In a Battle of Conformity and Preemption, Arbitration Prevails
The Supremacy Clause of the U.S. Constitution nullifies state laws that conflict with federal law and treaties of the U.S. But, under the McCarran-Ferguson Act, state insurance law reverse preempts federal law that interferes with the business of insurance as regulated by the states. This issue comes up in conflicts between anti-arbitration provisions in certain state’s insurance laws and the Federal Arbitration Act (the “FAA”). But what happens if it is not the FAA, but a treaty, like the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”)? And what happens if the insurance policy contains a provision that requires the policy to conform to state law where a provision of the policy–the arbitration clause for example–is in conflict with state law?
In McDonnel Group, L.L.C. v. Great Lakes Ins. SE, UK Branch, No. 18-30817 (4th Cir. May 13, 2019), the Fourth Circuit affirmed a district court order holding that a state anti-arbitration statute was preempted by the Convention. That holding was nothing new, as the Fourth Circuit had previously held that a treaty is not a law passed by Congress and, therefore, is not reverse preempted by McCarran-Ferguson. What is new here, as the court stated, is how a “conformity to statute” provision affects the analysis.
A “conformity to statute” provision basically provides that if a provision of a policy is inconsistent with state law, then the policy is amended to conform to state law. Here, the policyholder argued that the state law anti-arbitration provision must “amend out” the arbitration provision in the insurance policy. The district court held, and the circuit court affirmed, that because the Convention preempts state law, the state anti-arbitration provision cannot apply to the policy in dispute. And because the statute does not apply to the policy, there is no conflict between the policy and state law. Therefore, the conformity provision is not triggered and the arbitration provision survives.
There are a lot of moving parts here, but basically, the arbitration provision prevailed because the anti-arbitration law was preempted by a U.S. treaty–not a law passed by Congress–and was not be reverse-prempted by McCarran-Ferguson.