New York Appeals Court Affirms that Workers' Comp Side Agreements Mandating NY Arbitration Are Unenforceable

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A New York appellate court has upheld a decision that may enable businesses to avoid New York arbitration over side agreements attached to California workers' comp policies.

In Matter of Monarch Consulting, Inc. v. National Union Fire Insurance Co., which includes National Union disputes with a host of California policyholders including Priority Business Services and Source One Staffing, the Appellate Division of the New York Supreme Court, First Department, upheld a decision by Supreme Court Judge Bransten in National Union Fire Insurance Co. et al. v. Source One Staffing, LLC. That decision denied AIG subsidiary National Union's petition to compel New York arbitration of disputes over terms of collateral agreements governing the policyholders' co-payment obligations and dispute resolution procedures, the latter including mandatory arbitration in New York.

Between 2003 and 2010, AIG imposed these collateral agreements on thousands of policyholders buying mandatory workers' compensation policies in California, sending the collateral agreements to policyholders well after the policies themselves had been issued. In 2011, the California Department of Insurance banned side agreements unless they are attached to the policy at the time of issue.

In a 2011 decision which she reaffirmed in 2012, Judge Bransten cited a California Department of Insurance directive to the effect that workers comp collateral agreements are required to be filed with the state’s Workers Compensation Insurance Review Board. Since the National Union collateral agreements at issue were not so filed, Judge Bransten found that the arbitration provisions are unenforceable.The Appellate decision's 3-2 opinion, written by Judge Moskowitz, reiterated this principle:

We find that, in light of the strong policy under California law of regulating insurance carriers and their agreements with their insureds, the side agreements, along with the arbitration clauses contained in them, are not enforceable because the insurer failed to file them with the Workers' Compensation Insurance Rating Bureau (WCIRB) and the California Department of Insurance (CDI). Thus, the petitions to compel arbitration are dismissed and the cross petitions to stay arbitration are granted.

Both the Source One and Priority Business decisions hinged on whether state law in a dispute over the validity of the arbitration clauses was pre-empted by the Federal Arbitration Act (FAA). The appellate court agreed with Judge Bransten's analysis in Source One 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 Appellate decision reversed motion court rulings in Monarch Consulting and Priority Business Services. In Priority, the motion court erroneously found that the FAA did not directly conflict with the California insurance code and did not impair California's filing requirement. The Appellate decision, in contrast,concluded that "application of the FAA would modify California law because it would mandate arbitration even though National Union did not, as required by California law, file the payment agreements, and the payment agreements, in turn, contained the arbitration clauses."

Priority Business Services is represented by Edward J. Stein and Jeffrey E. Glen of Anderson Kill, and Source One is represented by Anderson Kill's Rene F. Hertzog.

Edward J. Stein, counsel to Priority, commented, "We were pleased that the Appellate Division rejected National Union's attempt to defy California insurance law and regulations. The court's conclusion that the Federal Arbitration Act does not preempt state insurance law is consistent with the position of the California Department of Insurance, and it makes perfect sense."

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