Because arbitration is generally considered a more efficient forum for dispute resolution than litigation, insurers may include mandatory arbitration provisions––often with New York law and forum provisions––in their contracts. New York has served as a preferred forum for arbitration because it provides “access to a convenient forum which dispassionately administers a known, stable, and commercially sophisticated body of law.”[1] And “New York’s policy in favor of arbitration [is] so strong that it overrides all but a very few other public policies of the State itself.”[2] Similarly, contractual arbitration provisions are entitled to strong protection under federal law,[3] with the Federal Arbitration Act (“FAA”) providing that agreements to arbitrate are generally “valid, irrevocable, and enforceable.”[4]
Despite the long-standing federal law favoring arbitration, arbitration provisions in insurance policies recently have been facing a distinct challenge. Several U.S. states have adopted laws invalidating arbitration provisions––ostensibly to protect a resident’s “day in court” and right to a jury trial––in insurance disputes. But these statutes directly conflict with the FAA.[5] Generally, where a state law conflicts with a federal law, the federal law will govern under the Supremacy Clause of the United States Constitution.[6] There is, however, a limited exception for state laws that specifically regulate the insurance industry.
The McCarran-Ferguson Act[7] flips the typical mechanism of federal preemption. It provides that, where there is a conflict between state law relating to insurance regulation and an “Act of Congress,” the state law will govern. Thus, federal courts consistently have held that the FAA is “reverse-preempted” by McCarran-Ferguson when dealing with domestic insurers (that is, U.S.-based insurers).[8]
But this concept becomes complicated when a foreign (non-U.S.) insurer is involved because foreign insurers enforce their arbitration provisions differently than domestic insurers. Domestic insurers rely on Chapter 1 of the FAA to enforce arbitration agreements. Foreign insurers, by contrast, rely on Chapter 2, which implements an international treaty––The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, otherwise known as the New York Convention.[9] The question is whether McCarran-Ferguson also reverse preempts the New York Convention? Most federal circuit courts hold that it does not.
Most recently, the First Circuit (covering federal appeals from Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island) addressed this issue in Green Enterprises, LLC, v. Hiscox et al., agreeing with the majority of federal circuit courts.[10] At issue in Green was a Puerto Rican statute prohibiting arbitration provisions in insurance policies.[11] As an issue of first impression in the circuit, the First Circuit held that the New York Convention is not affected by McCarran-Ferguson, and affirmed the district court’s decision compelling the insured to arbitrate its claim.
While several federal appellate courts have reached the same outcome as the First Circuit, those courts differ in their reasoning. Some hold that McCarran-Ferguson applies only to statutes, not treaties.[12] According to these courts, an “Act of Congress” reverse-preempted by McCarran-Ferguson does not include “international agreements that this country has entered into and rendered judicially enforceable,” like the New York Convention.
Other courts hold that the New York Convention is a treaty but do not decide whether Congress intended to include a treaty within the scope of “Act of Congress” when it used those words in the McCarran–Ferguson Act.[13] Instead, these courts conclude that the New York Convention provides a clear and mandatory “directive to domestic courts” to compel arbitration.[14] And, because the New York Convention does not require any congressional action to implement it, it is “self-executing” and “leaves no discretion to the political branches of the federal government whether to make enforceable the agreement-enforcing rule it prescribes.”[15] Thus, it cannot be affected by McCarran-Ferguson. In Green Enterprises, the First Circuit follows the rationale of this second group of decisions.
Additionally, the First Circuit expressly rejected an almost thirty-year old decision from the Second Circuit (covering New York, Connecticut and Vermont), Stephens v. Am. Int’l Ins. Co.,[16] which held that the New York Convention was not self-executing. As the First Circuit explains, the Second Circuit decision predates a Supreme Court case that suggests the opposite, “offered no analysis of the text [], and contained little explanation for why it concluded that the Convention was in relevant part non-self-executing.”[17]
The First Circuit is not the only federal appellate court to question Stephens. The Fourth Circuit (covering Maryland, North Carolina, South Carolina, Virginia, and West Virginia) noted that, while “the [Second Circuit] concluded, without elaboration, that state laws precluding arbitration of disputes with a delinquent insurer reverse preempt the Convention Act,” even the Second Circuit has questioned––but not overruled––its holding that the New York Convention was not self-executing.[18] Additionally, the United States Supreme Court has rejected petitions for a writ of certiorari in two cases, both of which held that the New York Convention is not reverse-preempted by McCarran-Ferguson.[19]
To date, only five federal circuit courts have ruled on this issue:
| Federal Appellate Court | States Covered | Is the NY Convention Reverse-Preempted by McCarran Ferguson |
| First | Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island | No – Self-Executing |
| Second | Connecticut, New York, Vermont | Yes (but questioned) |
| Fourth | Maryland, North Carolina, South Carolina, Virginia, West Virginia | No – not “Act of Congress” |
| Fifth | Louisiana, Mississippi, Texas | No – not “Act of Congress” |
| Ninth | Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington | No – Self-Executing |
The lack of guidance from the other federal courts of appeal has caused federal district courts to take various approaches. District courts in Arkansas,[20] Florida,[21] Illinois,[22] and Indiana[23] have noted that the New York Convention is not reverse preempted by McCarran-Ferguson. But in Missouri, dueling district court opinions have reached contradictory results.[24]
Bottom line: besides reaching the “right” result, the First Circuit’s decision provides welcome clarity for foreign insurers seeking to arbitrate in those states. And until the other circuit courts––or the Supreme Court––weigh in, the enforceability of insurance policy arbitration provisions, at least in some states, remains in flux.
Jeffrey S. Weinstein and Diana E. McMonagle are partners at Mound Cotton Wollan & Greengrass. Jeff can be reached at 212-804-4226 or jweinstein@moundcotton.com. Diana can be reached at 212-804-4250 or dmcmonagle@moundcotton.com. Samuel B. Weiss was an associate at the firm. \
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[1] Int’l Bus. Machines Corp. v. Mueller, 2017 WL 4326114, at *6 (S.D.N.Y. Sept. 27, 2017).
[2] Curtis, Mallet-Prevost, Colt & Mosle, LLP v. Garza-Morales, 308 A.D.2d 261, 269 (1st Dep’t 2003); see also Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 49–50 (1997) (“New York courts interfere ‘as little as possible with the freedom of consenting parties’ to submit disputes to arbitration”).
[3] See, e.g., Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983) (noting the Federal Arbitration Act’s “liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary”); see also Morgan v. Sundance, Inc., 142 S. Ct. 1708, 1713 (2022) (“[A]rbitration agreements [are] as enforceable as other contracts, but not more so.”).
[4] 9 U.S.C.A. § 2.
[5] See, e.g., Ga. Code Ann. § 9-9-2; Wash. Rev. Code Ann. § 48.18.200; La. Stat. Ann. § 22:868.
[6] U.S. Const. art. VI, cl. 2; see also Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 30 (1996) (noting that Congress can enact laws that “set aside” conflicting state laws).
[7] 15 U.S.C § 1012(b); see also Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48 (1987) (citing Union Lab. Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982)).
[8] See, e.g., McKnight v. Chicago Title Ins. Co., 358 F.3d 854, 857 (11th Cir. 2004) (“If the state has an anti-arbitration law enacted for the purpose of regulating the business of insurance, and if enforcing, pursuant to the Federal Arbitration Act, an arbitration clause would invalidate, impair, or supersede that state law, a court should refuse to enforce the arbitration clause.”); Am. Bankers Ins. Co. of Fla. v. Inman, 436 F.3d 490, 494 (5th Cir. 2006) (similar); Standard Sec. Life Ins. Co. of New York v. West, 267 F.3d 821, 823 (8th Cir. 2001) (similar).
[9] Convention Done at New York June 10, 1958, T.I.A.S. No. 6997 (Dec. 29, 1970), reprinted at 9 U.S.C.A. § 201.
[10] 2023 WL 3557919 (1st Cir. May 19, 2023).
[11] § 1119 Limiting actions on policies; jurisdiction, 26 L.P.R.A. § 1119.
[12] ESAB Grp., Inc. v. Zurich Ins. PLC, 685 F.3d 376, 390 (4th Cir. 2012); see also Safety Nat. Cas. Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714, 724 (5th Cir. 2009) (“Congress did not intend the term ‘Act of Congress,’ as used in the McCarran–Ferguson Act, to reach a treaty such as the Convention.”).
[13] CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Ga., LLC, 8 F.4th 1007, 1013 (9th Cir. 2021); see also Safety Nat., 587 F.3d at 735 (Clement, J., concurring).
[14] Green Enterprises, 2023 WL 3557919 at *3 (citing Medellin v. Texas, 552 U.S. 491, 508 (2008)).
[15] Green Enterprises, 2023 WL 3557919 at *3 (citing CLMS, 8 F.4th at 1013).
[16] 66 F.3d 41, 44 (2d Cir. 1995).
[17] Green Enterprises, 2023 WL 3557919 at *3.
[18] ESAB Grp., 685 F.3d at 385 (citing Stephens, 69 F.3d at 1233 n. 6).
[19] See Louisiana Safety Ass’n of Timbermen–Self Insurers Fund v. Certain Underwriters at Lloyd’s, London, 562 U.S. 827 (2010); CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Georgia, LLC, 142 S. Ct. 862 (2022). It is also interesting to note that Louisiana Safety and CLMS held that the New York Convention controlled for different reasons, and the Supreme Court rejected both appeals. In other words, it appears that the Supreme Court agrees with those decisions’ bottom line, regardless of their reasoning. There is therefore some irony in the fact that the Supreme Court’s acknowledgment of the New York Convention’s precedence over state anti-arbitration statutes still faces policyholder challenges in New York, a state that has historically embraced arbitration.
[20] J.B. Hunt Transp., Inc. v. Steadfast Ins. Co., 470 F. Supp. 3d 936, 943 (W.D. Ark. 2020).
[21] Goshawk Dedicated v. Portsmouth Settlement Co. I, 466 F. Supp. 2d 1293, 1304 (N.D. Ga. 2006) (citing Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998), overruled on other grounds by Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 66 F.4th 876 (11th Cir. 2023)); see also VVG Real Est. Invs. v. Underwriters at Lloyd’s, London, 317 F. Supp. 3d 1199, 1206 (S.D. Fla. 2018) (citing Antillean Marine Shipping Corp. v. Through Transport Mut. Ins., Ltd., 2002 WL 32075793 (S.D. Fla. 2002)).
[22] Catalina Holdings (Bermuda) Ltd. v. Hammer, 378 F. Supp. 3d 687, 694 (N.D. Ill. 2019) (citing Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, 771 F.3d 980, 986–87 (7th Cir. 2014) and noting that the 7th Circuit declined “to reach the merits of an argument that McCarran-Ferguson preempts the Foreign Sovereign Immunities Act”).
[23] Certain Underwriters at Lloyd’s, London v. Simon, 2007 WL 3047128, at *7 (S.D. Ind. Oct. 18, 2007) (citing Goshawk Dedicated, 466 F.Supp.2d at 1303).
[24] Compare Foresight Energy, LLC v. Ace Am. Ins. Co., 2023 WL 2585931, at *3 (E.D. Mo. Mar. 21, 2023) (New York Convention controls) with Foresight Energy, LLC v. Certain London Mkt. Ins. Companies, 311 F. Supp. 3d 1085 (E.D. Mo. 2018) (McCarran Ferguson controls).