August 29, 2018 practice point

Delegation Clause in Insurance Contract Is Void under Virginia Law

By Mengru Song

Under Virginia law, an arbitration agreement in an insurance agreement is void, and insurers cannot compel a policyholder to arbitrate insurance disputes. Va. Code § 38.2–312. Insurers cannot circumvent Virginia law by providing that an arbitrator has exclusive authority to decide arbitrability, because the Fourth Circuit recently has held that such a delegation clause is void. Minnieland Private Day Sch., Inc. v. Applied Underwriters Captive Risk Assurance Co., Inc., 867 F.3d 449, 453 (4th Cir. 2017).

In 2013, Minnieland Private Day School (Minnieland) entered into a “Reinsurance Participation Agreement” (RPA) with Applied Underwriters Captive Risk Assurance Company (Applied) as part of Minnieland’s purchase of Applied’s workers’ compensation program. The RPA entitled Minnieland to share in the profits and losses attributable to Minnieland’s policies. The RPA provided that “[a]ll disputes between the parties relating in any way to (1) the execution and delivery, construction or enforceability of this Agreement, (2) the management or operations of the Company, or (3) any other breach or claimed breach of this Agreement” were subject to mandatory binding arbitration.

After paying its premiums for 33 months, Minnieland was billed a monthly premium that was 1,167 percent higher than the previous month and 801 percent higher than the average premium that it had paid before. Minnieland paid this unusually large bill, but it did not pay the similarly large bill for the following month. Applied responded by terminating Minnieland’s worker’s compensation policy and billing it for the outstanding balance.

In December 2015, Minnieland sued Applied for its noncompliance with Virginia insurance and workers’ compensation laws. Of particular note here, Minnieland alleged that RPA constituted an insurance contract, not a reinsurance contract, and that under Virginia law, the arbitration provision in the RPA was invalid. Applied moved to compel arbitration, arguing that the delegation clause in the RPA gave the arbitrator exclusive authority to decide arbitrability, including whether the RPA was or was not an insurance contract subject to Virginia law.

In making this argument, Applied relied on the Supreme Court’s decision in Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010) which held that a delegation clause authorizes arbitrators to decide questions of arbitrability and that, unless the delegation clause is specifically challenged, the court should send the case to the arbitrator to decide. Minnieland had not challenged the delegation clause, so Applied argued that the case should be sent to arbitration. The Fourth Circuit disagreed. It held that the entire arbitration agreement, including the delegation clause, was void under Virginia law “from its inception . . . .” Accordingly, “the delegation provision – an additional, antecedent agreement to arbitration – [also was] unenforceable from its inception.” The Court also stated that Virginia law gives the insured the right to resolve insurance disputes in court and that allowing an arbitrator to decide whether the contract was an insurance agreement would undermine Virginia law.

 

Mengru Song is a 2018 J.D. candidate at DePaul University College of Law in Chicago, Illinois.


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