Opinion
NO. 2015-CA-000720-MR
02-16-2018
WOODMEN OF THE WORLD LIFE INSURANCE SOCIETY APPELLANT v. NISHA WEST, ADMINISTRATRIX OF THE ESTATE OF RANDALL BRIDGEMAN AND BEULAH BRIDGEMAN APPELLEES
BRIEFS FOR APPELLANT: Daniel C. Mack R. Craig Reinhardt Lexington, Kentucky BRIEF FOR APPELLEE: W. Matthew Garmon Lance W. Turner Monticello, Kentucky
NOT TO BE PUBLISHED APPEAL FROM WAYNE CIRCUIT COURT
HONORABLE VERNON MINIARD, JR., JUDGE
ACTION NO. 14-CI-00319 OPINION
REVERSING AND REMANDING
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BEFORE: KRAMER, CHIEF JUDGE; TAYLOR AND THOMPSON, JUDGES. THOMPSON, JUDGE: Woodmen of the World Life Insurance Society appeals from an order of the Wayne Circuit Court denying its motion to compel arbitration and stay proceedings.
Woodmen is a not-for-profit fraternal benefit society permitted to issue life insurance policies to its members. On December 11, 1991, Randall Bridgeman applied for life insurance with Woodmen and for membership in Woodmen by signing (1) an application for a benefit certificate with Woodmen in which he answered information about himself and the life insurance policy he was seeking; (2) an application for membership in Woodmen; and (3) a life insurance certificate which contained the following information under the heading "contract":
The contract between the member and Woodmen consists of:Consistent information about which documents were part of the contract was also provided to members in their copy of Woodmen's articles of incorporation, constitution and laws.
· This certificate, including endorsements, additional applications, and amendments, if any.
· The written application, a copy of which is attached to this certificate.
· The Articles of Incorporation of Woodmen.
· The Constitution and Laws of Woodmen.
The Articles of Incorporation and the Constitution and Law and any amendments to them are binding on the member and the beneficiary but will not take away or reduce any of the benefits of this certificate.
This certificate is granted in consideration of the application and payment of the initial premium.
Woodmen's articles of incorporation, constitution and laws states on the top of its first page that the "Articles of Incorporation and Constitution and Laws are part of your benefit certificate. (See Constitution and Laws, Article 7.) They describe how Woodmen is governed, its purposes and objectives as well as your rights as members." Article seven states:
The contract between Woodmen and the owner consists of: the certificate, including any riders, endorsements and amendments; the application and any applications for modification of the certificate which are based upon evidence of insurability; and the Articles of Incorporation and this Constitution and Law, including all amendments to each[.]These provisions are consistent with Kentucky Revised Statutes (KRS) Chapter 304, Subtitle 29, which governs fraternal benefit societies.
On February 13, 1992, Woodmen issued Randall a flexible life insurance certificate with a face value of $40,000. Randall's wife, Beulah Bridgeman, was named as his beneficiary.
In July 1997, at Woodmen's national convention, its elected delegates voted to amend its articles of incorporation, constitution and laws to include a dispute resolution procedure (DRP). The DRP, set out in article eight of Woodmen's constitution and laws, provides a three-step process of informal negotiation, mediation and binding arbitration.
According to the affidavit of Steven Jones, vice president of marketing for Woodmen, the amended versions of Woodmen's articles of incorporation, constitution and laws, including the DRP, were mailed to each member following adoption. As a member, Randall would have received a copy of the articles of incorporation, constitution and laws after they were amended in July 1997 and again when other provisions were amended in July 2013. Both copies contained the same DRP provisions.
On December 7, 2013, Randall died and Nisha West, administratrix of the estate of Randall Bridgeman, and Beulah Bridgeman (collectively Bridgeman) sought payment of the death benefit pursuant to the certificate. Woodmen denied Bridgeman's claim based upon non-payment of premiums. Bridgeman refused to participate in DRP and instead filed a complaint alleging Randall purchased the policy in reliance on material misrepresentations and Woodmen acted in bad faith in refusing to pay the benefit due under the policy in violation of the unfair claims settlement practices act.
Woodmen filed a motion to compel arbitration and stay the proceedings pursuant to the DRP. The circuit court denied Woodmen's motion concluding Bridgeman could not be bound by the addition of DRP provision to the contract merely through receiving notice of it and the contract between Woodmen and Randall was an insurance contract which could not be arbitrated. The circuit court noted that while Woodmen originally had its origins as a fraternal society, it had evolved into a massive insurance business.
Because the circuit court denied Woodmen's motion to compel arbitration as a matter of law based upon its interpretation of the contract and statutes, we conduct a de novo review. Ping v. Beverly Enterprises, Inc., 376 S.W.3d 581, 590 (Ky. 2012); Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 73 (Ky. 2010); Daviess Cty. Pub. Library Taxing Dist. v. Boswell, 185 S.W.3d 651, 656 (Ky.App. 2005).
Woodmen argues Bridgeman was properly bound by the DRP provision even though it did not exist at the time Randall entered into his contract with Woodmen. Woodmen argues its articles of incorporation, constitution and laws were made part of the contract through a provision incorporating them and by statute. Therefore, when the DRP was added, it also became incorporated into the contract. Woodmen argues the addition of the arbitration clause to the contract is expressly permitted after issuance of the certificate because its amended laws are given retroactive application by statute and Randall consented to be bound by Woodmen's articles of incorporation, constitution and laws, including any amendments to them, and received appropriate notice by being mailed the amended articles of incorporation, constitution and laws that included the DRP in July 1997 and July 2013.
Although fraternal benefit societies provide life insurance like commercial insurance companies, in every state they are regulated by laws based upon the Model Fraternal Code, rather than by the same laws as commercial insurance companies. Hawkins v. Aid Ass'n for Lutherans, 338 F.3d 801, 803 (7th Cir. 2003). The laws governing fraternal benefit societies in Kentucky are contained in KRS Chapter 304, Subtitle 29, which is a distinct section of the Kentucky Insurance Code. KRS 304.1-010. By drafting a separate insurance code subtitle for fraternal benefit societies and exempting them from general insurance laws, a state legislature recognizes "that those organizations [are] unique and should be governed by a different set of rules than ordinary insurance companies." Woodmen of World Life Ins. Soc'y/Omaha Woodmen Life Ins. Soc'y v. JRY, 320 F. App'x 216, 220 (5th Cir. 2009).
Following each current section in KRS 304.29 is a publisher's note stating that "[t]his Subtitle . . . is derived from the 1983 Model Fraternal Code of the National Fraternal Congress of American[.]"
Fraternal benefit societies differ significantly from commercial insurance companies because they are "conducted solely for the benefit of its members and their beneficiaries and not for profit, operated on a lodge system with ritualistic form of work, [and] hav[e] a representative form of government[.]" KRS 304.29-011.
(1) A society shall operate for the benefit of members and their beneficiaries by:
KRS 304.29-051.(a) Providing benefits as specified in KRS 304.29-161; and
(b) Operating for one (1) or more social, intellectual, educational, charitable, benevolent, moral, fraternal, patriotic or religious purposes for the benefit of its members, which may also be extended to others. The purposes may be carried out directly by the society, or indirectly through subsidiary corporations or affiliated organizations.
It is undisputed that Woodmen is a fraternal benefit society as defined in KRS 304.29-011. As such, it may provide death benefits to its members and their dependents. KRS 304.29-161(1)(a), (2). The terms of its benefit contract are governed by KRS 304.29-191 (emphasis added), which specifies in relevant part as follows:
(1) Every society authorized to do business in this state shall issue to each owner of a benefit contract a certificate specifying the amount of benefits provided. The certificate, together with any riders or endorsements attached thereto, the laws of the society, the application for membership, the application for insurance and declaration of insurability, if any, signed by the applicant, and all amendments to each, shall constitute the benefit contract, as of the date of issuance, between the society and the owner, and the certificate shall so state. A copy
of the application for insurance and declaration of insurability, if any, shall be endorsed upon or attached to the certificate. All statements on the application shall be representations and not warranties. Any waiver of this provision shall be void.
(2) Any changes, additions or amendments to the laws of the society duly made or enacted subsequent to the issuance of the certificate, shall bind the owner and the beneficiaries, and shall govern and control the benefit contract in all respects the same as though the changes, additions or amendments had been made prior to and were in force at the time of the application for insurance, except that no change, addition or amendment shall destroy or diminish benefits which the society contracted to give the owner as of the date of issuance.
The circuit court ruled that Bridgeman could not be bound by the DRP provision merely through Randall receiving notice of it, pursuant to Ally Cat, LLC v. Chauvin, 274 S.W.3d 451, 456 (Ky. 2009). The Court in Ally Cat determined a home owners limited warranty document which included an arbitration provision did not constitute the making of an agreement to arbitrate pursuant to KRS 417.050 because the parties to the sales and purchase contract did not sign it, the person who signed a document did not do so while acting in a representative capacity, her signature was below language indicating she was simply acknowledging receipt of the document, and the document was not incorporated into the contract which provided any amendment must be in writing and signed by both parties. Ally Cat, LLC, 274 S.W.3d at 456. We disagree that Randall's situation is analogous to that in Ally Cat and agree with Woodmen that Bridgeman is bound by the terms of the DRP as added to his contract in accordance with KRS 304.29-191. We discuss separately whether such an arbitration agreement is enforceable or precluded by state and/or federal law.
Although we agree with the circuit court that Woodmen has evolved from its fraternal society origins into a massive insurance company, the traditional contract rules requiring a signatory's agreement before the contract is changed does not apply to Woodmen because as a fraternal society, different laws apply. While there is no Kentucky case law interpreting KRS 304.29-191, our sister courts in interpreting equivalent provisions in their statutes determined that arbitration agreements added to their members' contracts after they were purchased through amendments to the society's articles of incorporation and bylaws are binding on the policyholders. Hawkins, 338 F.3d at 806-08; Lomax v. Woodmen of World Life Ins. Soc'y, 228 F.Supp.2d 1360, 1364-65 (N.D. Ga. 2002); Woodmen of World Life Ins. Soc'y v. Johnson, 23 F.Supp.2d 1344, 1344-45 (S.D. Ala. 1998); Clayton v. Woodmen of World Life Ins. Soc'y, 981 F.Supp. 1447, 1448-49 (M.D. Ala. 1997); Woodmen of World Life Ins. Soc'y v. Harris, 740 So.2d 362, 367-68 (Ala. 1999).
The reasoning provided in Hawkins and Lomax is persuasive. In Hawkins, 338 F.3d at 806, the Court determined adding an arbitration provision was not unconscionable because "members of fraternal benefit societies expressly delegate decision-making power to their elected representatives[,]" members "chose to . . . enter[] into the type of open contract associated with fraternal benefit societies and required by [state] law" and under state law "agreements between a fraternal benefit society and its members include the society's bylaws, as well as any subsequent amendments, provided they do not destroy or diminish benefits promised in the policy." Therefore, the fraternal benefit society's "decision to add the arbitration provision was permissible, and the fact that [the members] were not consulted is of no consequence." Id.
The Court applied similar reasoning in Lomax, 228 F.Supp.2d at 1364-65:
[The members'] benefit certificates, which they signed, specifically incorporated and adopted the Woodmen constitution and laws and any amendments thereto. Therefore, . . . by becoming members of the Woodmen society, [they] specifically agreed to be bound by amendments to the organization's constitution[.] . . . Additionally, . . . [Woodmen] adequately informed its members about the adoption of the [DRP][.]See also Benitez-Navarro v. Gonzalez-Aponte, 660 F.Supp.2d 185, 191-92 (D.P.R. 2009) ("Although [the members] may not have been aware of the contents of the By-Laws, they were aware of the contractual clause which incorporated them by reference. The court finds that this knowledge alone is sufficient to find that [the members] knowingly agreed to the terms found in the contracts[.]").
Randall's signed life insurance certificate with Woodmen stated Woodmen's articles of incorporation, constitution and laws, including subsequent amendments to them, form part of the contract. Kentucky's law on fraternal benefit societies specifies that the benefit contract includes the certificate, the laws of the society and all amendments, and such amendments shall bind the owner and the beneficiaries as if such changes were in force at the time of the application for insurance. KRS 304.29-191(2). The adoption of the DRP was duly voted on by Woodmen representatives and notice was provided to all members. Therefore, this is not a situation analogous to Ally Cat. Instead, Randall agreed to be bound by subsequent amendments to his contract and Kentucky statutes provided that such amendments would become part of his contract. Essentially, Randall agreed that his Woodmen representatives were authorized to change the terms of his contract and Bridgeman is properly bound by the terms of the contract as amended.
Woodmen argues the arbitration clause is valid and enforceable against Bridgeman. We agree.
By filing a motion to compel arbitration, Woodmen was seeking specific performance of an asserted contractual right. N. Fork Collieries, LLC v. Hall, 322 S.W.3d 98, 102 (Ky. 2010). Although Woodmen did not state whether it was seeking enforcement of the arbitration agreement under the Kentucky Uniform Arbitration Act (KUAA), KRS 417.045 et seq., the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1 et seq. or both, and the DRP does not reference either Act, both the KUAA and the FAA are applicable to the review of the order denying enforcement of the arbitration agreement.
Other courts have repeatedly ruled that the FAA applies to Woodmen's life insurance contracts because the benefit certificates are issued from Woodmen's location of incorporation, Nebraska and, thus, affect interstate commerce. Lomax, 228 F.Supp.2d at 1365-66 (N.D. Ga. 2002); Woodmen of World Life Ins. Soc'y v. White, 35 F.Supp.2d 1349, 1355 (M.D. Ala. 1999).
Both Acts favor the enforcement of arbitration agreements. Ping, 376 S.W.3d at 588. The KUAA provides:
A written agreement to submit any existing controversy to arbitration or a provision in written contract to submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable, save upon such grounds as exist at law for the revocation of any contract.KRS 417.050. The FAA provides:
A written provision in . . . a contract evidencing a transaction involving [interstate] commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.9 U.S.C. § 2.
Bridgeman must arbitrate under the DRP unless Woodmen's arbitration provision is unenforceable as prohibited by law. Although written agreements to arbitrate are typically enforceable in Kentucky under the KUAA, the KUAA specifies "[t]his chapter does not apply to: . . . (2) Insurance contracts." KRS 417.050. The question is whether the Woodmen policy is an "insurance contract" as that term is used in KRS 417.050(2).
KRS 304.29-231 (emphasis added) exempts fraternal benefit societies from the normal requirements of the insurance code as follows: "Except as herein provided, societies shall be governed by this subtitle [Subtitle 29] and shall be exempt from all other provisions of the insurance laws of this state unless they be expressly designated therein, or unless it is specifically made applicable by this subtitle." Therefore, although Woodmen sells insurance policies as the bulk of its business, as a fraternal benefit society it is generally exempt from Kentucky's insurance laws.
In construing the effects of these statutes, we note that KRS 417.050(2) does not state its exclusion of insurance contracts from arbitration applies to fraternal benefit organizations and Subtitle 29 does not make KRS 417.050(2) applicable to fraternal benefit societies. Therefore, if KRS 417.050(2) is part of "the insurance laws of this state" the KRS 304.29-231 exclusion will result in Bridgeman being forced to arbitrate under the FAA. If KRS 417.050(2) is not part of "the insurance laws of this state" any arbitration will be prohibited by the KUAA.
Generally, under the FAA, state law is preempted if inconsistent with the FAA. However, pursuant to the McCarran-Ferguson Act, 15 U.S.C. § 1012(a), (b):
The business of insurance . . . shall be subject to the laws of the several States which relate to the regulation or taxation of such business . . . [and] No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, . . . unless such Act specifically relates to the business of insurance[.]
In Scott v. Louisville Bedding Co., 404 S.W.3d 870, 880 (Ky.App. 2013), the Court held KRS 417.050 was enacted for the purpose of regulating the business of insurance. Scott is consistent with the United States Supreme Court's interpretation that the core of "business of insurance" includes "[t]he relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement[.]" Sec. & Exch. Comm'n v. Nat'l Sec., Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969). See 1 Couch on Ins. § 2:5 ("state statutes aimed at protecting or regulating, directly or indirectly, the relationship between an insurance company and policyholders are laws regulating the business of insurance"); Am. Health & Life Ins. Co. v. Heyward, 272 F.Supp.2d 578, 581-83 (D.S.C. 2003) (holding statute prohibiting arbitration of insurance contracts was enacted for the purpose of regulating the business of insurance); Sturgeon v. Allied Professionals Ins. Co., 344 S.W.3d 205, 214 (Mo.App. 2011) (same).
While Bridgeman asserts that the holding in Scott is limited to the particular context in which it was applied, it defies logic for KRS 417.050(2) to be enacted for the purpose of regulating the business of insurance, yet not be part of insurance law. While there are no cases in Kentucky examining how KRS 417.050(2) and KRS 304.29-231 should be interpreted in conjunction with one another, there are decisions from our sister courts examining the interaction between equivalent fraternal code statutes, which exempt fraternal benefit societies from insurance law, and statutes prohibiting arbitration of insurance contracts. See JRY, 320 F.App'x at 219-20; Thrivent Fin. For Lutherans v. Lakin, 322 F.Supp.2d 1017, 1023-24 (W.D. Mo. 2004); Harris, 740 So.2d at 366-68; Cox v. Woodmen of World Ins. Co., 347 S.C. 460, 463-69, 556 S.E.2d 397, 399-402 (S.C.Ct.App. 2001). In each case, the Courts concluded fraternal benefit societies' life insurance contracts, which included arbitration agreements, did not qualify as "insurance contracts" and, therefore, the arbitration agreements could not be precluded from arbitration by statutes prohibiting the arbitration of insurance contracts. JRY, 320 F.App'x at 220; Lakin, 322 F.Supp.2d at 1024; Harris, 740 So.2d at 368; Cox, 347 S.C. at 468-69, 556 S.E.2d at 402. In Cox, the Court explained:
Although not found in Title 38 [the insurance code], § 15-48-10(b)(4) [the statute prohibiting arbitration of insurance contracts] is a law enacted for the purpose of regulating the business of insurance, and is accordingly, an insurance law. The legislature did not expressly provide the statute applies to fraternal benefits associations. Thus, rather than being an insurance law that expressly applies to fraternal benefits associations, it is a "general insurance law of this state" within the legislature's meaning of § 38-37-70 [the statute prohibiting general insurance laws from applying to fraternal benefit associations]. Accordingly, the arbitration exception is not applicable to fraternal benefits associations such as Woodmen. Thus, as the Woodmen contracts provide for arbitration, the current dispute is subject to arbitration pursuant to the FAA.Cox, 347 S.C. at 469, 556 S.E.2d at 402. Based on the same reasoning, we conclude the DRP is enforceable.
There is no reason to delay arbitration for the circuit court to resolve whether there was fraudulent inducement in the formation of the contract or for discovery on this issue because Bridgeman does not claim that the DRP itself was the result of fraudulent inducement and, thus, the arbitrator can resolve this issue. Louisville Peterbilt, Inc. v. Cox, 132 S.W.3d 850, 856-57 (Ky. 2004); Dutschke v. Jim Russell Realtors, Inc., 281 S.W.3d 817, 821-22 (Ky.App. 2008); Consultants & Builders, Inc. v. Paducah Fed. Credit Union, 266 S.W.3d 837, 839-41 (Ky.App. 2008).
Accordingly, we reverse and remand the Wayne Circuit Court's order denying Woodmen's motion to compel arbitration.
KRAMER, CHIEF JUDGE, CONCURS.
TAYLOR, JUDGE, DISSENTS AND WRITES SEPARATE OPINION.
TAYLOR, JUDGE, DISSENTING: Respectfully, I dissent. Under KRS 417.050, insurance contracts are not subject to arbitration. I believe this statute is controlling and applicable to all insurance contracts in Kentucky, including those issued by fraternal societies. Had the General Assembly desired to exempt fraternal society insurance policies from this arbitration limitation, they could have plainly stated the same therein. KRS 304.29-231 is not controlling in this case, in my opinion. Furthermore, I find Woodmen's amendment of its Articles of Incorporation/Bylaws, but not the insurance contracts affected thereby, to surreptitiously add an arbitration provision without adequate notice to its affected policy holders, to be unconscionable.
Based on the meager record before this Court and applicable law, I would affirm the Wayne Circuit Court's order denying the motion to compel arbitration. BRIEFS FOR APPELLANT: Daniel C. Mack
R. Craig Reinhardt
Lexington, Kentucky BRIEF FOR APPELLEE: W. Matthew Garmon
Lance W. Turner
Monticello, Kentucky
Therefore, if arbitration is precluded by a statute regulating the business of insurance, then the FAA can be "reverse preempted" and the state's own arbitration act will govern, in which case arbitration would be prohibited by the KUAA.