As I’ve noted in prior posts regarding the U.S. Supreme Court’s decision in AT&T Mobility, LLC v. Concepcion (see, for example, my August 22, 2011 post), the insurance industry is in a somewhat unique position with respect to the use of arbitration clauses as a mechanism of avoiding class action exposure. One reason for this is that under the McCarran-Ferguson Act some courts have concluded that a state law barring or restricting the use of arbitration in insurance policies may override the Federal Arbitration Act (this is called “reverse preemption”). This result has now come to pass post-Concepcion in a recent decision by the Arkansas Supreme Court.
In Southern Pioneer Life Insurance Co. v. Thomas, 2011 Ark. 490, 2011 Ark. LEXIS 573 (Ark. Nov. 17, 2011), the plaintiffs purchased a vehicle (it was a 2006 PT Cruiser for readers curious about such details) under a finance contract. At the time of sale, they also bought a credit life insurance policy that would pay off the loan if one of them died before it was paid off. The plaintiffs paid off the loan early, but were not refunded any of the premium. They then filed a putative class action seeking refunds of unearned premiums under these policies. Id. at *2-3. The loan application on which the plaintiffs purchased the life insurance included an arbitration provision, and the insurer sought to compel arbitration of the named plaintiffs’ claims in defending the suit. (As I’ve explained before, this is a common tactic in defending class actions – if the named plaintiffs’ claim must go to arbitration, once the arbitration is resolved, regardless of the outcome they should not be able to pursue a class action.)
The Arkansas Supreme Court held that the arbitration agreement was unenforceable under an Arkansas statute that provides generally for the validity and enforceability of arbitration agreements, but states that it “shall have no application . . . to any insured or beneficiary under any insurance policy or annuity contract.” Ark. Code Ann. § 16-108-201(b). The court explained that:
Under the McCarran-Ferguson Act, reverse preemption occurs if (1) the federal statute at issue does not specifically relate to the business of insurance; (2) the state law was enacted for the purpose of regulating the business of insurance; and (3) application of the federal statute will invalidate, impair, or supersede the state law.
Id. at *5. The court found reverse preemption appropriate because: (1) the Federal Arbitration Act is not specific to insurance; (2) the portion of the state law at issue regulated insurance, although it also applied to other contexts; and (3) enforcement of the arbitration provision under the Federal Arbitration Act would effectively invalidate the Arkansas statute. The court therefore affirmed the lower court’s ruling denying the motion to compel arbitration.
This result is not surprising. Absent some creative avenue around the McCarran-Ferguson Act, which I haven’t looked into extensively (and may be a case-by-case determination in each applicable state), it seems to me that the options insurers have, to the extent they want to take advantage of the Concepcion decision, are: (1) expanding the use of arbitration provisions only in states where the applicable law does not prohibit or limit the use of arbitration in insurance policies; (2) lobbying state legislatures to allow arbitration in states that currently prohibit or restrict it; and (3) lobbying Congress to fix this on a national basis by enacting a statute that allows the use of arbitration provisions in insurance contracts. A national “fix” would be possible without amending the McCarran-Ferguson Act because it has an express exception where another federal statute specifically relates to insurance. Whether the political option is viable at the national level I will leave to others who know more about that. But I would think a viable argument could be made that in the case of large disasters, for example, people who have smaller disputes with their insurance companies are better off with a quick, easy and fair arbitration process than a lengthy and expensive court proceeding. The devil is probably in the details of how such a process would function.