The McCarran-Ferguson Act allows the states generally to regulate the business of insurance. 15 U.S.C. § 1011 et seq. Under McCarran-Ferguson’s reverse pre-emption framework, a federal statute yields to a conflicting state statute where the state statute regulates the business of insurance and the federal statute does not “specifically relate to the business of insurance.” 15 U.S.C. § 1210(b). Accord: U.S. Dept. of Treasury v. Fabe, 508 U.S. 491, 507 (1993) (state insurer insolvency law according enhanced priority to policyholder claims held to trump federal statute according priority to federal tax claims).
Some states have laws barring the enforcement of arbitration clauses in insurance contracts. See e.g. Off. Code Ga. Ann. § 9-9-2(c); Kan. Stat. Ann. § 5-401(c); La. Rev. Stat. Ann. § 22:868. The majority of courts have held that, while the Federal Arbitration Act mandates the enforcement of arbitration clauses in agreements affecting interstate commerce, state laws precluding the enforcement of arbitration clauses in insurance contracts trump the mandate of the Federal Arbitration Act. See American Banker’s Ins. Co. of Florida v. Inman, 436 F.3d 490 (5th Cir. 2006); McDermott Int’l, Inc. v. Lloyd’s Underwriters of London, 120 F.3d 583, 586 (5th Cir. 1997); McKnight v. Chicago Title Ins. Co., 358 F.3d, 854, 857 (11th Cir. 2004); Standard Sec. Life Ins. Co. of NY v. West, 267 F.3d 821 (8th Cir. 2001). Accordingly, it is reasonably well-settled that an arbitration clause in an insurance contract between citizens of the United States is unenforceable where contrary to a state law applicable specifically to insurance.
A lingering question has been whether an arbitration clause in a contract involving international commerce can be pre-empted by a contrary state law barring the forced arbitration of insurance disputes. Unlike arbitration clauses affecting interstate commerce within the United States, which are governed by the Federal Arbitration Act, agreements to arbitrate in the international context are governed by a treaty; to wit, the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, sometimes called the “New York Convention,” (the “Arbitration Convention”) and its implementing legislation (the “Arbitration Convention Act”). June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3; 9 U.S.C. §§ 201-208. While the Federal Arbitration Act appears in Chapter 1 of Title 9 of the United States Code, the Arbitration Convention Act appears in Chapter 2 of that title.
The United States Court of Appeals for the Fifth Circuit recently addressed the issue en banc, holding that the Arbitration Convention trumps the McCarran-Ferguson reverse pre-emption and upholding the enforcement of an arbitration clause in a reinsurance contract with Lloyd’s. See Safety National Cas. Corp. v. Certain Underwriters at Lloyd’s, London, Case No. 06-30262 (5th Cir. November 9, 2009). The en banc decision before eighteen judges on the Court was joined by fourteen of the judges, with a concurrence by a fifteenth judge, and with three judges dissenting.
The facts of the case are rather simple. The Louisiana Safety Association of Timbermen—Self Insurer’s Fund (“LSAT”) issued worker’s compensation insurance for its members. Certain Lloyd’s syndicates provided excess insurance to LSAT via a reinsurance agreement with an arbitration clause. Safety National Casualty Corporation (“Safety National”) subsequently acquired certain losses and reserves from LSAT under a loss portfolio transfer agreement. The dispute centered upon whether Lloyd’s was required to continue the reinsurance following the transfer to Safety National. Because the reinsurance agreements with Lloyd’s included an arbitration clause, arbitrability became a threshold issue.
While the decision has substantial practical business impact, it turned on the esoterica of treaty jurisprudence. In a nutshell, a treaty can be deemed “self-executing” or not self-executing. If the latter, the treaty is not enforceable in American courts until implemented by an act of Congress. In Safety National, Lloyd’s argued that the Arbitration Convention was self-executing or, alternatively, that even if not self-executing, the Convention Act served to implement a treaty which is antithetical to the McCarran-Ferguson pre-emption. The majority of the court adopted the latter reasoning.
The leading recent Supreme Court decision on determining whether a treaty is self-executing is Medellin v. Texas, 128 S.Ct. 1346 (2008), which held that the Vienna Convention on Consular Relations and the Optional Protocol Concerning the Compulsory Settlement of Disputes to the Vienna Convention was self-executing. The Medellin case was in the news last year. The defendant was convicted of a horrific murder and sentenced to death. After his conviction, the defendant filed a state habeas proceeding, arguing that he had not been accorded his right to a consular visit under the Vienna Convention and that, therefore, his conviction should be set aside. The Texas courts rejected his argument, but the International Court of Justice held that the United States had violated the Vienna Convention and that the United States was obligated to review and reconsider the sentence without regard to state procedural requirements. The United States Supreme Court affirmed the conviction holding that, because the Vienna Convention had not been implemented through legislation, it was not binding on Texas.
Interestingly, in his opinion for the majority in Medellin, Chief Justice Roberts cited the Arbitration Convention as an example of a treaty that required congressional legislation to implement. Id. at 1366. The Fifth Circuit considered that language to be dicta and chose not to follow it. Safety National, Slip. Op. at 12-13.
In my view, the majority in Safety National is correct. The Arbitration Convention should be enforced without regard to the niceties of state insurance laws, McCarran-Ferguson notwithstanding. The whole point of the Arbitration Convention is to shield foreign companies from the vagaries of local courts and juries. American companies would expect signatories to the Arbitration Convention to respect it, notwithstanding the provincial views of a particular province, county or canton.
The Fifth Circuit’s decision in Safety National conflicts with the Second Circuit’s decision in Stevens v. American International Insurance Co., 66 F.3d 41 (2nd Cir. 1995), where the court held that the Arbitration Convention was not self-executing and that, therefore, an insolvent insurer could enjoy the shield of a state law protecting it from the enforcement of arbitration clauses. Given the conflict in the circuits, Safety National may seek review by the Supreme Court.
Lew Hassett is Co-Chairman of the firm’s Insurance and Reinsurance Practice. His practice concentrates in the areas of complex civil litigation, including insurance and reinsurance matters, business torts and insurer insolvencies. Lew received his bachelor’s degree from the University of Miami and his law degree from the University of Virginia.
