A New York trial court judge denied an American International Group Inc. unit's request to compel a workers compensation policyholder into arbitration.

Monday's ruling in National Union Fire Insurance Co. of Pittsburgh, Pa. vs. Source One Staffing L.L.C. addressed whether a policyholder must settle a dispute through arbitration because an insurance payment agreement issued by the insurer contained an arbitration clause.

“That clause directs that all disputes arising under the payment agreement are subject to arbitration, including questions as to the arbitrability of the dispute,” New York Supreme Court Judge Eileen Bransten's opinion shows.

The court record also shows that Source One alleged “at some point” that National Union “failed to reasonably adjust claims” and “made inappropriate demands that (Source One) increase its collateral under the payment agreement,”

In October 2010 National Union sued, demanding arbitration of a payment dispute. Then in December 2010, Source One sued in Los Angeles, disputing the arbitration clause's enforceability on the basis that the California insurance code mandates that a workers comp policy and other related documents cannot be issued unless the insurer files a copy of the policy “with the rating organization.”

Among other issues, the insurer contended in the New York court that the payment agreement is not a policy within the California insurance code's meaning.

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It also argued that the Federal Arbitration Act pre-empts state law, and that under the FAA the arbitration clause and a forum-selection clause are valid.

But Judge Bransten found that the federal McCarran-Ferguson Act leaves the regulation of insurance to the states.

Therefore, the judge found the FAA cannot pre-empt California law regulating insurance, according to a statement from New York-based Anderson Kill & Olick P.C., which represented Source One.

National Union responded with a statement saying that two other New York Supreme Court judges hearing similar cases have ruled in favor of the insurer.

“National Union respectfully disagrees with the Source One decision denying its motion to compel arbitration, and has appealed that decision,” National Union's statement reads. “In two other recent cases involving other insureds and similar issues in New York Supreme Court, National Union prevailed on motions to compel arbitration. We are optimistic that the appellate court will ultimately enforce the parties' agreements to arbitrate in all three cases.”