Opinion ID: 864563
Heading Depth: 3
Heading Rank: 2

Heading: Effect of the Inadvertent Approval on the

Text: Validity or Enforceability of Policy ¶28. In the initial opinion and order of March 4, 2003, the chancery court based its decision to deny arbitration at least in part on an attorney general’s opinion and the MDI’s inadvertent approval of Gulf policy forms which mandated arbitration. The chancellor opined: The Court also notes that the Mississippi Attorney General has rendered an official opinion that “Mississippi law does not provide that punitive damages can be excluded from insurance policies.” Furthermore, it is the policy of the Mississippi Insurance Department not to approve policy forms that mandate 13 In Orr, the Fifth Circuit considered the MDI’s authority to prohibit arbitration clauses in light of its ruling. Id. at 709. In doing so, it held that the Commissioner had no authority to prohibit arbitration clauses relating to insurance. Id. As a result, the MDI changed its policy and now allows arbitration provisions provided certain restrictions are met. It is unclear under what authority the MDI now believes it can impose restrictions beyond that which is provided by FAA and judicial precedent. 14 arbitration. The policy was inadvertently approved by the Mississippi Insurance Department. Gulf should not benefit by resubmitting a policy provision it has been previously informed was unacceptable but which was erroneously approved by the Mississippi Insurance Department. Lee Harrell, a Deputy Commissioner of Insurance for the State of Mississippi, submitted an affidavit which is part of the record in this case. In this affidavit, Deputy Harrell stated, inter alia, that the MDI had in the past approved Gulf’s submission of certain policy forms for a new program of employment related practices liability, and that these forms contained mandatory arbitration provisions. Deputy Harrell, in referring to a prior letter from Commissioner Dale, likewise stated in his affidavit: [I]t had been the policy of the Department of Insurance – and Commissioner Dale’s policy as Commissioner of Insurance – not to approve policy forms, policy applications and other documents that provide for mandatory arbitration. Commissioner Dale explained that the approval of Gulf Insurance Company’s employment related practices liability form containing a mandatory arbitration provision was the result of “inadvertent oversight” and “it should not have occurred.” (emphasis in the original). As already noted, there is also in the record an attorney general’s opinion written in response to Commissioner Dale’s inquiry as to whether certain insurance policies, including employment-practices liability policies, could exclude coverage for punitive damages under Mississippi law, and if so, would the Commissioner of Insurance have statutory discretion to disapprove policy forms which excluded punitive damages from coverage. In sum, the attorney general’s opinion concluded that the Commissioner of Insurance was “vested with sufficient [statutory] authority to set Department policy as to whether punitive damage exclusions are permissible.” Orr involved an appeal from the United States District Court for 15 the Northern District of Mississippi. The Orr court addressed the effect of an attorney general’s opinion or a state official’s policy statement on the FAA. The [McCarran-Ferguson] Act bars application of the FAA to insurance contracts only in the context of a state statute evincing the same, not mere policy statements of state officials or administrative rule interpretations of governmental entities. See Miller v. Nat’l Fidelity Life Ins. Co., 588 F.2d 185, 186-87 (5th Cir. 1979). The party seeking to avail itself of the Act must demonstrate that application of the FAA would invalidate, impair, or supersede a particular state law that regulates the business of insurance. Id. At 187. “The test under McCarran-Ferguson is not whether a state has enacted statutes regulating the business of insurance, but whether such state statutes will be invalidated, impaired, or superseded by the application of federal law.” Id. Appellants fail to identify any statute that would be impaired, invalidated, or superseded by the application of the FAA. Instead, Appellants try to perpetrate a judicial end-run by asserting that an attorney general’s opinion or insurance department’s regulatory, administrative policy is the functional equivalent of a state law relating to insurance, thereby triggering the provisions of the Act. Appellants’ arguments are without merit. First, “[o]pinions of the Mississippi Attorney General do not have the force of law....” Frazier v. Lowndes County, Mississippi Bd. of Educ., 710 F.2d 1097, 1100 (5th Cir. 1983) (citing Local Union No. 845, United Rubber, Cork, Linoleum and Plastic Workers of Am., Home Assoc. v. Lee County Bd. of Supervisors, 369 So.2d 497, 498 (Miss. 1979)). Second, because no Mississippi statute addresses, much less prohibits or restricts, arbitration of credit insurance-related claims, disputes or controversies, the Commissioner of Insurance for the State of Mississippi (the “Commissioner”) is without regulatory authority to prohibit arbitration clauses relating to insurance. (Emphasis in the original). 294 F.3d at 708-09. ¶29. It is abundantly clear that it was not the intent of McCarran-Ferguson to reversepreempt the application of the FAA because it was in conflict with state insurance department policy and an attorney general’s opinion. Stated differently, a state insurance department policy and an attorney general’s opinion are not “state laws” which are being invalidated by the application of the FAA. Thus, the learned chancellor erred in relying on the “inadvertent 16 approval” theory espoused by Neel-Schaffer, and in finding that the Commissioner of Insurance and the Attorney General could disapprove insurance policy forms which included mandatory arbitration provisions. ¶30. Notwithstanding our foregoing discussion on the effect of a state department policy on the FAA, we again emphasize that the Mississippi Code provides a specific statutory mechanism for the Commissioner to disapprove a policy form currently in effect. See Miss. Code Ann. § 83-2-11. Even assuming arguendo that state department policy could reversepreempt the FAA, which it cannot, it is of no moment in today’s case because pursuant to the provisions of § 83-2-11, the policy form remained in effect until a hearing and order was entered disapproving the form. The Commissioner only indicated that he planned to initiate the disapproval process and that should such ever be done, it would not limit the enforceability of the form at that time but prohibit future use of the form. ¶31. However, the record is void of MDI’s initiation of formal proceedings to reverse the inadvertent approval. The Legislature created a procedure in which the MDI could reverse approval of policy forms. In this instance, the MDI chose not to institute such proceedings. Thus until the conclusion of formal reversal proceedings, a policy form previously approved would remain valid and enforceable. Again, based on our finding that today’s application of the FAA does not invalidate any state law, the fact that Neel-Schaffer alleges that the MDI policy form approval was inadvertent is of no moment. ¶32. Finally, Neel-Schaffer makes several arguments based upon principles of equity, estoppel and unconscionability. These are procedurally barred and without merit. As to 17 substantive unconscionability, this issue is procedurally barred based on the fact that it is raised for the first time during this appeal.14 ¶33. Finally, Neel-Schaffer argues that Gulf should be equitably estopped from attempting to enforce an arbitration clause which it knew was contrary to MDI policy. The doctrine of equitable estoppel requires proof of a belief and reliance on some representation, a change of position as a result of the representation, and detriment or prejudice caused by the change of position. Mound Bayou Sch. Dist. v. Cleveland Sch. Dist., 817 So.2d 578, 583 (Miss. 2002). Neel-Schaffer does not address what misrepresentation Gulf made directly to it or how it acted on such misrepresentation. Moreover, Neel-Schaffer fails to reveal to us how it was ultimately prejudiced. This argument is without merit. ¶34. For the foregoing reasons, we unhesitatingly find that the arbitration clause contained in Gulf’s insurance contract with Neel-Schaffer was valid and enforceable. B. Whether the parties’ dispute is within the scope of the arbitration agreement. ¶35. In its second opinion/order, the chancery court found that while there was a valid agreement between the parties to arbitrate, the punitive damage provision of the arbitration agreement was ambiguous, and that Neel-Schaffer’s claim for punitive damages thus fell outside the scope of the provision. We find that the chancery court erred and that the arbitration provision is not ambiguous in its scope. 14 Neel-Schaffer argues that the arbitration provision is substantively unconscionable based on the fact that it waives its right to seek punitive damages. 18 ¶36. The first sentence of the arbitration clause explicitly defines its scope.15 The specific part of the arbitration clause found to be ambiguous does not involve the scope.16 Instead, it involves whether Neel-Schaffer waived its right to seek punitive damages or, more specifically, the arbitrator’s authority to award punitive damages. ¶37. The chancery court ruled that the punitive damage provision of the arbitration agreement was subject to two interpretations. The chancellor opined: It is not readily apparent from reading the arbitration provision what the drafter meant. One reading is that no punitive damages could be recovered. Another is only that the panel of arbitrators could not award punitive damages, but rather that the issue of punitive damages was to be left to the courts. This ambiguity is to be construed against the drafter. Therefore, the Court finds that the dispute in question, a claim for punitive damages, does not fall within the scope of that arbitration agreement. Having then found that the first prong of the test, whether the parties agreed to arbitrate the dispute in question, has not been satisfied, it is not necessary to reach the second prong. ¶38. Though the chancery court’s opinion focuses on the issue of scope, its interpretations differ generally on whether the provision sets forth a complete or limited waiver of punitive damages. That is, whether Neel-Schaffer waived any right to seek punitive damages or whether such provision merely limited the arbitrators’ authority to grant such damages and thereby allowing Neel-Schaffer whatever opportunity provided under the law to pursue punitive damages in court. ¶39. Gulf argues that the sentence in question is not ambiguous. Gulf contends that this sentence limits the remedies that potential arbitrators could award and that it does not limit the 15 The first sentence states: “Any controversy arising out of or relating to this Policy or its breach shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association.” 16 This sentence states: The arbitration panel may make an award of Compensatory “Loss”, but may not award punitive or exemplary “Loss.” (Emphasis in the original). 19 scope of the arbitration provision. Gulf agrees with the chancery court’s first suggested interpretation in that the sentence prohibits the arbitration panel from awarding either party punitive damages. Gulf maintains that the scope of the arbitration provision is plainly set forth in the first sentence, which provides: “Any controversy arising out of or relating to this Policy or its breach shall be settled by binding arbitration in accordance with the rules of the American Arbitration Association.” (emphasis added). ¶40. Gulf notes that although the chancery court ruled that the provision was ambiguous regarding whether punitive damages fell within the scope, it declined to enforce the provision to the extent that there was no ambiguity. Gulf is confused as to why the chancery court declined to enforce the entire provision despite finding only that claims for punitive damage fall outside the scope. ¶41. Neel-Schaffer maintains that the provision is ambiguous and that therefore chancery court correctly ruled that its claims against Gulf fell outside its scope. Neel-Schaffer likewise argues that there is a difference between “claim” and “loss” as defined under the policy and as referenced in the provision. The chancery court did not address this distinction nor did NeelSchaffer raise such before it. ¶42. Neel-Schaffer dismisses as semantic Gulf’s argument that the limitation goes to remedy as opposed to scope. It argues that if the Court were to adopt Gulf’s reasoning then it must also conclude that Neel-Schaffer waived its right to seek punitive damages. NeelSchaffer strongly denies that it waived its right to seek punitive damages and contends that there is no proof that it intended to do so. 20 ¶43. As to scope, the first sentence of the arbitration eliminates any doubt. The parties agreed that “[a]ny controversy arising out of or relating to this Policy or its breach,” would be subject to binding arbitration. Neel-Schaffer does not argue that its claims do not arise out of or relate to the policy. Because of this and the fact that there is no ambiguity as to scope, NeelSchaffer’s claims unquestionably fall within the scope of the arbitration agreement. ¶44. In finding that the punitive damage provision was ambiguous, the chancellor relied on the doctrine of contra proferentem – where a contract is ambiguous it will be construed against the drafter. Gulf argues that the chancery court relied on the doctrine of contra proferentem to supplant the federal policy to construe ambiguities concerning the scope of arbitrability in favor of arbitration. See Mastrobuouno v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62, 115 S.Ct. 1212, 131 L.Ed. 2d 76 (1995). The FAA is a congressional declaration of a liberal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary. Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). ¶45. Based on clearly established federal law and our case law addressing arbitration issues, there is no doubt here that in those instances where this Court must interpret arbitration provisions, the doctrine of contra proferentem must succumb to the federal policy. The federal policy, as an interpretive guideline, specifically concerns arbitration agreements, while on the other hand the doctrine of contra proferentem is a general rule of contract construction. The instant dispute (regarding the interpretation of the provision) is the type dispute that the FAA policy sought to eliminate. 21 ¶46. Neel-Schaffer contends that a remedial limitation necessarily limits the scope of arbitration. In support of this, Neel-Schaffer relies on Mulder v. Donaldson, Lufkin, & Jenerette, 623 N.Y.S.2d. 560 (N.Y. App. Div. 1995) for the proposition that where an arbitrator lacks authority to award punitive damages, a party may pursue a court action for punitive damages despite the fact that they already had been awarded compensatory damages in arbitration.17 However, the scenario advanced by Neel-Schaffer would create a system where a party seeking punitive damages would prosecute an action in two different forums, and thus nullifying the effort under the FAA to reduce litigation costs. ¶47. In sum, we conclude that there is no ambiguity in the provisions of the arbitration agreement. In the case sub judice, two companies and its employees/officers, sophisticated in business affairs, agreed to submit any dispute arising out of or related to the policy to a nonjudicial forum. In doing so, the parties agreed that this forum would be without authority to render an award for punitive damages. It was likewise agreed that the ultimate resolution from the arbitrators would be final and binding. The argument that Neel-Schaffer’s claims fall outside the scope of the arbitration agreement thus allowing Neel-Schaffer to seek punitive damages in a separate court proceeding is without merit. We thus find that the parties’ dispute in today’s case was within the scope of the arbitration agreement. 17 Under New York law, the power to award punitive damages is limited to judicial tribunals and may not be exercised by arbitrators. Garrity v. Lyle Stuart, Inc., 353 N.E.2d 793 (N.Y. 1976). See also Mastrobuono, 514 U.S. 52 (1995); Belco Petroleum Corp. v. AIG Oil Rig, Inc., 565 N.Y.S.2d 776 (N.Y. App. Div. 1991). 22 ¶48. Having thus found that there was a valid arbitration agreement and that the parties’ dispute fell within the scope of the arbitration agreement, we find that the parties in today’s case agreed to arbitrate the dispute in question.