Reinsurance Focus

The Nebraska Supreme Court has held that Nebraska’s statute prohibiting mandatory arbitration clauses in insurance policies is preempted by the Liability Risk Retention Act of 1986 (LRRA). At issue was a professional liability insurance policy from Allied Professionals Insurance Company, a risk retention group incorporated in Arizona and registered with the Nebraska Department of Insurance as a foreign risk retention group. When a dispute arose between the policyholder and Allied, the policyholder filed an action seeking a declaration that Allied was obligated to provide coverage for an underlying civil suit pending against him. Allied moved to compel arbitration pursuant to the policy’s mandatory arbitration clause, which required binding arbitration of any dispute concerning the policy. The lower court rejected Allied’s argument that the Nebraska statute was preempted by federal law and concluded that the arbitration clause was neither valid nor enforceable. It therefore denied Allied’s motion to compel arbitration.

Nebraska’s Supreme Court reversed, finding that while the Federal Arbitration Act did not preempt Nebraska’s law, the LRRA did. The LRRA provides, in part, that a foreign risk retention group is exempt from any state law that would “regulate, directly or indirectly, the operation of a risk retention group.” Nebraska’s prohibition of arbitration clauses in insurance policies “regulates the operation of a risk retention group” within the meaning of the LRRA. As a result, the arbitration clause in the Allied policy was not prohibited by state statute, but was a valid and enforceable clause compelling arbitration. Speece v. Allied Professionals Insurance Co., 289 Neb. 75 (Neb. Sept. 19, 2014).

This post written by Renee Schimkat.

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