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Citizens of Humanity, LLC v. Applied Underwriters Captive Risk Assurance Company, Inc.

Supreme Court of Nebraska

April 6, 2018

Citizens of Humanity, LLC, a Delaware limited liability company, and CM Laundry, LLC, a California limited liability company, appellants,
v.
Applied Underwriters Captive Risk Assurance Company, Inc., a British Virgin Islands company, Appellee.

         1. Arbitration and Award. Arbitrability presents a question of law.

         2. Judgments: Appeal and Error. On a question of law, an appellate court reaches a conclusion independent of the court below.

         3. Final Orders: Arbitration and Award. A court order staying an action pending arbitration is a final, appealable order under Neb. Rev. Stat. § 25-1902 (Reissue 2016), because it affects a substantial right and is made in a special proceeding.

         4. Federal Acts: Contracts: Arbitration and Award: Intent. The purpose of the Federal Arbitration Act is to make arbitration agreements as enforceable as other contracts, but not more so.

         5. Federal Acts: Insurance: Contracts: Arbitration and Award. The Uniform Arbitration Act, at Neb. Rev. Stat. § 25-2602.01(f)(4) (Reissue 2016), limits the enforceability of mandatory arbitration in an agreement concerning or relating to an insurance policy of future policy-holder claims.

         6. Federal Acts: Insurance: States. Under the McCarran-Ferguson Act, state law regulating the business of insurance reverse preempts federal laws that do not specifically govern insurance.

         7. ___: ___: ___. Under the McCarran-Ferguson Act, courts consider three elements for determining when a state law controls over a federal statute: (1) The federal statute does not specifically relate to the business of insurance; (2) the state law was enacted for regulating the business of [299 Neb. 546] insurance; and (3) the federal statute, if applied, operates to invalidate, impair, or supersede the state law.

         8. Federal Acts: Insurance: Contracts: Arbitration and Award. The Federal Arbitration Act does not preempt Neb. Rev. Stat. § 25-2602.01(0(4) (Reissue 2016).

         9. Courts: Statutes: Intent. When two statutes are capable of coexistence, it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.

         10. Courts: Statutes. Courts will harmonize overlapping statutes so long as each reaches some distinct cases.

         11. Federal Acts: Contracts: Arbitration and Award. The Federal Arbitration Act's saving clause permits agreements to arbitrate to be invalidated by generally applicable contract defenses.

         12. Contracts: Public Policy. A promise or other term of an agreement is unenforceable on grounds of public policy if legislation provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such terms.

         13. Courts: Contracts: Arbitration and Award. Unless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is decided by the court, not the arbitrator.

         14. ___: ___: ___. Disputes about arbitrability for a court to decide include questions such as whether the parties are bound by a given arbitration clause or whether an arbitration clause in a concededly binding contract applies to a particular type of controversy.

         15. Arbitration and Award. Parties may delegate arbitrability to the arbitrator, because it is up to the parties to determine whether a particular matter is primarily for arbitrators or for courts to decide.

         16. Federal Acts: Contracts: Arbitration and Award: Words and Phrases. A delegation clause is an agreement to arbitrate a threshold issue and is simply an additional, severable, antecedent arbitration agreement the party seeking arbitration asks the court to enforce, and the Federal Arbitration Act operates on this additional arbitration agreement just as it does on any other.

         17. Federal Acts: Contracts: Arbitration and Award. A delegation agreement, like any other arbitration agreement, is valid under the Federal Arbitration Act except by application of 9 U.S.C. § 2 (2012), which invalidates such agreements upon such grounds as exist at law or in equity for the revocation of any contract.

         18. Federal Acts: Arbitration and Award: Presumptions. Under the Federal Arbitration Act, there is a presumption of arbitrability, and any doubts are resolved in favor of arbitration.

         [299 Neb. 547] 19. Federal Acts: Contracts: Arbitration and Award. Under the Federal Arbitration Act, if a delegation provision is valid, the validity of the remainder of the arbitration contract is for the arbitrator to decide.

         20. ___: ___: ___. Two types of validity challenges under the Federal Arbitration Act are (1) a challenge specifically to the validity of the agreement to arbitrate and (2) a challenge to the contract as a whole, either on a ground that directly affects the entire agreement or on the ground that the illegality of one of the contract's provisions renders the whole contract invalid. Only the first type of challenge is relevant to a court's determination of a challenged arbitration agreement. A party's challenge to another provision of the contract, or to the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate.

         21. Federal Acts: Contracts: Arbitration and Award: Courts. Under the Federal Arbitration Act, a challenge to a delegation provision must be directed specifically to the delegation before the court will assume authority over the matter.

         22. Contracts. A court must consider a contract as a whole and, if possible, give effect to every part of the contract.

         23. Insurance: Contracts: Arbitration and Award. A delegation of arbitrability of future policyholder claims in an agreement concerning or relating to an insurance policy is invalid under Neb. Rev. Stat. § 25-2602.01(0(4) (Reissue 2016)."

          Appeal from the District Court for Douglas County: Shelly R. Stratman, Judge. Reversed and remanded for further proceedings.

          Jonathan J. Papik and Andre R. Barry, of Cline, Williams. Wright, Johnson & Oldfather, L.L.R, for appellants.

          David A. Blagg and Michael K. Huffer, of Cassem, Tierney, Adams, Gotch & Douglas, and Spencer Y. Kook, of Hinshaw & Culbertson, L.L.R, for appellee.

          Heavican, C.J., Miller-Lerman, Cassel, Stacy, Kelch, and Funke, JJ.

          MILLER-LERMAN, J.

         I. NATURE OF CASE

         Appellants, Citizens of Humanity, LLC, and CM Laundry, LLC (collectively Citizens), filed a declaratory judgment action [299 Neb. 548] in the district court for Douglas County in connection with a dispute in which appellee, Applied Underwriters Captive Risk Assurance Company, Inc. (AUCRA), claimed it was owed money from Citizens. Citizens appeals from an order of the district court for Douglas County, in which the court granted AUCRA's motion to stay the court case pending arbitration, including arbitration of the issue of arbitrability. Because we conclude that the district court's ruling enforcing delegation of the issue of arbitrability was error, we reverse this ruling and remand the cause for further proceedings.

         II. STATEMENT OF FACTS

         Citizens of Humanity is a blue jean manufacturing company organized in Delaware with its principal place of business in California. Its subsidiary, CM Laundry, is organized and has its principal place of business in California, and its business is laundering the blue jeans manufactured by its parent company before they are sold to customers. AUCRA is organized in the British Virgin Islands and has its principal place of business in Douglas County, Nebraska.

         1. EquityComp and the Reinsurance Participation Agreement

         Citizens purchased a workers' compensation insurance package known as the EquityComp program. The EquityComp program is a workers' compensation program marketed by AUCRA and offered through California Insurance Company. The program is sometimes referred to by AUCRA as a "profit-sharing plan." Under this program, Citizens purchased a workers' compensation policy identified as a "guaranteed cost" policy from California Insurance Company and Continental National Indemnity, which are affiliated with AUCRA but are not parties to this appeal. Citizens' "Request to Bind Coverages & Services" for the EquityComp workers' compensation policies stated that issuance of the insurance coverage was conditioned on Citizens' executing a "Reinsurance Participation Agreement" (RPA). Citizens executed the related [299 Neb. 549] RPA with AUCRA on August 8, 2012. The RPA is the subject of this appeal.

         By Citizens' participation in the EquityComp program, and by the terms of the RPA, portions of Citizens' premiums and losses billed by the affiliated workers' compensation insurers were to be subsequently ceded to AUCRA. AUCRA then agreed to fund a segregated account or "cell" held by AUCRA. The amount to be funded into the cell would be dependent on a prospective formula set forth in the RPA that would take into account claims filed against Citizens' workers' compensation policies. This was known as Citizens' "loss experience." Citizens, through its segregated cell account, effectively would be partially self-insured, because it would then be responsible for an amount equal to all of its actual losses under the workers' compensation policies, up to a limit. Excess losses, beyond that limit, would be paid by the workers' compensation insurance, but such experience would obligate the insured to fund the cell in a greater amount.

         The EquityComp proposal materials claimed that the "Profit Sharing Plan is not a filed retrospective rating plan or dividend plan." However, the RPA required a 3-year minimum contractual commitment and amounts subsequently returned to the insured or ...


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