ALBANY, N.Y. – The New York Court of Appeals determined that an arbitration panel should decide the enforceability of side agreements made between an insurance company and California workers’ compensation policyholders, citing a federal law protecting arbitration agreements.
Three businesses argued that disputes over side agreements made with the National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, shouldn’t go before an arbitration panel in New York because the arbitration clauses weren’t reviewed by California regulators.
Arbitration is an efficient and often inexpensive way to resolve disputes with the added benefit of preserving the relationship between the two parties, Andrew Stern, an attorney at Sidley Austin who represents National Union, told the Northern California Record.
“We’ve seen there has been decades of hostility to arbitration in various courts and there have been a series of U.S. Supreme Court decisions that have repeatedly emphasized that arbitration is worthwhile and positive alternative to court litigation," Stern said. “We think and our client believes that the agreement it makes should be enforced and shouldn’t be subject to someone second-guessing."
The California businesses claimed that disputes over some payment agreements in the insurance policies shouldn’t be subject to arbitration because arbitration agreements weren’t filed with California regulators in compliance with a state law directing workers' compensation insurers to submit policies, including side agreements, to state regulators for review.
The court considered whether the McCarran-Ferguson Act, which gives control over insurance industries to the states, precludes the Federal Arbitration Act (FAA), which allows for arbitration in a private dispute. The court reversed the decision of the previous court and found that because the arbitration agreements were made before the California issue was in effect, the agreements weren’t subject to the regulatory requirements. As a result, the McCarran-Ferguson Act is not involved in the case but the FAA is.
“Because the parties clearly and unmistakably delegated the question of arbitrability and enforceability of the arbitration clauses to the arbitrators – in provisions that were not specifically challenged by the insureds – the FAA mandates that the arbitration provisions be enforced as written,” the decision, written by Justice Leslie E. Stein, stated.
“It’s important in this particular case because in the insurance business it’s common to have these agreements,” Stern said. Arbitration can prevent a “long, drawn-out legal battle,” and keep the dispute out of the public eye.
“Typically private parties can resolve the dispute without necessarily destroying the relationship,” he said.
Ultimately, the decision was valuable because it validated these agreements, he said.
“When parties agree, that agreement should be enforced."