Nebraska High Court: Federal Risk Retention Act Preempts State Law

The Nebraska Supreme Court has ruled that a district court erred when it found that a federal law did not preempt the state’s prohibition against mandatory arbitration clauses in insurance contracts.

In Speece v. Allied Professionals Ins. Co., the Court held that while the Federal Arbitration Act (FAA) does not preempt the Nebraska statute regarding mandatory arbitration clauses, in this particular case the federal Liability Risk Retention Act (LRRA) does.

Exeter, Neb.-based chiropractor Dr. Brett Speece, D.C., who held a professional liability insurance policy from Allied Professionals Insurance Co. (APIC), was sued by the state over allegedly false Medicaid claims. He sought defense coverage under the policy he held with APIC, which is “a risk retention group incorporated in Arizona and registered with the Nebraska Department of Insurance as a foreign risk retention group,” according to the Court’s written opinion.

A dispute arose over whether APIC was obligated to provide defense coverage and, if so, the extent to which was obligated.

Speece sought a declaration in district court that APIC was obligated to provide defense coverage, and sued APIC for breach of contract and bad faith.

APIC filed a motion to compel arbitration, as the APIC policy contained an arbitration clause stating that all claims or disputes “shall be resolved by binding arbitration,” the Court wrote.

The district court denied APIC’s motion and the insurer appealed.

The Supreme Court agreed with the district court that the FAA does not preempt state insurance law because, while the FAA “provides that written provisions for arbitration are valid and enforceable,” the act “does not specifically relate to the business of insurance,” the Court stated.

The Court said the LRRA, however, “is a federal statute that ‘specifically relates to the business of insurance’; that an examination of the provisions of the LRRA shows an express intent to preempt certain state regulations; and that the LRRA preempts the application of [the applicable Nebraska state statute] to foreign risk retention groups. Having eliminated the application of the antiarbitration provision in [the applicable Nebraska state statute], the arbitration clause at issue is enforceable.”