AIG unit loses bid to force arbitration in N.Y.

A New York judge has denied American International Group Inc.’s bid to compel a California-based workers compensation insurance buyer into arbitration in an increasingly common type of dispute pitting policyholders against insurers.


More policyholders across the country are challenging workers comp insurers over whether contract dispute resolution clauses typically contained in side agreements can force employers to settle disagreements in New York or forums other than where the employers primarily conduct business, according to policyholder attorneys.

Policyholder attorneys say the clauses attempt to compel employers into forums favoring insurers.

“There definitely has been an uptick in policyholder willingness to challenge these arbitration agreements and spend some money doing it,” said Alex D. Hardiman, a partner at Anderson Kill & Olick P.C., who represented the employer in the recently decided case of National Union Fire Insurance Co. et al. vs. Source One Staffing L.L.C.

National Union is a unit of New York-based AIG, which declined to comment.

The Aug. 1 ruling involved a dispute over collateral for a large deductible policy purchased by Irwindale, Calif.-based Source One Staffing, Mr. Hardiman said.

New York Supreme Court Judge Eileen Bransten ruled that the Federal Arbitration Act does not pre-empt California’s insurance code, because the federal McCarran-Ferguson Act leaves insurance taxation and regulation to the states and trumps the FAA.

Arbitration override

That issue is central to the case, because the insurer provided Source One with a payment agreement that stated that all disputes arising under the agreement are subject to arbitration only in a New York court.

But the employer argued that the arbitration and forum selection clauses were invalid because California law requires all workers comp policies, including payment agreements, to be filed with the California Insurance Department, and the insurer had failed to do so.

The insurer argued, though, that the payment agreement is not a policy under California’s insurance code, so it did not have to be filed with the state’s Insurance Department. National Union also argued that when a party to a contract containing an arbitration clause disputes the validity of the contract, the FAA dictates that the issue of validity is arbitrable and that the FAA pre-empts state insurance code.

While the judge denied AIG’s petition to compel arbitration, it also granted the insurer 20 days to amend its petition regarding whether the payment agreement constitutes an insurance policy.

Nick Roxborough, a policyholder attorney at Roxborough, Pomerance, Nye & Adreani L.L.P. in Los Angeles, said he hopes the ruling will affect other pending cases where employers have “made all the same arguments” as those heard by Judge Bransten. He said he intends to raise the ruling in another New York court hearing a very similar case in which he represents a policyholder involved in a dispute with AIG, as well as in a case in California.

Meanwhile, related legislation that would require workers comp insurers to disclose to employers that challenges to a dispute resolution or arbitration clause may be heard in a venue outside of California is moving its way through California’s Legislature.

Senate Bill 684, sponsored by the California Department of Insurance, has been passed out of the Senate, as well as Assembly committees.

The measure would require insurers to notify employers “contemporaneously with a written quote” that such a clause exists.

The bill also would require insurers to notify policyholders that any dispute resolution language is negotiable, according to a California Assembly analysis of SB 684.

Employers have complained that insurers regularly include dispute-resolution language in side agreements, or agreements that are delivered to policyholders only after a policy contract has been agreed upon.

California’s bill is expected to reach Gov. Jerry Brown’s desk, and enactment would narrow the number of disputes similar to the recent case involving Source One Staffing, Mr. Roxborough said.

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