In a dispute pertaining to a credit card account a separate agreement for credit insurance, a federal district court in Kentucky held that arbitration agreements in contracts for the extension of credit are not invalidated by reverse-preemption under the McCarran-Ferguson Act because such contracts are not insurance contracts or policies.

In Eaves-Leanos v. Assurant, Inc., Civ. A. No. 3:07-CV-18-S, 2008 WL 114889 (W.D. Ky. Jan. 10, 2008), Eaves-Leanos sued Citibank in connection with insurer Assurant's alleged failure to discharge a balance on Eaves-Leanos' credit card account with Citibank. Eaves-Leanos also sought to bring the suit as a class action.

Citibank moved to compel arbitration pursuant to an arbitration provision in the cardholder agreement. Eaves-Leanos opposed the motion on various grounds, but generally asserted that no valid arbitration agreement existed.

Eaves-Leanos first asserted that the arbitration agreement was unenforceable because the McCarran-Ferguson Act (MFA), 15 U.S.C. § 1011-1015, allowed for reverse-preemption of the Federal Arbitration Act (FAA) in favor of state law prohibiting arbitration agreements in insurance contracts.

The Court observed that the MFA operates to "save state statutes enacted for the purpose of regulating the business of insurance." It also noted that both South Dakota and Kentucky state law clearly prohibited arbitration agreements in insurance contracts.

However, the Court declined to hold that Citibank's contract was an insurance contract or insurance policy within the scope of the MFA. While the Court was unclear as to what role Citibank played in delivering Assurant's credit insurance product, it found the underlying Citibank contract was "nothing more than an agreement for the extension of credit," and not an insurance contract or policy within the scope of either state arbitration law or the MFA. Therefore, the Court held that the FAA was not reverse-preempted in this case.

Eaves-Leanos then argued that the application of South Dakota state law in interpreting the contract, rather than the law of Kentucky, was impermissible because the contract was one of adhesion. The Court determined that the challenged arbitration agreement was enforceable under either state's contract law and that the application of South Dakota contract law was permissible because it would not result in substantial injustice.

While Eaves-Leanos maintained that the arbitration agreement was procedurally unconscionable because it was added as a modification to the original contract, the Court found the addition permissible. The Court specifically noted that the addition of an arbitration agreement via notice, as Citibank had done, was expressly authorized in a South Dakota Attorney General's Opinion. Furthermore, according to the Court, this addition via notice was also permitted under Kentucky law, which approved of such additions so long as there was explicit notice on the customer's billing statement.

Eaves-Leanos also challenged the arbitration agreement as substantively unconscionable because it contained a class action waiver. The Court observed that the waiver in this case did not preclude Eaves-Leanos from pursuing an individual remedy, nor did it limit the types of claims or damages she could seek, rendering the waiver permissible under South Dakota law. In the alternative, the Court noted that Eaves-Leanos presented no evidence that the presence of a class action waiver rendered an arbitration agreement unconscionable under Kentucky law.

Finally, Eaves-Leanos challenged the arbitration agreement as unconscionable because the required arbitration procedure was cost-prohibitive. Because no federally protected interest was at stake, the Court analyzed the "cost-prohibitive" argument under state law instead of federal law. It found Eaves-Leanos had not demonstrated the likelihood that the process would be cost-prohibitve.

The Court also noted that all arbitration administrators listed in the agreement capped consumer arbitration costs at $375 dollars or less, and that administrators such as the National Arbitration Forum provide for deferral or reduction of fees in the case of hardship, which further precluded a finding that the process was cost-prohibitive.