Federal Court Holds State Arbitration Act ‘Reverse Preempts’ FAA Based on the McCarran-Ferguson Act (June 14).

A South Carolina U.S. District Court has found that state arbitration acts relating to the insurance industry can trump the Federal Arbitration Act.

In Blue Ridge Emergency Physicians P.A. v. Emergency Physicians Insurance Co. RRG (referred to below as EPIC) the court held the McCarran-Ferguson Act (15 U.S.C.A. § 1011 et seq.) allows the South Carolina Uniform Arbitration Act to "reverse preempt" the FAA.

As a result, the court denied respondent EPIC’s motion to compel arbitration despite an arbitration clause in EPIC’s Governance Rules, which applies to insurance agreements it sells. Blue Ridge Emergency Physicians, P.A. v. Emergency Physicians Ins. Co. RRG, No. 6:10-cv-00428-JMC, 2011 WL 899639 (D.C. S.C. Mar. 15, 2011).

Blue Ridge claimed it bought $365,000 worth of supplemental malpractice coverage from EPIC, an insurer. When Blue Ridge decided to place its funds elsewhere, its money was not returned. EPIC denied providing the specific coverage and also denied receiving the funds for the premium.

At the time of purchase, Blue Ridge signed a Subscriber’s Agreement in which it agreed to be bound by EPIC’s Governance Rules. Rules Section 8.3 stated that any dispute involving the two parties would first be submitted to an attorney-in-fact for resolution, and then, if necessary, to American Arbitration Association resolution.

EPIC argued the clause was governed by the Federal Arbitration Act and asked the court to compel arbitration. South Carolina’s arbitration statute, however, states that arbitration agreements will not apply to “any insured or beneficiary under any insurance policy or annuity contract.” S.C. Code Ann. §15-48-10(b)(4).

The court cited the McCarran-Ferguson Act, which places the insurance industry out of the grasp of many federal regulations. Specifically, McCarran-Ferguson provides that an act of Congress cannot “invalidate, impair or supersede” a state law that regulates insurance unless the act “specifically relates to the business of insurance.” 15 U.S.C.A. §1012(b)(West 1945).

For reverse preemption to apply, it must be found that the South Carolina statute was enacted to regulate the business of insurance. The South Carolina Court of Appeals decided the issue in Cox v. Woodmen of the World Ins. Co., 566 S.E.2d 397 (2001). The case stands for the proposition that South Carolina arbitration statute S.C. Code Ann. §15-48-10(b)(4) was enacted to regulate insurance, and therefore reverse preempts the FAA and prohibits the enforcement of most arbitration clauses in insurance policies.

EPIC filed an appeal with the Fourth U.S. Circuit Court of Appeals, and a motion to stay pending the appeal followed in late April. But EPIC’s attorney, Constance L. Akridge, a stockholder in Las Vegas’s Jones Vargas, says that the case has since settled.

--Suzanne Grassel, CPR Intern