Parties’ Choice of Law Prevails: Arbitration Compelled

Arbitration provisions in insurance agreements often come under attack when one of the parties to a dispute invokes a state law anti-arbitration provision to oppose a motion to compel arbitration. In many of these disputes, the court has to determine what state law governs the dispute. In a recent case, a federal magistrate judge recommended that the insurer’s motion to compel arbitration be denied because of a state’s anti-arbitration law but the federal district court disagreed.

In The Alliance Group, Inc. v. Zurich American Insurance Co., No. 8:21civ188 (D. Neb. Nov. 16, 2021), a dispute arose over program agreements that contained arbitration clauses. The insurer moved to compel arbitration and the magistrate judge recommended denying the motion. The magistrate judge found that Nebraska’s anti-arbitration law precluded arbitration based on McCarran-Ferguson preemption. The insurer objected to the magistrate judge’s findings and recommendation.

In sustaining the objection and granting the insurer’s motion to compel arbitration, the court found that the governing law provision in the program agreements designating New York law applied and that the Federal Arbitration Act also applied. The court rejected the magistrate judge’s choice of law analysis and held that the parties’ choice of law should prevail especially when the parties are sophisticated and experienced business entities.

The choice of law analysis was prompted by the application of the Restatement (Second) of Conflict of Laws (“Restatement”) § 187(2) (1971), which the parties agreed was applicable in the case. The court held that the parties’ choice of law was the default rule unless the two limited exceptions applied. The court held that they did not.

Under the Restatement, New York law applied unless New York “ha[d] no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice.” The Court found that New York not only had a substantial relationship to the parties and the transaction in this case, but also that the parties could have reasonably chosen New York law even without that relationship.

The second exception was whether Nebraska law had a materially greater interest in the dispute. The court held that it did not. Although Nebraska and New York have a different view on arbitration of insurance disputes, Under the circumstances of this case, the court held that Nebraska’s interest in determining the validity of an arbitration provision in an agreement relating to an insurance policy was not materially greater than New York’s interest in promoting arbitration. Because neither exception to the Restatement applied, the court held that parties’ choice of New York law governed.