A home warranty contract is an insurance contract.
That’s the conclusion of the Oklahoma Supreme Court in a case in which the plaintiffs challenged a mandatory arbitration provision in a home warranty contract, maintaining such provisions are not legal under state law in any contract that references insurance.
In Sparks v. Old Republic Home Protection Co. Inc. the plaintiffs, homeowners William and Donna Sparks, sued “Old Republic Home Protection Company, Inc., for breach of contract and bad faith breach of contract of their home warranty policy. Defendant filed a motion to compel arbitration of the underlying dispute pursuant to a contractual provision requiring resolution of disputes through binding arbitration,” the court’s opinion states.
The Sparks had “purchased a policy from Old Republic Home Protection (ORHP) which included coverage for the repair or replacement cost of the home air conditioning system during the stated policy term.” The ORHP-drafted contract “included a provision that disputes between the parties would be resolved by arbitration under the Federal Arbitration Act.”
Around six months after purchasing the warranty contract, the Sparks suffered a covered loss that arose out of a faulty repair of their home’s air conditioning system. They alleged in their lawsuit against ORHP that the company had a pattern of hiring unqualified contractors or contractors who would make an assessment that little or no work was needed. Asserting ORHP was negligent in the hiring of the repair contractor and therefore liable for the damage to their home, the Sparks sued ORHP for breach of contract and bad faith breach of contract.
Relying on the wording of the provision in the warranty contract, ORHP filed a motion to compel arbitration, which the trial court denied. On appeal, the Court of Civil Appeals affirmed the lower court’s decision.
The Sparks had argued that the arbitration clause was not enforceable because of Oklahoma state law holding that arbitration could not be compelled in contracts that reference insurance. While the trial court gave no reason for its denial of ORHP’s motion, in its opinion the appeals court noted that under Oklahoma’s Uniform Arbitration Act arbitration could not be compelled in this case because “the contract ‘referenced insurance’ within the meaning of this Act and further that the Oklahoma legislature did not intend to exempt contracts made pursuant to the Oklahoma Home Service Contract Act (HSCA) and the Service Warranty Act (SWA) from this provision in the Uniform Arbitration Act.”
In its first pleading ORHP stated it is an insurance company and that the warranty agreement between the company and the Sparks was an insurance contract. In a later filing and without explanation, ORHP “pled that it was not an insurance company and that this was simply a home service contract but not insurance,” the high court’s opinion states.
The court noted, however, that on the bottom corner of the warranty contract rate sheet submitted by ORHP, “appears an insignia with ‘Old Republic Insurance Group.'”
ORHP had argued that under its arbitration provision “disputes between the parties would be resolved by arbitration under the Federal Arbitration Act” and that the FAA preempted state and federal law.
The McCarran-Ferguson Act, enacted in 1945, gave authority over insurance contracts to the states. But the ORHP argued that the FAA, not the McCarran-Ferguson Act, controlled because “‘Old Republic and the Plaintiffs chose the [FAA] as the law that governs all disputes.'”
The Oklahoma Supreme Court said in its opinion, however, that no evidence had been presented to show “that this arbitration policy provision was independently discussed or negotiated between the parties.”
Ultimately, the Oklahoma Supreme Court held that “the Plaintiffs’ home warranty plan meets the definition of insurance and as such is exempt from the Oklahoma Uniform Arbitration Act.”
The court also held that because insurance is regulated under state law, “the McCarran-Ferguson Act applies precluding the Federal Arbitration Act from preempting conflicting state law.”
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