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HAMILTON LIFE INS. CO. v. REPUBLIC NATL. LIFE INS.

July 30, 1968

HAMILTON LIFE INSURANCE COMPANY OF NEW YORK, Petitioner,
v.
REPUBLIC NATIONAL LIFE INSURANCE COMPANY, Respondent


Herlands, District Judge.


The opinion of the court was delivered by: HERLANDS

HERLANDS, District Judge:

Novel and important questions of federal-state relations in accommodating the Federal Arbitration Act, 9 U.S.C. § 1 et seq. with the McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. § 1011 et seq. are raised by the petitioner's motion and the respondent's cross-motion.

 Petitioner Hamilton Life Insurance Company of New York (Hamilton), moves for an order, pursuant to 9 U.S.C. § 4 *fn1" (the Federal Arbitration Act) directing the respondent, Republic National Life Insurance Company (Republic), to proceed to arbitration. Republic has cross-moved, pursuant to Fed.R.Civ.P. 12(b), to dismiss the petition on the following three grounds: (1) that the Court lacks subject matter jurisdiction; (2) that the Court lacks in personam jurisdiction over Republic; and (3) that Hamilton has failed to join an indispensable party. As alternative relief, Republic seeks a stay of all proceedings pending the determination by the Court of Appeals for the Ninth Circuit of an appeal in a related proceeding.

 On September 21, 1965, Republic and Hamilton entered into a group reinsurance agreement. This provided that Republic would reinsure a certain percentage of the risks on group life insurance policies written by Hamilton covering civil service employees in the New York City area. The group reinsurance agreement is contained in a standard form of reinsurance contract furnished by Republic. It was executed in New York City by an officer of Hamilton, who then mailed it to Republic's office in Dallas, Texas for signature. (Affidavit of Robert H. Autenreich, sworn to December 12, 1967, pp. 2-3). After the agreement was executed, additional negotiations occurred. As a result, there was a change in the first year administrative charge on ceded business. This change was made in the original reinsurance agreement, which was first initialed by an officer of Republic in Dallas, Texas and then by an officer of Hamilton in New York City, in October, 1965. (Autenreich Affidavit, p. 3 and Exhibit 1 attached thereto).

 The reinsurance agreement contains the following broad arbitration clause:

 
"ARTICLE XII ARBITRATION
 
1. All disputes and differences between the two contracting parties upon which an amicable understanding cannot be reached are to be decided by arbitration and the arbitrators shall place a liberal construction upon this agreement free from legal technicalities, for the purpose of carrying out its evident intent.
 
2. The court of arbitrators, which is to be held in the city where the home office of CEDING COMPANY [Hamilton] is domiciled, shall consist of three arbitrators who must be officers of Life insurance [sic] companies familiar with the reinsurance business, other than the two parties to this agreement. One of the arbitrators is to be appointed by CEDING COMPANY [Hamilton], the second by REPUBLIC NATIONAL and the third is to be selected by these two representatives before the beginning of the arbitration. Should the two arbitrators be unable to agree upon the choice of a third, the appointment shall be left to the president of the American Life Convention.
 
3. The arbitrators are not bound by any rules of law. They shall decide by a majority of votes and from their written decision there can be no appeal. The cost of arbitration, including the fees of the arbitrators, shall be borne by the losing party unless the arbitrators shall decide otherwise."

 Disputes having arisen between the parties, on July 27, 1967 Hamilton served a Demand For Arbitration in New York City on Republic. The Demand For Arbitration recited that Hamilton had paid various claims under group insurance contracts ceded to and accepted by Republic and that by virtue of the reinsurance agreement Republic was obligated to pay Hamilton the sum of $278,023.41. (Exhibit 1 to Affidavit of Herbert A. Einhorn, sworn to December 11, 1967).

 On November 14, 1967, Hamilton served a Notice of Appointment of Arbitrator, which also demanded that Republic select an arbitrator pursuant to the terms of the reinsurance agreement. (Exhibit 2 to Einhorn Affidavit). Republic, however, has refused to proceed to arbitration. Instead, it has subjected Hamilton to a barrage of court proceedings in an effort to obtain judicial relief.

 On July 14, 1967, Republic commenced an action against Hamilton based on the agreement in issue in the United States District Court for the Northern District of Texas. The action was dismissed for lack of jurisdiction on October 23, 1967. Republic appealed from this dismissal on October 30, 1967. On November 17, 1967, Republic voluntarily discontinued its appeal.

 On November 3, 1967, Republic commenced a second action against Hamilton, this time in the United States District Court for the District of Arizona. Service of the summons and complaint in that action was effected on Hamilton on November 20, 1967.

 On December 11, 1967, Hamilton filed in this Court a petition to compel arbitration (Hamilton's motion now before the Court), which was brought on for hearing on December 26, 1967 by a notice of motion dated December 12, 1967.

 Republic did not file an answer to the petition herein or request an adjournment of the proceedings in this Court. Instead, on December 20, 1967, Republic obtained, ex parte, from the United States District Court for the District of Arizona a temporary restraining order prohibiting Hamilton from proceeding before this Court. This order was extended on December 29, 1967. On January 9, 1968, a preliminary injunction against proceeding in this Court was issued in order to afford the United State District Court for the District of Arizona an opportunity to consider the matter fully.

 On January 29, 1968, the United States District Court for the District of Arizona quashed its injunction and granted Hamilton a stay of all further proceedings in Arizona pending this Court's determination of the present application for an order directing arbitration.

 On February 2, 1968, Republic moved in the Arizona federal district court for a rehearing or for a stay of its order quashing the preliminary injunction against proceeding in this Court pending appeal. On February 15, 1968, the Arizona court adhered to its prior determination but directed that no proceedings take place in the Southern District of New York until February 27, 1968 in order to allow Republic to apply to the Ninth Circuit Court of Appeals for a stay.

 On February 19, 1968, Republic applied ex parte to said Court of Appeals for a stay. On February 21, 1968, the Ninth Circuit stayed until March 4, 1968 the dissolution of the preliminary injunction against proceeding in the Southern District of New York to allow Hamilton to be heard on Republic's application for a stay pending appeal. Subsequently, on March 4, 1968, the Ninth Circuit vacated its temporary stay.

 On March 7, 1968, Republic applied to the United States Supreme Court for a temporary stay. On March 8, 1968, this application was denied by Mr. Justice Black.

 I

 Whether the McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. § 1011 et seq. (hereinafter the McCarran-Ferguson Act) prevents the petitioner from compelling arbitration of this dispute pursuant to § 4 of the Federal Arbitration Act *fn2" is the threshhold and crucial question. For the reasons that follow, this Court answers that question in the negative.

 In United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440 (1944), the Supreme Court decided that the business of insurance was commerce and therefore subject to federal regulatory legislation, specifically the anti-trust laws. South-Eastern Underwriters reversed the pre-existing rule that the business of insurance was not commerce and hence subject only to state regulation. See Paul v. State of Virginia, 75 U.S. 168, 19 L. Ed. 357 (1868); New York Life Insurance Co. v. Deer Lodge County, 231 U.S. 495, 34 S. Ct. 167, 58 L. Ed. 332 (1913).

 The McCarran-Ferguson Act was enacted in 1945 in order to "allay doubts" that South-Eastern Underwriters impaired "the continuing power of the States to tax and regulate the business of insurance." FTC v. Travelers Health Ass'n, 362 U.S. 293, 299, 80 S. Ct. 717, 721, 4 L. Ed. 2d 724 (1960); State Board of Insurance v. Todd Shipyards Corp., 370 U.S. 451, 452, 82 S. Ct. 1380, 8 L. Ed. 2d 620 (1962); Maryland Casualty Co. v. Cushing, 347 U.S. 409, 413, 74 S. Ct. 608, 98 L. Ed. 806 (1954); Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 429-433, 66 S. Ct. 1142, 90 L. Ed. 1342 (1946).

 The purpose and scope of the statute is summed up in the House Report on the bill:

 
"It is not the intention of Congress in the enactment of this legislation to clothe the States with any power to regulate or tax the business of insurance beyond that which they had been held to possess prior to the decision of the United States Supreme Court in the Southeastern Underwriters Association case. Briefly, your committee is of the opinion that we should provide for the continued regulation and taxation of insurance by the State, subject always, however, to the limitations set out in the controlling decisions of the Supreme Court * * * which hold, inter alia, that a State does not have power to tax contracts of insurance or reinsurance entered into outside its jurisdiction by individuals or corporations ...

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