Georgia Statute Prohibiting Use of Arbitration Clauses in Insurance Agreements Not Preempted by Federal Arbitration Act Due to McCarran-Ferguson Act
Stempel, Jeffrey W., Journal of Risk and Insurance
McKnight v. Chicago Title Ins. Co., F.3d, 2004 U.S. App. LEXIS 1436 (U.S. Court of Appeals for the Eleventh Circuit--January 30, 2004)
The United States Arbitration Act, 9 U.S.C. Sections 1-16 was originally enacted in 1926 but has become much more important during the past 20 years due to broad application of the Act by the U.S. Supreme Court. In particular, the Court has held that the Federal Act creates substantive federal law applicable in both state and federal court and a national policy in favor of arbitration rather than trial, assuming the parties have agreed to arbitrate rather than litigate. In addition, the Supreme Court and other courts have tended to find sufficient agreement whenever there is a written arbitration provision in a contract, even if there are some practical concerns about the quality of the consent involved due to preprinted forms, small print, situations where reading the agreement is impractical, etc.
Generally, then, an arbitration clause that is part of an insurance policy or an application for insurance would presumably be enforced as long as the policy reflects a transaction involving interstate commerce (which is a requirement for the Act's application). However, the Georgia Arbitration Code (Ga. Code. Ann. Section 9-9-1, et seq.), which generally makes arbitration agreements specifically enforceable, expressly exempts arbitration provisions from its scope. The question thus arose: was the Georgia law making insurance arbitration clauses unenforceable a state law regulating insurance and therefore protected from federal preemption under the McCarran-Ferguson Act, 15 U.S.C. Section 1011, et. seq.? Or was the Georgia law "merely" an arbitration statute that was preempted by the Federal Arbitration Act? In McKnight v. Chicago Title, a federal court of appeals concluded that the Georgia law regulated insurance and was therefore immune from federal preemption.
In 1991, Charles and Jean McKnight bought property in Georgia and purchased title insurance from Chicago Title. The insurance policy contained a provision making arbitrable all disputes where the amount at issue was $1 million or less. In 2001, when the McKnights attempted to subdivide the property, they learned that the easement on their property was only 20-ft wide, not the 50 ft stated in the title insurance policy. The McKnights made a claim against Chicago Title for the diminished value of the land. Chicago Title denied coverage and the McKnights sued. Chicago Title moved to compel arbitration. The federal trial court refused, holding that a Georgia statute providing an insurance-only exception to arbitration was protected against federal preemption because McCarran-Ferguson generally vests insurance regulation power in the states and precluded federal preemption.
Chicago Title appealed to the Eleventh Circuit, which affirmed the trial court and denied the motion for arbitration. Said the Court:
If the state has an anti-arbitration law enacted for the purpose of regulating the business of insurance, and if enforcing, pursuant to the Federal Arbitration Act, an arbitration clause would invalidate, impair, or supersede that state law, a court should refuse to enforce the arbitration clause. …