Concepcion, collective-arbitration waivers, and the business of insurance: Arkansas Supreme Court says the McCarron-Ferguson Act reverse preempts the FAA

Following the Supreme Court's decision in AT&T Mobility, Inc. v. Concepcion, 113 S. Ct. 1740 (2011), it seemed clear that states possessed little power to limit the enforcement of arbitration provisions and class action waivers in consumer contracts.  "Arbitration is a matter of contract, and the [Federal Arbitration Act ("FAA")] requires courts to honor parties' expectations."  However, the Supreme Court of Arkansas, in its recent decision in Southern Pioneer Life Ins. Co. v. Thomas, 2011 Ark. 490 (Ark., 2011) identified what could be a significant exception to Concepcion: the business of insurance. 

In Southern Pioneer, the Thomas's executed a credit application and a retail installment contract as part of the purchase of a new car.  The credit application contained a provision calling for arbitration of "[a]ny claim or dispute, whether in contract, tort or otherwise…, which arise [sic] out of or relate to this Application, an installment sale contract or lease agreement, or any resulting transaction or relationship…."  The related retail installment contract provided an option for the purchase of credit-life insurance coverage with Southern Pioneer, the entire premium for which was financed with the purchase price of the vehicle and wrapped into the life of the loan.  The Thomas's opted for the insurance, but subsequently paid off the loan six years ahead of the maturity date.  They then filed a putative class action, alleging breach of the insurance contract against Southern Pioneer and seeking the refund of unearned premiums from the date of payoff through the original maturity date.  Southern Pioneer sought to compel arbitration pursuant to the arbitration clause in the credit application.

The trial court denied Southern Pioneer's motion, and the Arkansas Supreme Court affirmed, because the Arkansas Uniform Arbitration Act (the "AUAA") in effect at the time, and which recognized the validity, enforceability and irrevocability of contractual arbitration provisions generally, expressly did not apply to "any insured or beneficiary under any insurance policy…."  Ark. Code. Ann. 16-108-201(b) (Repl. 2006).  While recognizing that the FAA "would ordinarily preempt conflicting state law," the Court held that the McCarran-Ferguson Act (the "MFA"), [15 U.S.C. 1011, et seq.], "operates to bar application of the FAA and leave the regulation of the insurance industry to the states…."  The MFA provides that "[n]o 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 Arkansas Supreme Court's decision suggests that, while states may be barred by the FAA from either enacting or judicially enforcing laws or doctrines like the Discover Bank rule, as set forth in Concepcion (California's rule classifying most collective-arbitration waivers in consumer contracts as unconscionable, and therefore unenforceable), states are nonetheless free under the McCarron-Ferguson Act to place limitations or outright prohibitions on collective-arbitration waivers or arbitration agreements generally, if the limitation or prohibition is a law enacted by the state for the purpose of regulating the business of insurance.

However, the Ohio Revised Code does not specifically exempt the business of insurance from the enforceability of contractual arbitration provisions like the AUAA did in Southern Pioneer.  As a result, Concepcion, and by extension the FAA, appear likely to continue to govern the enforceability of arbitration agreements and collective-arbitration waiver provisions in Ohio jurisdictions for the foreseeable future, including those found in contracts of insurance.

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