Date: 11-26-2017

Case Style: Citizens of Humanity v. Applied Underwriters, Inc.

Case Number: B276601

Judge: Chavez

Court: California Court of Appeals Second Appellate District Division Two on appeal from the Superior Court, Los Angeles County

Plaintiff's Attorney: Spencer Y. Kook, Misty A. Murray, and James C. Castle

Defendant's Attorney: Browne George Ross, Eric M. George, Peter W. Ross, and Corbin K. Barthold

Description: Defendants and appellants Applied Underwriters, Inc.
(Applied Underwriters), California Insurance Company (CIC),
Continental Indemnity Company (CNI), Applied Risk Services,
Inc., Joan Sheppard, Westin Fredrick Penfield, and Michael Scott
Wichman (collectively, defendants) appeal from an order denying
their petition to compel arbitration of a dispute with plaintiffs
and respondents Citizens of Humanity, LLC and CM Laundry,
LLC (collectively, plaintiffs). We affirm the trial court’s order.

BACKGROUND
The RPA
In 2012, plaintiffs purchased from defendants a workers’
compensation insurance package known as the EquityComp
program. As part of that program, plaintiffs entered into a
Reinsurance Participation Agreement (RPA) with Applied
Underwriters Captive Risk Assurance Company, Inc. (AUCRA), a
company affiliated with defendants. The RPA contains an
arbitration provision that provides in relevant part:
“13. Nothing in this section shall be deemed to
amend or alter the due date of any obligation under
this Agreement. Rather, this section is only intended
to provide a mechanism for resolving accounting
disputes in good faith.”
“(A) It is the express intention of the parties to
resolve any disputes arising under this Agreement
without resort to litigation in order to protect the
confidentiality of their relationship and their
respective businesses and affairs. Any dispute or
controversy that is not resolved informally pursuant
to sub-paragraph (B) of Paragraph 13 arising out of
or related to this Agreement shall be fully
determined in the British Virgin Islands under the
provisions of the American Arbitration Association.
3
“(B) All disputes between the parties relating
in any way to (1) the execution and delivery,
construction or enforceability of this Agreement, (2)
the management or operation of the Company, or (3)
any other breach or claimed breach of this Agreement
or the transactions contemplated herein shall be
settled amicably by good faith discussion among all of
the parties hereto, and, failing such amicable
settlement, finally determined exclusively by binding
arbitration in accordance with the procedures
provided herein. The reference to this arbitration
clause in any specific provision of this Agreement is
for emphasis only, and is not intended to limit the
scope, extent or intent of this arbitration clause or to
mean that any other provision of this Agreement
shall not be fully subject to the terms of this
arbitration clause. All disputes arising with respect
to any provision of this Agreement shall be fully
subject to the terms of this arbitration clause.”
None of the other agreements between the parties contains
an arbitration provision.
The RPA also contains a choice of law provision that
states:
“16. This Agreement shall be exclusively governed by
and construed in accordance with the laws of
Nebraska and any matter concerning this Agreement
that is not subject to the dispute resolution provisions
of Paragraph 13 hereof shall be resolved exclusively
by the courts of Nebraska without reference to its
conflict of laws.”
The instant action
In February 2015, plaintiffs filed a complaint against
defendants and AUCRA alleging causes of action against AUCRA
for fraudulent inducement in entering into the arbitration
agreement, breach of contract, and breach of the covenant of good
4
faith and fair dealing; and against all of the defendants for fraud,
false advertising, breach of fiduciary duty, professional
negligence, and declaratory relief.
The parties filed competing motions to compel and to stay
arbitration of their dispute. In their motion to stay the
arbitration, plaintiffs argued that Nebraska law applied
pursuant to the choice of law provision in the RPA and that the
arbitration provision of the RPA was void under section 25-
2602.01(f)(4) of the Nebraska Uniform Arbitration Act (NUAA),
which prohibits arbitration of “any agreement concerning or
relating to an insurance policy.” Plaintiffs further argued that
the Federal Arbitration Act (9 U.S.C. §§ 1-16) (FAA) did not
preempt the NUAA because another federal statute, the
McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015) mandates that
state laws “regulating the business of insurance” preempt any
federal statute not specifically related to the business of
insurance and that impairs state insurance laws. Defendants
argued that the FAA governs and preempts the NUAA, and that
under the RPA’s broad delegation clause, any issue concerning
arbitrability should be resolved by the arbitrator.
Before the hearing on defendants’ motion to compel
arbitration, plaintiffs dismissed AUCRA as a defendant.
Plaintiffs then argued that the motion to compel arbitration
should be denied because the only defendant that had signed the
RPA had been dismissed. At the hearing on defendants’ motion,
the trial court requested supplemental briefing from the parties
on a number of issues, including whether California or Nebraska
law should be applied to determine whether defendants have the
right to enforce the RPA’s arbitration provision, whether
Nebraska law bars arbitration of the parties’ dispute, and
whether the FAA or the McCarran-Ferguson Act applies.
5
In their supplemental brief, plaintiffs argued, among other
things, that the McCarran-Ferguson Act displaced the FAA, that
both California and Nebraska law applied to bar arbitration, and
that the court, not the arbitrator, should determine the
consequences of applying the McCarran-Ferguson Act.
Defendants argued that the RPA’s delegation clause required all
questions concerning construction and enforceability of that
agreement, including applicability of the NUAA, to be decided by
the arbitrator, and that the FAA governed the arbitration
provision, which was not displaced by the general choice of law
provision.
Following a July 8, 2016 hearing, the trial court denied the
motion to compel arbitration. In its written order denying the
motion, the trial court first addressed the threshold question of
who should decide -- the court or the arbitrator -- the arbitrability
of the parties’ dispute. The court noted that defendants’ sole
basis for arguing that the arbitrator rather than the court should
decide this issue was the FAA and cases decided thereunder. The
trial court then noted that a potential conflict existed between
the FAA and the McCarran-Ferguson Act, which allows state
laws enacted for the purpose of regulating the business of
insurance to reverse preempt the FAA. After analyzing
applicable federal case law on the reverse preemption issue, the
trial court concluded that reverse preemption applied under the
McCarran-Ferguson Act and that Nebraska law applied to
invalidate the arbitration clause in the RPA. The trial court
denied the motion to compel arbitration and this appeal followed.
DISCUSSION
I. Standard of review
We ordinarily review an order denying a petition to compel
arbitration for abuse of discretion. However, where, as is the
case here, the trial court’s denial of a petition to compel
6
arbitration presents a pure question of law, we review the order
de novo. (Gorlach v. Sports Club Co. (2012) 209 Cal.App.4th
1497, 1505.)
II. Applicable legal framework
The instant case involves the intersection of three different
statutory schemes: the FAA, the McCarran-Ferguson Act, and
the NUAA.
A. The NUAA
Section 25-2602.01(b) of the NUAA provides that a written
agreement to arbitrate disputes between the contracting parties
“is valid, enforceable, and irrevocable, except upon such grounds
as exist at law or in equity for the revocation of a contract, if the
provision is entered into voluntarily and willingly.” (Neb. Rev.
Stats., § 25-2602.01(b).) Subsection (f) of that statute, however,
excepts from this provision “any agreement concerning or
relating to an insurance policy,” thereby prohibiting agreements
to arbitrate certain insurance-related disputes.1
B. The FAA
The FAA reflects the fundamental principle that
arbitration is “a matter of contract.” (Rent-A-Center, West, Inc. v.
Jackson (2010) 561 U.S. 63, 67 (Rent-A-Center).) Section 2 of the
FAA makes arbitration agreements in contracts “involving
commerce . . . valid irrevocable, and enforceable” (9 U.S.C. § 2),

1 Section 25-2602.01 of the NUAA provides in relevant part:
“(b) A provision in a written contract to submit to arbitration any
controversy thereafter arising between the parties is valid,
enforceable, and irrevocable, except upon such grounds as exist at
law or in equity for the revocation of any contract, if the provision
is entered into voluntarily and willingly. [¶] . . . [¶] (f)
Subsection (b) of this section does not apply to: [¶] . . . [¶] . . . any
agreement concerning or relating to an insurance policy other
than a contract between insurance companies including a
reinsurance contract.” (Neb. Rev. Stats., § 25-2602.01.)
7
and section 4 of the FAA provides for federal district court
enforcement of such agreements. The “body of federal
substantive law” created by the FAA is applicable, however, in
both state and federal courts. (Southland Corp. v. Keating (1984)
465 U.S. 1, 12.) State law therefore cannot bar enforcement of
the FAA, even in the context of state law claims brought in state
court. (Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S.
440, 445.) The FAA thus ordinarily preempts conflicting state
laws that prohibit arbitration of particular types of claims.
(AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 341.)
C. McCarran-Ferguson Act
The federal McCarran-Ferguson Act provides a narrow
exception to federal preemption of conflicting state laws that
regulate the business of insurance. Section 1012(b) of the
McCarran-Ferguson Act provides: “No Act of Congress shall be
construed to invalidate, impair, or supersede any law enacted by
any State for the purpose of regulating the business of insurance,
. . . unless such Act specifically relates to the business of
insurance.” (15 U.S.C. § 1012(b).) “The McCarran-Ferguson Act
thus allows state law to reverse-preempt an otherwise applicable
federal statute, because the McCarran-Ferguson Act does not
permit an ‘Act of Congress’ to be ‘construed to invalidate, impair,
or supersede’ state law unless the Act of Congress ‘specifically
relates to the business of insurance.’” (Safety Nat’l Cas. Corp. v.
Certain Underwriters (5th Cir. 2009) 587 F.3d 714, 720.)
The principal issues presented here are (1) whether the
McCarran-Ferguson Act causes the NUAA to reverse preempt the
FAA, thereby rendering the arbitration provisions of the RPA
unenforceable; and (2) who -- a court or an arbitrator -- should
decide the preemption/enforceability issue. We address the latter
of these issues first.
8
III. Who decides arbitrability
“The question whether the parties have submitted a
particular dispute to arbitration, i.e., the ‘question of
arbitrability,’ is ‘an issue for judicial determination [u]nless the
parties clearly and unmistakably provide otherwise.’ [Citations.]”
(Howsam v. Dean Witter Reynolds (2002) 537 U.S. 79, 83.)
“Courts should not assume that the parties agreed to arbitrate
arbitrability unless there is ‘clea[r] and unmistakabl[e]’ evidence
that they did so.” (First Options of Chicago, Inc. v. Kaplan (1995)
514 U.S. 938, 944, quoting AT&T Techs. v. Communs. Workers of
Am. (1986) 475 U.S. 643, 649.)
Defendants argue that paragraph 13(B) of the RPA, which
requires “[a]ll disputes between the parties relating in any way to
. . . the execution and delivery, construction or enforceability of
this Agreement” and “[a]ll disputes arising with respect to any
provision of this Agreement” to be “finally determined exclusively
by binding arbitration” expresses a clear and unmistakable
intent to arbitrate the question of arbitrability.
2 That provision
must be considered, however, in the context of the agreement as a
whole (see Ruble v. Reich (Neb. 2000) 611 N.W.2d 844, 850 [when
interpreting an agreement, court views contract as a whole]),
including the provision that requires the RPA to “be exclusively
governed by and construed in accordance with the laws of
Nebraska.” Under Nebraska law, the entire arbitration clause,
including the delegation provision, is potentially unenforceable.
Paragraph 13(B), including the delegation provision, must
also be considered in the context of the applicable statutory
framework. (Bickford v. Board of Education (Neb. 1983) 336
N.W.2d 73, 74 [“it is the general rule that contracts include
applicable statutory provisions, whether specifically mentioned or

2 Defendants refer to this contract language as the
“delegation provision.”
9
not”].) Here, the conflicting preemptive effects of the FAA, the
McCarran-Ferguson Act, and the NUAA impact the parties’
agreement to arbitrate. Viewed in context, the language of
paragraph 13(B) of the RPA is not clear and unmistakable
evidence of the parties’ agreement to arbitrate disputes arising
under that agreement, including disputes concerning
arbitrability.
Defendants contend the Supreme Court’s decision in RentA-Center
precludes judicial determination of arbitrability in this
case. In Rent-A-Center, the Supreme Court explained that a
“delegation provision is an agreement to arbitrate . . . ‘gateway’
‘questions of arbitrability,’ such as whether the parties have
agreed to arbitrate or whether their agreement covers a
particular controversy” and that such “[a]n agreement to
arbitrate a gateway issue is simply an additional, antecedent
agreement the party seeking arbitration asks the . . . court to
enforce.” (Rent-A-Center, supra, 561 U.S. at pp. 68-70.) The
court in Rent-A-Center further explained that under substantive
federal law, an arbitration provision, including a delegation
provision, “‘is severable from the remainder of the contract’” (id.
at pp. 70-71), and that a party must challenge the validity of “the
precise agreement to arbitrate at issue” before a court will
intervene to consider the challenge. (Id. at p. 71.)
The provision at issue in Rent-A-Center was a delegation
provision “that gave the arbitrator ‘exclusive authority to resolve
any dispute relating to the . . . enforceability . . . of this
Agreement.’” (Rent-A-Center, supra, 561 U.S. at p. 74.) The
party resisting enforcement in Rent-A-Center challenged the
validity of the arbitration agreement as a whole on the ground
that it was unconscionable but did not make any arguments
specific to the delegation provision. (Ibid.) Given the absence of
any challenge to the delegation provision, the court in Rent-A-
10
Center concluded that it must treat that provision as valid and
enforceable under the FAA, leaving any challenge to the validity
of the arbitration agreement as a whole to the arbitrator. (Id. at
pp. 73-75.)
Rent-A-Center did not involve application of the McCarranFerguson
Act or the NUAA and is therefore distinguishable from
the instant case. Rent-A-Center is also distinguishable because
plaintiffs’ challenge, based on the preemptive effect of the
McCarran-Ferguson Act and the NUAA, is directed to the
delegation provision as well as the arbitration provision as a
whole. (See Minnieland Private Day Sch., Inc. v. Applied
Underwriters Captive Risk Assur. Co. (4th Cir. 2017) 867 F.3d
449, 455-456 [insured’s argument that Virginia statute rendered
void “any” arbitration provision in RPA necessarily included
challenge to enforceability of delegation provision].) Resolution of
those issues are accordingly for the court, and not the arbitrator,
to decide. (Rent-A-Center, supra, 561 U.S. at p. 71.)
There is also an issue as to whether plaintiffs’ challenge to
the arbitration provision, premised on preemption of the FAA by
the McCarran-Ferguson Act and the NUAA, raises a “question of
arbitrability” that can legally be delegated to an arbitrator. We
find the Ninth Circuit’s analysis in Van Dusen v. United States
Dist. Court for the Dist. of Ariz. (9th Cir. 2011) 654 F.3d 838 (Van
Dusen) to be instructive on this issue.
At issue in Van Dusen was whether arbitration agreements
entered into by the defendant employers and the plaintiff
interstate truck drivers came within an exemption under section
1 of the FAA for “‘contracts of employment of seamen, railroad
employees, or any other class of workers engaged in foreign or
interstate commerce.’” (Van Dusen, supra, 654 F.3d at p. 840.)
The federal district court declined to rule on the applicability of
the exemption, concluding that the question of whether the
11
drivers were employees of the defendants was a question for the
arbitrator to decide. (Ibid.) The drivers sought mandamus relief
from the Ninth Circuit, arguing that the district court’s failure to
address the exemption issue constituted clear error. (Id. at p.
842.)
On appeal, the drivers argued that the issue of whether the
FAA section 1 exemption applied was not a “question of
arbitrability” the parties could legally delegate to an arbitral
forum. (Van Dusen, supra, 654 F.3d at p. 842.) The Ninth
Circuit found that argument to be persuasive, noting that “a
district court has no authority to compel arbitration under
Section 4 [of the FAA] where Section 1 exempts the underlying
contract from the FAA’s provisions. [Citation.]” (Id. at p. 843.)
The court in Van Dusen further noted that the defendants’
“position that contracting parties may invoke the authority of the
FAA to decide the question of whether the parties can invoke the
authority of the FAA . . . puts the cart before the horse: Section 4
has simply no applicability where Section 1 exempts a contract
from the FAA, and private contracting parties cannot, through
the insertion of a delegation clause, confer authority upon a
district court that Congress chose to withhold.” (Id. at p. 844.)
The Ninth Circuit observed that the United States Supreme
Court defines “‘questions of arbitrability’ as questions of ‘whether
parties have submitted a particular dispute to arbitration’
[citation]” and that the question of whether the FAA confers
authority on the court to compel arbitration “does not fit within
that definition.” (Ibid.)
3

3 Although the Ninth Circuit determined that “the best
reading of the law requires the district court to assess whether a
Section 1 exemption applies before ordering arbitration” the
absence of controlling precedent, along with the FAA’s policy
favoring arbitration, made the question a “relatively close” one
12
The First Circuit, in Oliveira v. New Prime, Inc. (1st Cir.
2017) 857 F.3d 7 (Oliveira) addressed the same issue presented in
Van Dusen in a similar dispute involving a motion to compel
arbitration where the parties had delegated questions of
arbitrability to the arbitrator. (Oliveira, at p. 9.) Applying the
court’s reasoning in Van Dusen, the First Circuit held that
whether the FAA confers authority on a district court to compel
arbitration is not a question of arbitrability: “[T]he question of
the court’s authority to act under the FAA is an ‘antecedent
determination’ for the district court to make before it can compel
arbitration under the [FAA].” (Oliveira, at p. 14.)
Here, as in Van Dusen and Oliveira, the threshold issue is
whether the FAA applies, thereby authorizing the court to compel
arbitration of the dispute, or whether such authority is lacking
because the FAA is preempted by the McCarran-Ferguson Act
and the NUAA. We agree with the Van Dusen court’s reasoning
that defendants’ reliance on the FAA as the basis for compelling
arbitration of this threshold issue “puts the cart before the
horse.” (Van Dusen, supra, 654 F.3d at p. 844.) We therefore
conclude that the trial court did not err by denying defendants’
motion to compel arbitration of the preemption issue and the
validity of the arbitration agreement, including the delegation
provision.
IV. Validity of the agreement to arbitrate
The validity of the parties’ arbitration agreement turns on
whether the McCarran-Ferguson Act applies, whether section 25-
2602.01(f) of the NUAA applies, and whether those two statutes
together preempt the FAA.

and that it could not find the district court’s ruling to be “‘clearly
erroneous’” under the applicable standard for mandamus relief.
(Van Dusen, supra, 654 F.3d at p. 846.)
13
A. Applicability of the McCarran-Ferguson Act
Courts apply a three-part test for determining whether the
McCarran-Ferguson Act causes a state law to reverse preempt a
federal statute: (1) whether the federal statute to be preempted
specifically relates to the business of insurance, (2) whether the
state law was enacted for regulating the business of insurance,
and (3) whether application of the federal statute operates to
invalidate, impair, or supersede the state law. (Am. Bankers Ins.
Co. v. Inman (5th Cir. 2006) 436 F.3d 490, 493 (Am. Bankers);
Std. Sec. Life Ins. Co. v. West (8th Cir. 2001) 267 F.3d 821 (Std.
Sec.); Kremer v. Rural Comty. Ins. Co. (Neb. 2010) 788 N.W.2d
538, 551 (Kremer).)
It is undisputed that the FAA does not regulate the
business of insurance, and that application of the FAA in this
case would invalidate section 25-2602.01(f) of the NUAA. The
determinative inquiry is whether section 25-2602.01(f) of the
NUAA was enacted for the purpose of regulating the business of
insurance within the meaning of the McCarran-Ferguson Act.
That inquiry is guided by principles articulated by the United
States Supreme Court in United States Dep’t of Treasury v. Fabe
(1993) 508 U.S. 491, 500-503 (Fabe).
In Fabe, the Supreme Court held that an Ohio statute
governing the priority of claims against an insolvent insurer is a
“law enacted for the purpose of regulating the business of
insurance” within the meaning of the McCarran-Ferguson Act
and rejected the argument that the Ohio statute was a
bankruptcy law rather than a law “regulating the business of
insurance.” (Fabe, supra, 508 U.S. at pp. 498-499, 505-506.) The
court reasoned that although “the Ohio statute does not directly
regulate the ‘business of insurance’ by prescribing the terms of
the insurance contract or by setting the rate charged by the
insurance company,” the business of insurance is not “confined
14
entirely to the writing of insurance contracts, as opposed to their
performance.” (Id. at pp. 502-503.)
The court in Fabe emphasized that the focus of the
McCarran-Ferguson Act is the relationship between insurer and
insured and that “‘[s]tatutes aimed at protecting or regulating
this relationship [between insurer and insured], directly or
indirectly, are laws regulating the “business of insurance.”’”
(Fabe, supra, 508 U.S. at p. 501, quoting SEC v. National Sec.,
Inc. (1969) 393 U.S. 453, 460.) The Supreme Court concluded
that “[t]he broad category of laws enacted ‘for the purpose of
regulating the business of insurance’ consists of laws that possess
the ‘end, intention, or aim’ of adjusting, managing, or controlling
the business of insurance. [Citation.]” (Fabe, at p. 505.)
Applying the principles articulated in Fabe, the Nebraska
Supreme Court in Kremer, supra, 788 N.W.2d 538, addressed the
precise issue presented here -- whether section 25-2602.01(f) of
the NUAA is a state law enacted for the purpose of regulating the
business of insurance within the meaning of the McCarranFerguson
Act. The court in Kremer held that it was, and that
section 25-2602.01(f) accordingly reverse preempts the FAA
through application of the McCarran-Ferguson Act. (Kremer, at
p. 553.) The Nebraska Supreme Court reaffirmed this principle
in Speece v. Allied Professionals Ins. Co. (Neb. 2014) 853 N.W.2d
169, 175.
Federal courts applying Fabe have likewise concluded that
the FAA is reverse preempted under state laws similar to the
Nebraska statute at issue here. (See, e.g., Am. Bankers, supra,
436 F.3d 490 [FAA reverse preempted under McCarran-Ferguson
Act by Mississippi statute prohibiting arbitration of disputes
regarding uninsured and underinsured motorist coverage of
personal automobile insurance policies]; McKnight v. Chicago
Title Ins. Co. (11th Cir. 2004) 358 F.3d 854, 858-859 [FAA reverse
15
preempted by Georgia law prohibiting arbitration clauses in
insurance contracts]; Std. Sec., supra, 267 F.3d 821 [FAA reverse
preempted by Missouri Arbitration Act’s prohibition on
arbitration clauses in insurance contracts]; Mutual Reinsurance
Bureau v. Great Plains Mut. Ins. Co. (10th Cir. 1992) 969 F.2d
931, 934-935 [FAA reverse preempted by Kansas statute barring
arbitration provision in insurance contracts].)
Consistent with the principles articulated in Fabe, supra,
508 U.S. 491, as applied by federal appellate courts and the
Nebraska Supreme Court, we agree with the trial court’s
conclusion in the instant case that section 25-2602.01(f) of the
NUAA is a state law enacted for the purpose of regulating the
business of insurance. If the NUAA applies in the instant case,
by operation of the McCarran-Ferguson Act, it reverse preempts
the FAA.
B. Applicability of the NUAA
Defendants argue that even if section 25-2602.01(f) is a
state law that regulates the business of insurance, the statute
does not apply. They argue that the general choice of law
provision in the RPA requiring the RPA to “be exclusively
governed by and construed in accordance with the laws of
Nebraska” constitutes an agreement to apply Nebraska law to
resolve the parties’ substantive claims only, and not to
incorporate state law rules limiting arbitration. Defendants cite
Mastrobuono v. Shearson Lehman Hutton (1995) 514 U.S. 52
(Mastrobuono) as support for their position. In that case, the
Supreme Court considered two seemingly conflicting contractual
provisions regarding punitive damages -- an arbitration provision
that required “any controversy” arising out of the transactions
between the parties to be arbitrated in accordance with the rules
of the National Association of Securities Dealers (NASD), which
authorized punitive damages awards; and a choice of law
16
provision incorporating “the laws of the state of New York.”
Under New York case law, the power to award punitive damages
was limited to judicial tribunals. (Id. at pp. 55, 61.) The court in
Mastrobuono concluded that the “best way to harmonize” the two
provisions was to read the choice of law provision “to encompass
substantive principles that New York courts would apply, but not
to include [New York’s] special rules limiting the authority of
arbitrators.” (Id. at pp. 63-64.)
Mastrobuono is distinguishable because it involved two
provisions that on their face pointed to different bodies of law
with conflicting rules regarding the availability of punitive
damages. The Supreme Court drew the distinction between
“substantive principles” of law and “special rules limiting the
authority of arbitrators” solely as a means of “giv[ing] effect” to
both provisions. (Mastrobuono, supra, 514 U.S. at p. 64.) Here,
however, the RPA has a single provision that unambiguously
provides that the RPA “shall be exclusively governed by and
construed in accordance with the laws of Nebraska.” Although
the RPA does refer to the AAA rules, those rules -- unlike the
competing arbitration rules in Mastrobuono -- do not conflict with
Nebraska law. Because there is no need to give effect to any
competing provision, there is no basis not to give effect to its
plain language incorporating all of the laws of Nebraska,
including its substantive law prohibiting the arbitration of
insurance-related disputes. (See Bickford, supra, 336 N.W.2d at
p. 74.)4

4 During oral argument, both parties discussed Mastick v.
TD Ameritrade, Inc. (2012) 209 Cal.App.4th 1258, in which the
court concluded that a general choice of law provision applying
California law operates to invoke the specific provisions of the
California Arbitration Act. (Id. at pp. 1264-1265.) We do not
17
Defendants next contend the RPA falls outside the scope of
section 25-2602.01(f) and cite South Jersey Sanitation Co. v.
Applied Underwriters Captive Risk Assur. Co. (3d Cir. 2016) 840
F.3d 138 (South Jersey) as support for that argument. In South
Jersey, the Third Circuit concluded that section 25-2602.01(f) did
not invalidate an arbitration provision in a similar RPA because
the statute applied only to insurance policies. Disregarding the
broad language of the statute prohibiting enforcement of an
arbitration provision in “any agreement concerning or relating to
an insurance policy,” the court in South Jersey instead relied on
dicta by the Nebraska Supreme Court in Kremer, supra, 788
N.W.2d at page 552 stating that “‘a statute precluding the parties
to an insurance contract from including an arbitration agreement
for future controversies regulates the insurer-insured
relationship.’” (South Jersey, at p. 146.) The court in South
Jersey stated: “This language, while dicta, strongly suggests that
Subsection (f)(4) of the Nebraska Statute applies only to
insurance policies themselves, and that ‘any agreement’ must be
read as an arbitration agreement or provision within such a
policy, rather than a derivative investment contract.” (Ibid., fn.
omitted.)
We decline to apply the South Jersey court’s advisory
interpretation of section 25-2602.01(f)(4) because it is
inconsistent with the plain language of the statute, which broadly
covers “any agreement concerning or relating to an insurance
policy.” The South Jersey court’s interpretation nullifies that
statutory language, and violates fundamental principles of
statutory interpretation that “courts should give meaning to
every word of a statute and should avoid constructions that
would render any word or provision surplusage,” and that “‘[a]n

address the parties’ arguments concerning Mastick, as California
law does not govern the instant dispute.
18
interpretation that renders statutory language a nullity is
obviously to be avoided.’ [Citation.]” (Tuolumne Jobs & Small
Business Alliance v. Superior Court (2014) 59 Cal.4th 1029, 1038-
1039.) The South Jersey court’s interpretation is also
inconsistent with the principles set forth in Fabe that laws
regulating the “business of insurance” are not “confined entirely
to the writing of insurance contracts” (Fabe, supra, 508 U.S. at p.
503), but include “laws that possess the ‘end, intention, or aim’ of
adjusting, managing, or controlling the business of insurance.”
(Id. at p. 505.)
South Jersey is also distinguishable. The district court in
that case “never found that the RPA falls within the ambit of the
Nebraska Statute,” (South Jersey, supra, 840 F.3d at p. 146)
whereas the trial court in the instant case did. There is
substantial evidence in the record to support the trial court’s
finding. The RPA itself allows plaintiffs to participate in an
underlying Reinsurance Treaty between AUCRA and CIC, and
section 25-2602.01 applies to “any agreement concerning or
relating to an insurance policy . . . including a reinsurance
contract.” (Neb. Rev. Stats., § 25-2602.01.) There was also
substantial evidence that the RPA was an integral part of a
workers’ compensation insurance program defendants sold to
plaintiffs and others. A consent order entered into by Applied
Underwriters and the California Department of Insurance on
September 6, 2016,
5 is further support that the RPA concerns or

5 The consent order prohibits CIC and AUCRA from issuing
new RPAs or renewing existing RPAs with respect to any
California policy until the RPA is submitted to the Workers’
Compensation Insurance Ratings Bureau and the California
Department of Insurance for approval in compliance with
Insurance Code sections 11658 and 11735. We granted plaintiffs’
request that we take judicial notice of the consent order.
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relates to the workers’ compensation insurance policies issued as
part of defendants’ EquityComp program. For example, the
consent order defines the term “RPA” as “ancillary or collateral to
a guaranteed cost workers’ compensation insurance policy that
covers claims by California workers” and the terms “policy” or
“policies” as “a Guaranteed Cost Policy or Policies for which an
RPA is in force as of July 1, 2016.” The consent order states that
it “applies to policies and RPAs covering loss exposures in
California” and that it “is not intended to impact policies or RPAs
relating to risks covered outside of California.” There is
substantial evidence in the record that the RPA is an “agreement
concerning or relating to an insurance policy” within the meaning
of section 25-2602.01(f) of the NUAA.
Defendants argue that Nebraska law should not be applied
to the instant dispute, because to do so would result in
impermissible “extraterritorial” regulation by a state, prohibited
by the Supreme Court in Federal Trade Comm’n v. Travelers
Health Ass’n (1960) 362 U.S. 293 (Travelers Health). That case,
however, is inapposite.
At issue in Travelers Health was a Nebraska statute that
prohibited Nebraska insurance companies from engaging in
unfair trade practices “‘in any other state.’” (Travelers Health,
supra, 362 U.S. at p. 296.) A Nebraska insurance company
argued that the Nebraska statute, by operation of the McCarranFerguson
Act, precluded the Federal Trade Commission from
regulating the insurance company’s conduct outside Nebraska.
The Supreme Court rejected that argument, concluding that the
McCarran-Ferguson Act was not intended to allow a state to
“regulate activities carried on beyond its own borders.” (Id. at p.
300.)
The Nebraska statute at issue in Travelers Health sought,
by its express terms, to regulate the conduct of an insurer in
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another jurisdiction. The NUAA by its terms does not seek to
regulate activities carried on outside Nebraska. The NUAA
applies in the instant case because the parties contractually
agreed to its application.
CONCLUSIONS
The threshold issue of whether the FAA applies or is
preempted by the McCarran-Ferguson Act and section 25-
2602.01(f) of the NUAA was for the court, and not the arbitrator,
to decide. The trial court did not err by adjudicating this gateway
issue.
The trial court did not err by concluding that section 25-
2602.01(f) of the NUAA is a statute that regulates the business of
insurance within the meaning of the McCarran-Ferguson Act.
Application of the FAA would operate to invalidate or
impair section 25-2602.01(f) of the NUAA. The trial court did not
err by concluding that the McCarran-Ferguson Act applies and
reverse preempts the FAA.
Section 25-2602.01(f) of the NUAA applies to the RPA and
renders the arbitration provision contained in the RPA
unenforceable. The trial court accordingly did not err by denying
the petition to compel arbitration.

Outcome: The order denying the petition to compel arbitration is affirmed. Plaintiffs are awarded their costs on appeal.

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