A federal district court has held an arbitration clause in a Reinsurance Participation Agreement (RPA) between an insured and a reinsurer invalid and unenforceable under governing state law. The RPA complemented a standing Quota Share Reinsurance Agreement between reinsurer Applied Underwriters Captive Risk Assurance (AUCRA) and the insured’s insurers whereby AUCRA was ceded a portion of the insured’s premiums paid under a Workers Compensation Profit Sharing Plan. When the insured failed to pay its premiums, it received notice that its workers’ compensation policies and the RPA were being terminated for nonpayment. After attempts to resolve the dispute with AUCRA failed, the insured filed a lawsuit seeking declaratory and other relief, including reformation of the RPA. AUCRA moved to compel arbitration pursuant to the RPA’s arbitration clause.

The court analyzed the arbitration clause under Nebraska law, which the parties agreed controlled, and found the clause fell within the purview of a Nebraska statute prohibiting arbitration clauses in insurance contracts. The court rejected AUCRA’s arguments that (a) the statute did not apply to the RPA because the statute is aimed only at traditional insurance contracts between an insurance company and its insured, and (b) even if applicable, the RPA fell within the reinsurance exception contained within that statute. The court noted that the reinsurance exception applied to “contract[s] between insurance companies including a reinsurance contract” and the insured was not an insurance company. The court also rejected AUCRA’s argument that the insured had waived or was otherwise estopped from contesting the validity of the arbitration clause by virtue of its pre-suit settlement attempts. The court thereby denied AUCRA’s motion to compel arbitration and granted the insured’s motion to stop arbitration. On a final issue, the court denied AUCRA’s motion to transfer venue to Nebraska per the RPA’s forum selection clause, finding the interests of justice weighed in favor of retaining the case in Tennessee. Milan Express Co., Inc. v. Applied Underwriters Captive Risk Assurance Company, Inc., Case No. 1:13-CV-01069 (USDC W.D. Tenn. Jan. 23, 2014).