Through the McCarran-Ferguson Looking Glass

Citizens of Humanity, Inc. v. Applied Underwriters, Inc., No, B276601 (D2d2 Nov. 22, 2017)

When we talk about preemption and arbitration, we’re usually talking about federal law preempting a state law rule that says something isn’t arbitrable. But when it comes to insurance, that gets stood on its head. 

The McCarran-Ferguson Act, 15 U.S.C. §§ 1011–1015, says that federal law doesn’t regulate state insurance law unless the federal law is specifically addressed to the topic of insurance. It’s kind of a reverse preemption where state insurance law displaces federal laws of general applicability when it comes to insurance. 

One area where state insurance law does so is the Federal Arbitration Act. Under McCarran-Ferguson, state insurance laws that say insurance claims aren’t arbitrable trump the FAA’s generally applicable rule that federal law will make you arbitrate whatever the parties agree to arbitrate, subject to defenses that apply to any contract. Here, the parties selected Nebraska law, which includes a statute that says that insurance policy disputes aren’t arbitrable. So the superior court rightfully denied the motion to compel in this case.

There’s also a threshold issue of whether the McCarran-Ferguson issue should have been decided by the court or the arbitrator. The clause in this instance specifically delegated arbitrability questions to the arbitrator. Under the FAA, that usually means the arbitrator decides arbitrability. But Nebraska law says none of this can go to the arbitrator, so the attack on the arbitration provision was also an attack on the delegation clause. Under those circumstances, the court needs to decide the gateway choice of law question.

Affirmed.

Privilege Log Necessary, Regardless of Burden

Riddell, Inc. v. Superior Court, No. B275482 (D2d7 Aug. 23, 2017)

Insurers filed a declaratory relief action regarding a coverage dispute with an Insured that manufactures football helmets. The rule is pretty well settled that, to the extent that there are factual questions in the DJ that overlap the underlying litigation, the DJ case must get stayed to avoid prejudice to the insured in having to litigate the merits as part of the coverage dispute. That said, the issue doesn’t come up very often because usually a coverage DJ action can be resolved as a matter of law based just on the policy language and the underlying complaint.

Brandt Fees Are Part of the 1 in State Farm's Punis Ratio

Nickerson v. Stonebridge Life Ins. Co., No. S213879 (Jun. 9, 2016).

I wrote about this case back in 2013 when it was decided by the Court of Appeal. The focus of my post was on an instructional issue. But the Supreme Court granted review on a different issue in the case—one that merited three sentences paragraph in the Court of Appeal’s opinion: When deciding whether punitive damages in a bad faith insurance case exceed the constitutionally proscribed ration of nine or ten time the actual damages, should the baseline include so called Brandt fees. These are fees that, notwithstanding the American rule, can be recovered by an insurance coverage plaintiff to compensate for legal costs of obtaining coverage over the carrier’s objection. The Court of Appeal said they could not, citing a 2010 case on the point. But the Supreme Court—with Justice Kruger writing for a unanimous court—disagrees. Brandt fees are an element of compensatory damages in a bad faith case. It is thus appropriate to consider them as part of the starting point in the State Farm/Gore analysis, which puts a nine- or ten-to-one ratio of punitives to compensatories at the outer limits of the state’s power to punish. That’s the case even when the parties follow the common practice—as happened here—of stipulating to have the court calculate Brandt fees post-trial in the event of a bad faith verdict in the plaintiff’s favor.

Reversed.