Mr.Buffet’s original partnership. Notwithstanding the frequent kvetching about the arbitration process, it is still the most used protocol for resolving reinsurance disputes, unless you are in Nebraska, or a few other states.1

    Two courts recently interpreted Applied Underwriter’s (Applied) Reinsurance Participation Agreement (RPA) in Citizens of Humanity et al. v. Applied Underwriters, Inc., et al and Milmar Food Group II, LLC et al. v. Applied Underwriters, Inc. et al, reaffirming the long settled standard whereby the McCarren-Ferguson Act reverse preempts the FAA.

    The RPA at issue in both cases contained an arbitration provision and a Nebraska choice of law provision. The main question decided by the courts was whether the Federal Arbitration Act (FAA), generally permitting an arbitration clause in any commercial contract, preempts the Nebraska Uniform Arbitration Act (NUAA) which generally prohibits arbitration of “any agreement concerning or relating to an insurance policy . . . .”

    Nebraska is one of the states that directly prohibit enforcement of arbitration clauses by insurers. As noted above, this interplay between the FAA and any state law prohibiting arbitration becomes complicated by the application of the McCarran-Ferguson Act.

    The McCarran-Ferguson Act provides that no act of Congress will preempt any law enacted by a state for the purpose of regulating insurance unless such act by Congress specifically relates to the business of insurance.

    Both courts noted that it is an established principle that the FAA does not specifically regulate the business of insurance. With that principle in place, the courts turned their attention to whether the NUAA was enacted for the purpose of regulating “the business of insurance” within the meaning of the McCarran-Ferguson Act. In both decisions the courts discussed United States Dep’t of Treasury v. Fabe, where Fabe noted that “ ‘[s]tatutes aimed at protecting or regulating this relationship [between insurer and insured], directly or indirectly, are laws regulating the “business of insurance.” ’ ” The court in Citizens of Humanity went on to note decisions of a number of other courts upholding reverse preemption of the FAA by various state laws regulating insurance.[1]

    By applying the principles of Fabe in both cases the court held that the NUAA is a state law expressly for the purpose of regulating insurance, while the FAA is not, and as such the McCarran-Ferguson Act causes the state law to reverse preempt the FAA.

    If your counter party is Nebraska domiciled, with Nebraska law governing the transaction, recognize before contracting that your arbitration clause is likely to be unenforceable. Having said that, Omaha is still a terrific city to visit!

    [1] “(See, e.g., Am. Bankers, supra, 436 F.3d 490 [FAA reverse preempted under McCarran Ferguson Act by Mississippi statute prohibiting arbitration of disputes regarding uninsured and underinsured motorist coverage of personal automobile insurance policies]; McKnight v. Chicago Title Ins. Co. (11th Cir. 2004) 358 F.3d 854, 858-859 [FAA reverse preempted by Georgia law prohibiting arbitration clauses in insurance contracts]; Std. Sec., supra, 267 F.3d 821 [FAA reverse preempted by Missouri Arbitration Act’s prohibition on arbitration clauses in insurance contracts]; Mutual Reinsurance Bureau v. Great Plains Mut. Ins. Co. (10th Cir. 1992) 969 F.2d 931, 934-935 [FAA reverse preempted by Kansas statute barring arbitration provision in insurance contracts].)” Citizens of Humanity et al. v. Applied Underwriters, Inc., et al.

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