WHAT YOU NEED TO KNOW IN A MINUTE OR LESS
The New York Convention generally requires US courts to enforce written arbitration agreements covering international disputes, including arbitration clauses in contracts with foreign entities.1 More than a dozen US states, however, have enacted laws prohibiting mandatory arbitration clauses in insurance policies.2 So, is an international arbitration clause in an insurance policy governed by such state law enforceable? A number of courts across the country have grappled with this issue and the results are mixed.
In a minute or less, here’s what you need to know about the impact of anti-arbitration insurance laws on the enforceability of international arbitration clauses in insurance policies, and some considerations to keep in mind .
CAN STATE INSURANCE LAWS PROHIBIT ARBITRATION CLAUSES REPLACE THE NEW YORK CONVENTION?
In general, the Supremacy Clause of the US Constitution states that state law gives way to conflicting federal law, including treaties. Therefore, if the New York Convention and state anti-arbitration insurance laws were the only provisions at issue, state laws would likely be preempted. However, the McCarran-Ferguson Act complicates the issue because it grants states the right to regulate the insurance industry and specifically provides that “[n]o An act of Congress shall be construed as invalidating, impairing, or superseding any law enacted by any state for the purpose of regulating insurance business. . . unless that law relates specifically to the business of insurance.3
In CLMS Management Services Ltd. Partnership v. Amwins Brokerage of Georgia, LLCwhich involved an insurance policy between U.S.-based policyholders and foreign insurers that contained a mandatory arbitration clause, the Ninth Circuit Court of Appeals considered whether the McCarran-Ferguson Act permitted an insurance law of Washington State to “reversely pre-empt” the New York Convention.4 The Ninth Circuit held that Congress did not intend to include a treaty within the scope of an “act of Congress” when it used those words in the McCarran-Ferguson Act, and therefore the New York Convention was not subject to reverse preemption by the McCarran-Ferguson Act.5
Conversely, the Second Circuit has previously found that the New York Convention requirements do not supersede a Kentucky anti-arbitration insurance law.6 According to the Second Circuit, since the New York Convention “relyed on an act of Congress for its implementation”, i.e. the Federal Arbitration Act, it is subject to the aforementioned McCarran-Ferguson ban.seven
Outside of the circuits that have addressed this issue, some district courts have taken a similar approach to the Ninth Circuit, while others have aligned themselves more closely with the Second Circuit.8
CONSIDERATIONS FOR INSURED
State anti-arbitration insurance laws, like most insurance laws, are intended to protect policyholders. However, the United States Supreme Court having recently declined to consider CLMS Management Services and resolve this area of law, US policyholders who have international arbitration clauses in policies with foreign insurers may not be able to rely on state anti-arbitration insurance laws to avoid such arbitration agreements. Here are some considerations for policyholders:
Policyholders should carefully review all dispute resolution provisions in their policies, both at initial placement and on an ongoing basis.
If a policy provides for arbitration of international disputes and if the law governing the arbitration clause is a state with an anti-arbitration insurance law, insureds should understand how that law may affect the applicability of the clause.
The likelihood of an arbitration clause being enforced is also an important factor for policyholders to consider when making strategic decisions about whether, when and where to take action.
1 Chapter 2 of the Federal Arbitration Act, 9 USC § 201 et seq., incorporates the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) into United States law.
2 WASHING. TOWER. CODE ANN. § 48.18.200 (2019); ARK. CODE ANN. § 16-108-233(b) (2011); GEORGIA. CODED. ANN. § 9-9-2(c)(3) (2019); HAWTHORN. TOWER. STAT. § 431:10-221 (1987); KY. TOWER. STAT. ANN. § 417.050(2) (2019); THE. STAT. ANN. § 22:868 (2020); MARYLAND. CODE ANN., CTS. & JUD. PROC. § 3-206.1 (2009); MO. ANN. STAT. § 435.350 (1996); BEC. TOWER. STAT. ANN. § 25-2602.01(f)(4) (2010); OK SO. STAT. tit. 12, § 1855(D) (2008); 10 IR GEN. LAWS ANN. § 10-3-2 (1998); SC CODE ANN. § 15-48-10(b)(4) (1978); CODIFIED LAWS SD § 21-25A-3 (1997); VIRGINIA. CODE ANN. § 38.2-312 (1986).
3 15 USC § 1012(b).
4 8 F.4e 1007, 1009 (9th Cir. 2021).
5 ID. at 1018. In its decision, the Ninth Circuit said its conclusion was supported by the reasoning of the Fourth and Fifth Circuits. Identifier. at 1016 (citing ESAB Grp., Inc. v. Zurich Ins. PLC, 685 F.3d 376, 387 (4th Cir. 2012) and Safety Nat. Cas. Corp. v. Certain Underwriters at Lloyd’s, London, 587 F. 3d 714, 722 (5th Cir. 2009)).
6 Stephens v. Am. Int’l Ins. Co., 66 F.3d 41, 45–46 (2d Cir. 1995).
seven ID. (citing 9 USC §§ 201–208).
8 Compare JB Hunt Transp., Inc. c. Steadfast Ins. Co., 470 F. Supp. 3d 936, 943–45 (WD Ark. 2020) (stating that the McCarran-Ferguson Act does not permit Arkansas law to reverse preempt the New York Convention), with Foresight Energy, LLC c. Certain London Mkt. Ins. Cos., 311 F. Supp. 3d 1085, 1101 (ED Mo. 2018) (stating that a Missouri statute, through the McCarran-Ferguson Act, nullifies federal legislation implementing the New York Convention).