• Court of Appeals of Kentucky Upholds Statute Prohibiting Arbitration Provisions in Insurance Contracts
  • September 27, 2013 | Author: George B. Hall
  • Law Firm: Phelps Dunbar LLP - New Orleans Office
  • The Court of Appeals of Kentucky has held that a risk pool agreement among self-insured entities constitutes a contract of insurance subject to Kentucky’s statutory prohibition against arbitration provisions in insurance contracts. Scott v. Louisville Bedding Co., 2013 WL 3480312 (Ky. App. July 13, 2013).

    A company provided health insurance to its employees which it self-insured. To minimize its risk, it entered into a trust agreement which, according to the court, was designed to accept and pool contributions from self-insured entities, invest the funds and either pay losses sustained by the contributors or purchase insurance on behalf of contributors. The insured sustained losses and made a claim for reimbursement under the trust agreement. The trust administrator denied the claim, and the insured sued the trust, the trust administrator and its principal, alleging fraud, breach of contract and misrepresentation. The principal of the trust sought to enforce an arbitration agreement contained in the agreement. The trial court held that he was not personally a signatory to the agreement and denied his attempt to enforce the provision. The principal appealed.

    The appeals court held that the principal would be entitled to enforce the provision in his personal capacity because the insured alleged that he was the “alter ego” of the trust administrator and therefore sought to enforce the agreement against him personally. However, the appeals court ruled that the arbitration provision was unenforceable because the pool agreement constituted a “contract of insurance” under Kentucky law because it created an obligation for the trust to indemnify the insured for its risk, and the Kentucky Uniform Arbitration Act (“KUAA”) does not permit such a contract to provide for mandatory arbitration. The appeals court rejected argument that the Federal Arbitration Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 202, pre-empted Kentucky state law. It concluded that the KUAA regulated the business of insurance and therefore, under the McCarran-Ferguson Act, “reverse pre-empted” federal statutes mandating enforcement of the arbitration provision.