Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ared-4_10-cv-00091/USCOURTS-ared-4_10-cv-00091-1/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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IN THE UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF ARKANSAS

WESTERN DIVISION

RICELAND FOODS, INC.

Plaintiff

V.

LIBERTY MUTUAL INSURANCE

COMPANY

Defendant

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NO: 4:10CV00091 SWW

ORDER

Riceland Foods, Inc. (“Riceland”) brings this insurance dispute pursuant to the Court’s

diversity jurisdiction against Liberty Mutual Insurance Company (“Liberty”). Before the Court

is Liberty’s motion to dismiss or stay the case in favor of arbitration (docket entries #12, #13),

Riceland’s response in opposition (docket entry #16), and Liberty’s reply (docket entry #19).

After careful consideration, and for reasons that follow, Liberty’s motion will be denied.

I. 

Riceland, an agricultural cooperative that provides marketing services for its farmer

members, has been named as a defendant in over 100 lawsuits (hereinafter referred to as

“underlying lawsuits”) filed by coop members and rice distributors. The plaintiffs in the

underlying lawsuits allege, among other things, that Riceland negligently allowed genetically

modified rice to contaminate the United States long-grain rice supply, causing the plaintiffs to

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suffer damages. 

Liberty issued consecutive general liability policies to Riceland for the periods covering

August 1, 2004 through August 1, 2008. The first policy issued, which provides coverage for the

period from August 1, 2004 through August 1, 2005, did not contain an arbitration provision. 

However, the renewed policies, which together provide coverage for the period from August 1,

2005 through August 1, 2008, contain an arbitration provision that reads as follows:

If we and the insured do not agree whether coverage is provided under this Coverage

Part for a claim made against the insured, then either party may make a written

demand for arbitration. 

Compl., Exs. #1, #2, #3. 

Riceland notified Liberty of the underlying lawsuits and sought defense and

indemnification benefits under the aforementioned policies. Liberty declined to assume the

defense of the underlying lawsuits or to reimburse Riceland for fees and costs incurred. On

January 22, 2010, Liberty filed a claim for arbitration, seeking a declaration that Riceland has no

right to coverage under the policies with respect to the underlying lawsuits. See Compl., Ex. #6. 

On February 10, 2010, Riceland commenced this diversity action seeking, among other things,

declarations that the aforementioned arbitration endorsements are void under the Arkansas

Uniform Arbitration Act (“AUAA”) and otherwise unenforceable and that Liberty has a duty to

defend and indemnify Riceland in the underlying lawsuits.

II. 

Liberty moves to dismiss or stay this action in favor of arbitration pursuant to the Federal

Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16. Riceland opposes the motion, arguing that pursuant

to the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, the AUAA renders the arbitration

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endorsements unenforceable. 

Choice of Law.

Riceland asserts that Arkansas law governs the interpretation of the insurance policies,

but Liberty contends that a choice of law determination is “inappropriate at this early stage of

litigation on a procedural issue.” Docket entry #19, at 9. To the contrary, the question of

whether the McCarran-Ferguson Act prevents the application of the FAA and compelled

arbitration is a question of substantive law. Furthermore, unless Arkansas law governs the 

interpretation of the policies at issue, there is no basis for precluding application of the FAA. 

Accordingly, it is imperative that Court determine, at this time, which state’s law governs

interpretation of the insurance policies at issue in this case.

In a diversity action, a federal court looks to the choice-of-law principles of the forum

state–in this case Arkansas--and applies those principles as the forum state would. Simpson v.

Liberty Mut. Ins. Co., 28 F.3d 763, 764 (8th Cir. 1994). In contract actions, when, as in this case,

an agreement does not specify the law to be applied, Arkansas Courts have applied the 

“significant contacts” test, which requires an inquiry into the nature and quantity of each state’s

contacts with the transaction at issue. Fuller v. Hartford Life Ins. Co., 281 F.3d 704, 706 (8th

Cir. 2002); Southern Farm Bureau Casualty Ins. Co. V. Craven, 79 Ark. App. 423, 89 S.W.3d

369 (2002). 

“In cases not involving an effective choice of law by the parties, the following factors are

relevant to the determination of which state has the most significant relationship to a particular

case: 1) the place of contracting; 2) the place of negotiation of the contract; 3) the place of

performance; 4) the location of the subject matter of the contract; 5) the domicile, residence,

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Another state law, Ark. Code Ann. § 23-79-203, declares void any provision contained

in an insurance contract that directly or indirectly deprives the insured or beneficiary of the right

to trial by jury on any question of fact arising under the contract. Liberty contends that pursuant

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nationality, place of incorporation and place of business of the parties.” Crisler v. Unum

Insurance Co. of America, 366 Ark. 130, 133, 233 S.W.3d 658, 660 (2006)(citing Restatement

(Second) Conflict of Laws § 188 (1971)). 

Here, Liberty is a Massachusetts corporation with a principal place of business in Boston, 

see docket entry #13, Ex. G, and Riceland is an Arkansas corporation, with a principal place of

business in Stuttgart. Although the Court has no information regarding the place of contracting

or negotiation of the policies at issue, the face of the policies indicate that they were issued from

Liberty’s sales office in Little Rock, Arkansas. Additionally, the policies provide that if

Riceland has questions, it should contact Liberty at a Little Rock address and phone number and

contact the Arkansas Insurance Department if Liberty fails to provide adequate service. Finally,

it is clear that the majority of the insured risk, thus the subject matter of the contract, is located in

Arkansas. The Court finds that Arkansas law governs the interpretation of the insurance

policies at issue in this case. 

Arbitration. 

Section 2 of the FAA compels judicial enforcement of arbitration agreements in any

“contract evidencing a transaction involving commerce.” 9 U.S.C. § 2. There is no dispute that

the insurance policies at issue evidence a transaction involving interstate commerce. However,

a provision contained in the AUAA, specifically Ark. Code Ann. § 16-108-201(b)(2), conflicts

with the FAA’s mandate because it provides that arbitration agreements contained in insurance

contracts are unenforceable against insureds and beneficiaries.1

 See IGF Ins. Co. v. Hat Creek

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to § 23-79-203, an arbitration clause in an insurance contract is unenforceable under § 16-108-

201(b)(2) only when enforcement would deprive the insured of a jury trial on a question of fact. 

According to Liberty, the key issues in this case concern questions of law, rendering § 16-108-

102(b)(2) inapplicable. 

Liberty’s argument is without merit. Far from putting limits on the applicability of 

§ 16-108-201(b)(2), which invalidates arbitration agreements in insurance contracts, § 23-79-203

invalidates insurance policy provisions that bind insureds or beneficiaries to an appraisement of

damages. As explained by the Arkansas Supreme Court, the object of § 23-79-203 is to

invalidate “a clause providing for an appraisal in case of disagreement as to such an amount and

make this condition precedent to the insured’s rights of action on the policy” and “to enable

policy holders to go before a jury on questions of fact as well as questions of law.” Firemen's

Ins. Co. of Newark, N.J., v. Davis, 130 Ark. 576, 198 S. W. 127, 128 (Ark. 1917). 

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Partnership, 349 Ark. 133, 137, 76 S.W.3d 859. 862 (2002). Arkansas Code § 16-108-201(b)

provides:

(1) A written provision to submit to arbitration any controversy thereafter arising

between the parties bound by the terms of the writing is valid, enforceable, and

irrevocable, save upon such grounds as exist for the revocation of any contract.

(2) This subsection shall have no application to personal injury or tort matters,

employer-employee disputes, nor to any insured or beneficiary under any insurance

policy or annuity contract. 

Ark. Code Ann. § 16-108-201(b).

Ordinarily, the FAA would preempt conflicting state law, but the McCarran-Ferguson

Act operates to bar application of the FAA if (1) the FAA does not specifically relate to the

business of insurance, (2) a state statute has been enacted for the purpose of regulating the

business of insurance, and (3) the FAA would invalidate, impair, or supersede the state statute. 

See Standard Security Life Ins. Co. of New York v. West, 267 F.3d 821, 823 (8th Cir. 2001). 

Liberty does not dispute that the FAA does not specifically relate to the business of insurance,

but it contends that the second and third factors are not present in this case. For the reasons that

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follow, the Court disagrees.

Regarding the second factor, the Supreme Court has prescribed a framework for

resolving whether a state law “regulates insurance” within the meaning of the McCarranFerguson Act. See UNUM Life Ins. Co. of America v. Ward, 526 U.S. 358, 373, 119 S. Ct. 1380,

1389 (1999). Under that framework, the a court must initially consider whether “from a

common-sense view of the matter” the law regulates insurance. UNUM, 526 U.S. at 367, 119 S.

Ct. at 1386. Next, a court should consider three factors: (1) whether the statue has the effect of

spreading a policyholder’s risk; (2) whether the statute is an integral part of the policy

relationship between the insurer and the insured; and (3) whether the statute is limited to the

entities within the insurance industry. UNUM, 526 U.S. at 367, 119 S. Ct. at 1386. Although

the foregoing factors are relevant, they are merely guideposts, not separate essential elements

that must each be satisfied. UNUM, 526 U.S. at 374, 119 S. Ct. at 1389(quoting Cisneros v.

UNUM Life Ins. Co., 134 F.3d 939, 945 (1998)). 

Because § 16-108-201(b)(2) expressly exempts arbitration provisions in insurance

contracts from the general policy of enforcing such provisions, common sense dictates that the

provision regulates the business of insurance. As for the next three factors, the Court finds that

two are clearly met. Section 16-108-201(b)(2) affects policyholder risk “by introducing the

possibility of jury verdicts into the process of resolving disputed claims.” Standard Security Life

Ins., 267 F.3d at 824. And § 16-108-201(b)(2) regulates an integral part of the insurer-insured

relationship by invalidating an otherwise mandatory insurance contract term thus subjecting all

disputes to the possibility of a jury trial. Id. Although § 16-108-201(b)(2) also exempts tort and

employment claims from arbitration and thus is not limited to entities within the insurance

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industry, a finding that two of the three UNUM factors is sufficient to conclude that the provision

regulates insurance.

Regarding the third factor, that is, whether the FAA would invalidate, impair, or

supersede § 16-108-201(b), it is clear that application of the FAA to enforce the arbitration

endorsements would terminate the operation of § 16-108-201(b)(2) and have the effect of

displacing or superceding the state law. In sum, the Court finds that the three criteria relevant to

deciding whether the McCarran-Ferguson Act bars application of the FAA are met in this case, 

and that Liberty’s motion must be denied.

III. 

For the reasons stated, Defendant’s motion to dismiss or stay this action in favor or

arbitration (docket entry #12) is DENIED.

IT IS SO ORDERED THIS 6TH DAY OF AUGUST, 2010. 

/s/Susan Webber Wright

UNITED STATES DISTRICT JUDGE

 

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