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The US Court of Appeals for the Fifth Circuit concluded recently that the McCarran-Ferguson Act, which gives US states the power to regulate the business of insurance, does not trump the 1957 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Accordingly, the Fifth Circuit determined that state laws prohibiting the arbitration agreements in insurance contracts cannot preempt the requirements of the New York Convention.

The full implication of this decision for the primacy of state insurance regulation, however, remains to be seen.

Introduction

Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, No. 06-30262, 2009 US App. LEXIS 24585 (5th Cir. Nov. 9, 2009) (Safety National) addressed the question of whether a Louisiana state statute that prohibits arbitration agreements in insurance contracts could, pursuant to the McCarran-Ferguson Act, trump the New York Convention’s requirement that courts enforce international arbitration agreements. The Fifth Circuit answered that question in the negative and ruled that an international arbitration agreement contained in a reinsurance contract must be enforced pursuant to the New York Convention, regardless of state insurance law requirements.

Background

Safety National concerned a Louisiana insurer (LSAT) that entered into several reinsurance agreements with underwriters from Lloyds of London (Underwriters). After entering into the reinsurance agreements, LSAT attempted to assign its rights in the reinsurance contracts to another insurer (Assignee), but the Underwriters refused to recognize the assignment.

The Assignee subsequently sued the Underwriters in federal district court in Louisiana, and the Underwriters responded by moving to compel arbitration under the New York Convention. Following a dispute over the method by which the arbitrators would be appointed, LSAT intervened in the district court proceedings and moved to quash the arbitration on grounds that Louisiana law prohibits arbitration agreements in insurance contracts.

The Louisiana federal district court concluded that the McCarran-Ferguson Act required the court to give priority to the Louisiana state law that prohibits arbitration agreements in insurance contracts, although the New York Convention would normally require the court to enforce the international arbitration agreement.

Following certification to the Fifth Circuit of the question of whether the McCarran-Ferguson Act reverse-preempts the New York Convention, a three-member panel of the Fifth Circuit ruled that the McCarran-Ferguson Act does not trump the New York Convention and that the arbitration agreement was enforceable. A rehearing before the full Fifth Circuit was then held, and the full Fifth Circuit again determined that the arbitration clause was enforceable.

Significance of Safety National

Safety National is significant because it confirms that the New York Convention requires US courts to enforce valid international arbitration agreements contained in insurance and reinsurance agreements absent special circumstances. Accordingly, in the Fifth Circuit, Safety National appears at first blush to remove the specter of state law invalidating an international arbitration agreement contained in an insurance or reinsurance contract under the McCarran-Ferguson Act.

Safety National is also of interest because it rejects the Second Circuit holding in Stephens v. American International Insurance Company, 66 F.3d 41 (2d Cir. 1995), which refused to enforce international arbitration clauses found in reinsurance agreements on grounds that the New York Convention is not a self-executing treaty that trumps the McCarran-Ferguson Act. Accordingly, Safety National creates a circuit split that the United States Supreme Court might be forced to resolve.

Whether Safety National undercuts state insurance regulation, however, is an open question. The United States Supreme Court decided in U.S. Dept. of Treas. v. Fabe (1993) that a state statute "escapes pre-emption to the extent that is protects policyholders." As a result, many states amended their insurer receivership statutes to prohibit the exercise of arbitration clauses in reinsurance agreements with reinsurers in liquidation, and numerous state courts have upheld such provisions.