State Anti-Arbitration Statutes, the New York Convention and the McCarran-Ferguson Act
Arbitration provisions in insurance or reinsurance contracts periodically are challenged based on state anti-arbitration statutes. Often, when non-US insurers or reinsurers are involved, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention“) is raised as a basis to enforce the arbitration provisions in federal court. The counterpoint to that argument is reverse preemption under the McCarran-Ferguson Act. This is a heady academic subject that has real world consequences when a party is trying to enforce an arbitration provision in an insurance or reinsurance contract.
In a recent case, a Missouri federal court was faced with the question of whether it had subject matter jurisdiction under chapter 2 of the Federal Arbitration Act (“FAA”) to hear a dispute over whether arbitration could be compelled on a series of insurance policies. Foresight Energy, LLC. v. Certain London Market Ins. Cos., No. 17-CV-2266 CAS, 2018 U.S. Dist. LEXIS 69423 (E.D. Mo. Apr. 25, 2018). The insurance policies required disputes to be arbitrated in London. The policies, however, were governed by Missouri law and Missouri has an anti-arbitration statute that precludes arbitrations between insurers and policyholders. Mo. Rev. Stat. sec. 435.350 (2010).
The case was originally brought in state court, but one of the carriers removed it to federal court claiming federal subject matter jurisdiction under Chapter 2 of the FAA given the presence of non-US insurers. The policyholder moved to remand the matter back to state court and the court granted the motion.
The gist of the argument came down to whether the New York Convention is self-executing, and therefore not an act of Congress, or whether its implementing legislation in chapter 2 of the FAA is an act of Congress that interferes with state law regulating the business of insurance. In granting the remand motion, the court found that the plain language of McCarran-Ferguson, stating that no act of Congress can supersede state law regulating the business of insurance, was applicable to Missouri’s anti-arbitration provision when faced with chapter 2 of the FAA, an act of Congress.
The court adopted the analysis of the Second and Eighth Circuits in Stephens v. American International Ins. Co., 66 F.3d 41 (2d Cir. 1995) and Transit Casualty Co. v. Certain Underwriters at Lloyd’s of London, 119 F.3d 619 (8th Cir. 1997) and rejected the reasoning of the Fourth Circuit, in EAB Group, Inc. v. Zurich Ins. PLC., 685 F.3d 376 (4th Cir. 2012), which limited McCarran-Ferguson to domestic legislation. The court agreed with the notion that the New York Convention was not self-executing and that the Missouri anti-arbitration statute was a state law regulating the business of insurance. The court concluded that because chapter 2 of the FAA was an act of Congress and the New York Convention was not self-executing, McCarran-Ferguson reverse preempted the FAA and, accordingly, removed the basis for federal subject matter jurisdiction. The case was remanded to state court for lack of subject matter jurisdiction.
At some point, the US Supreme Court will weigh in on this controversy, or perhaps the McCarran-Ferguson Act will be amended or, as some in Congress have promised, repealed. In the interim, these arguments continue to play out differently depending on the federal circuit where the case is brought.