Opinion ID: 3010878
Heading Depth: 2
Heading Rank: 3

Heading: Scope of the Arbitration Agreement and the

Text: Insurance Exception Given the nature of the dispute, we address the agreement embodied in Form U-4 and the NASD Code incorporated by reference in order to ascertain whether this controversy falls within the intended scope of arbitration. Form U-4 itself merely provides that the parties agree to arbitrate any dispute that is required to be arbitrated under the NASD Code. The Code's language is broadly drafted and covers: any dispute, claim, or controversy arising out of or in connection with the business of any member of the [NASD], or arising out of the employment or termination of employment of associated person(s) with any member, with the exception of disputes involving the insurance business of any member which is also an insurance company.... NASD Code S 1. At the very least, the section's plain language differentiates between two types of disputes, both 12 of which are arbitrable. There is no question that the parties intended to arbitrate any dispute arising out of the employment or termination of employment. Beyond these employment disputes, claims in connection with the business of members are also within the intended scope of arbitration. The language of the Code carves out an exception where the dispute involves the insurance business of any member. In these situations, there is a clear intent not to arbitrate but rather to leave the matter within the province of the courts. Less clear, however, is the coverage of this exception, as several ambiguities immediately arise in the clause's interpretation. For example, it is not clear whether the business of insurance exception applies to employment related disputes, to disputes in connection with a member's business, or to both.9 More importantly, neither the Code nor NASD by-laws defines what is meant by the insurance business and the intended scope of its coverage. 10 The history of NASD Code S 1 reflects the above conclusions, but sheds little light on the scope of arbitration or the insurance business exception. Before 1993, S 1 made the following claims eligible for arbitration: any dispute, claim or controversy arising out of or in connection with the business of any member of the Association, with the exception of disputes involving the insurance business of any member which is also an insurance company.... 58 Fed. Reg. 39,070 (1993). At this point, it was clear that the insurance business exception _________________________________________________________________ 9. We note that under settled principles of statutory construction, the doctrine of the last antecedent phrase would suggest that the business of insurance exception applies only to the phrase immediately preceding it which, in this case, is employment disputes. See Norma J. Singer, Statutes and Statutory Construction S 47.26, at 240-41 (5th ed. 1992); 24 Words and Phrases, Last Antecedent 453-66 (1966). 10. Counsel for Prudential would have us rely on such Supreme Court cases as Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119 (1982) which define the business of insurance for purposes of the McCarranFerguson Act, 15 U.S.C. S 1011 et seq. This suggestion, however, is beside the mark. What Congress intended by insurance for purposes of the McCarran-Ferguson Act is simply irrelevant to how the parties before us define insurance and the scope of disputes subject to arbitration. 13 only applied to disputes in connection with a member's business. The stated purpose of the exception was to: exclude ... disputes on [the] belief that the number of insurance-only claims involving insurance companies is so disproportionately large in relation to their securities business that to include such claims would unduly burden the arbitration system. In addition, the inclusion of such claims could result in a requirement to arbitrate matters that are intrinsically insurance, that is, matters with respect to which the Association does not believe it should mandate arbitration. 44 Fed. Reg. 75,255 (1979). The intent to be inferred from this phrase is that where the dispute is insurance-only or even intrinsically insurance it falls beyond the scope of arbitration. But apart from a stated concern regarding the sheer volume of insurance claims, nothing further suggests what is meant by an intrinsically insurance dispute or a claim that is insurance only. In 1993, however, the NASD amended the section to include the phrase, or arising out of the employment or termination of employment of associated person(s) with any member. 58 Fed. Reg. at 39,070. The stated intent behind this amendment was to assure that the arbitration of industry employment disputes may be compelled at the instance of one of the parties to the dispute. Id. at 39,071. Moreover, the NASD intended the newly proposed clause to be read broadly so that employment disputes that also invoked matters involving public policy issues would still be arbitrated. Id. at 39,071-72. To illustrate, the amendment provided that in cases involving employment discrimination claims or claims involving public policy issues, the panel should consist of a majority of public arbitrators. Id. at 39,071. Nevertheless, the NASD did not comment as to the potential interplay between the employment clause and the insurance business exception so as to illuminate the intended scope of arbitrable disputes in that context. As a result, we are left with an unanswered question that is at the heart of this case -- namely, whether employment disputes that implicate a member's insurance business fall 14 under the insurance business exception. On the one hand, it is clear, from both the language of the text and its history, that employment disputes were unequivocally intended to be arbitrated. This is so even if the employment claim raises policy matters well beyond the narrow legal issue of contract breach or ordinary employment torts. These would include, for instance, discrimination based on age, sex, or race. See 58 Fed. Reg. at 39,071. On the other hand, the NASD has expressed a clear and unequivocal intent not to arbitrate insurance-only or intrinsically insurance claims. The contours of an insurance-only or intrinsically insurance claim are too amorphous to define with precision in the present factual context, especially where it is the exception to a broad arbitration provision. We can easily imagine scenarios, such as the one before us, where a claimant, in order to recover on normally arbitrable disputes, would require the arbitrator to decide insurance issues. Thus, it would be difficult to unambiguously announce, on the basis of the NASD Code and its drafting history, whether the parties intended that these sorts of controversies are intrinsically insurance without any further indication of the meaning of the phrase. In the end, we are left wondering to what extent, if any, the desire not to arbitrate intrinsically insurance disputes was meant to override the parties' intention to arbitrate employment disputes -- broadly read -- when the controversy implicates both employment and insurance aspects. Courts that have grappled with this conundrum generally attempt to isolate certain aspects of the dispute and ascertain whether they pose central insurance questions. See, e.g., Young v. Prudential Ins. Co. of America, 688 A.2d 1069, 1081 (N.J. Super. Ct. App. Div. 1997) (looking to whether insurance practices are at the heart of[the] case); Vitone v. Metropolitan Life Ins. Co., 943 F.Supp. 192, 198 (D.R.I. 1996) (inquiring whether a comprehensive evaluation of the defendant's insurance business would be required to resolve plaintiff's claims); Wojcik v. Aetna Life Ins. and Annuity Co., 901 F.Supp. 1282, 1291-92 (N.D.Ill. 1995) (requiring plaintiff to allege unlawful insurance practices and not merely wrongful employment conduct 15 directed toward plaintiff); Prudential Ins. Co. of America v. Shammas, 865 F.Supp. 429, 432 (W.D.Mich. 1993) (looking for claims that invoke a specific[ ] relationship with insurance); Trumbetta v. Metropolitan Life Ins. Co., 1994 WL 481152 (E.D. Pa. 1994) (unreported disposition) (looking to the actual basis of plaintiff's claim). While it is possible to construe the insurance business exception so that an employee's claim is intrinsically insurance or insurance-only once the claim requires a resolution of a central insurance question, such an interpretation fails for several reasons. Assuming that the business of insurance exception applies to employment disputes, there is nothing in the NASD Code or its drafting history to indicate the degree of insurance involvement in a dispute that would constitute an intrinsically insurance claim. Looking to the purpose behind the exception -- a concern for case volume -- does not aid the inquiry, as no party has made the contention that the types of claims involved here would threaten an overload on securities arbitrators.11 If this court were to determine how the insurance exception applies to employment disputes, without any guidance as to the meaning of the phrase intrinsically insurance, our decision very well might frustrate the intent of the parties. However, because federal arbitration law requires doubts to be resolved against the resisting party, we need not grope for a rule that would resolve the ambiguity here.12 Instead, we are not inclined to expand the _________________________________________________________________ 11. The district court surmised that the driving force behind the exception is a general lack of expertise by securities arbitrators to consider insurance claims. Although this may be true, neither the NASD Code nor its drafting history posits this as a concern to the parties. 12. In fact, the text of the Code itself phrases the exception as any dispute involving the insurance business while the NASD's expression of purpose seems to limit the exception to insurance-only or intrinsically insurance claims. Because the word involvement indicates a more relaxed relationship to insurance issues than does the word intrinsically we are faced with a patent ambiguity of the parties' intent. Under settled contract principles, we must give effect to all circumstances behind the contractual term including the principal purpose of the parties. Restatement (Second) Contracts S 202(1). 16 exception without a clear indication of the parties' purpose and intended scope of coverage.13 We ultimately cannot say with positive assurance that the language of Form U-4 and the NASD Code, as well as their drafting histories, indicate the parties' desire not to arbitrate employment disputes that require the resolution of an insurance business issue. There is only one clear expression of intent here -- that employment disputes are subject to arbitration while intrinsically insurance claims are not. Because this court cannot say with certainty what is meant by intrinsically insurance claims, and whether it embraces employment disputes, our mandate is clear: a presumption in favor of arbitration applies and doubts in construction are resolved against the resisting parties. Thus, we will reverse the district court's ruling that the insurance business exception exempted the plaintiffs' claims from arbitration in this case.14