The New York Convention Overpowers the McCarran-Ferguson Act and Washington State Law Prohibition of Arbitration Clauses in International Insurance Contracts

The Ninth Circuit held on August 12, in CLMS Management, that the New York Convention requires enforcement of an arbitration clause in an insurance policy issued by a foreign insurer to a U.S. policyholder, notwithstanding a Washington State statute prohibiting arbitration clauses in insurance contracts. The policyholder argued that the Convention was reverse-preempted¹ under the McCarran-Ferguson Act (MFA), which mandates “that state insurance law preempts conflicting federal law.” More specifically, 15 USC § 1012(b) provides:

“No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.”

The question therefore was whether the New York Convention, which requires courts to enforce parties’ international arbitration agreements, is an “Act of Congress,” subject to the MFA’s reverse-preemption, or is “self-executing” and thus not subject to the MFA’s reverse-preemption.

Origins of the CLMS Dispute

The underlying action was an insurance coverage dispute for damages to property caused by Hurricane Harvey. The insurance policy at issue was underwritten by certain Lloyd’s Syndicates and contained an arbitration provision requiring that “All matters in difference between the Insured and the Companies . . . shall be referred to an Arbitration Tribunal.” After the policyholder filed a complaint in the Western District of Washington for breach of contract, failure to communicate policy changes, and unfair claims handling, the Syndicates filed a motion to compel arbitration. The district court granted the Syndicates’ motion.

The New York Convention is a “Self-Executing” Treaty and Therefore Not Reverse-Preempted by the McCarran-Ferguson Act

While the parties agreed that federal law (i.e., the New York Convention) preempts Washington state law if these were the only two provisions at issue, they disputed whether the MFA’s reverse-preemption applied under the circumstances. The Ninth Circuit applied a textualist approach in its analysis, pointing to the use of mandatory language in Article II, Section 3 of the New York Convention, requiring that domestic courts “shall . . . refer [] parties to arbitration” as evidence that the treaty is “self-executing.” The Ninth Circuit also pointed to the views expressed by the Solicitor General in another case, Safety National,² that Article II, Section 3 of the New York Convention is self-executing.

The Supreme Court has “long recognized” a distinction between self-executing treaties, which automatically gain force as domestic law, and treaties that require further congressional action to carry the force of law. The latter type of treaty would constitute an “Act of Congress,” and the policyholder argued that the subsequently enacted Convention Enabling Act (9 U.S.C. § 201 et seq.) proves that the New York Convention was not self-executing. The Ninth Circuit rejected this argument, reasoning that “the fact that domestic legislation may have been necessary to clarify . . . issues pertaining to the implementation of the Convention does not contradict the conclusion that Article II[,Section 3] is self-executing.” Plaintiffs also pointed out in their appellate briefing that a ruling in Syndicates’ favor would result in a circuit split, as the Second Circuit held in 1995 that the New York Convention is not self-executing. But the Ninth Circuit noted this decision came before the Supreme Court decided Medellin, which provided key guidance on the distinction between “self-executing” treaties and those requiring further legislative action.

Conclusie

Several states have laws similar to Washington’s prohibition on the inclusion of arbitration clauses in insurance contracts.³ Given the apparent circuit split and the prevalence of arbitration clauses in insurance and reinsurance contracts involving U.S. and foreign parties, the Supreme Court may take this issue for review. Until then, future circuit court cases will have major implications for enforceability of arbitration provisions in such contracts.