No Reverse Preemption Leads to Arbitration Under the New York Convention

Arbitration, Blog, Compel arbitration, McCarran-Ferguson Act, Preemption 2 Minutes
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The continuing controversy between national and international support and enforcement of arbitration provisions in commercial contracts, including insurance contracts, and US state anti-arbitration statutes that preclude enforcement of arbitration provisions in insurance policies has a new case that falls into the pro-enforcement camp.

In J.B. Hunt Transport, Inc. v. Steadfast Insurance Co., No. 5:20-CV-5049 (W.D. Ark. Jul. 1, 2020), the policyholder brought suit against two insurance companies for failing to defend and indemnify the policyholder for an underlying wrongful death action settlement. One of the policies, written outside the US, had an arbitration clause. That insurer moved to compel arbitration. The policyholder defended the motion by arguing that the arbitration clause in the Auto Terror and Malicious Attack Protect Contingent Insurance Policy was unenforceable because of a provision in the Arkansas insurance law that precluded arbitration provisions from inclusion in insurance policies.

This brings us to the long-standing reverse preemption debate. Can a state insurance law anti-arbitration provision, through the McCarran-Ferguson Act, supersede the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) as implemented by Chapter II of the Federal Arbitration Act (“FAA”)? Some courts have said yes, and precluded arbitration, holding that Chapter II of the FAA is a federal law and that under the McCarran-Ferguson Act, state insurance law prevails over a Congressional enactment. Some courts have said no, and have compelled arbitration, finding that the New York Convention is self-executing and is not reverse preempted by the McCarran-Ferguson Act.

In this case, within the 8th Circuit where there is no precedent on the subject, the district court granted the motion to compel arbitration and ruled that the Arkansas anti-arbitration law did not reverse preempt the New York Convention or Chapter II of the FAA. The court went through an analysis of all the cases on both sides of the controversy and ultimately found more convincing the arguments that McCarran-Ferguson does not apply to the New York Convention or Chapter II of the FAA.

The court agreed with the 4th Circuit that Congress did not intend McCarran-Ferguson to permit state law to vitiate international agreements entered into by the US. The court also agreed with those other courts that found Article II, Section 3 of the New York Convention to be self-executing. Article II, Section 3 direct the court of a Contracting State “when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration.” “Shall” is the operative word seized upon by this and other courts.

The court granted the motion to compel arbitration and stayed the action in its entirety until the arbitration is completed.

This same issue is before the 9th Circuit and ultimately will need to be resolved by the US Supreme Court.

Published by Larry P. Schiffer, Schiffer Law & Consulting PLLC

After 38-years with boutique and global law firms, Larry P. Schiffer launched an independent legal and consulting practice, Schiffer Law & Consulting PLLC, where he provides services as a lawyer, counselor, consultant, mediator, arbitrator and expert witness. He practices commercial, insurance, and reinsurance litigation, arbitration, and mediation. He provides advice on a wide variety of insurance and reinsurance issues, including claims and disputes, policy wording analysis and drafting, insurance insolvency issues, due diligence for transactions and have insurance or reinsurance components, insurance and reinsurance education and other advice. He is available to appear for clients outside of NY at mediations and conferences as needed on a per diem basis. He is active in legal and trade associations where he has held various leadership positions. He has lectured and has been widely published on reinsurance and other insurance topics. He serves as an Expert Commentator on reinsurance for IRMI.com and co-authored the chapter on reinsurance in the New York State Bar Association’s Insurance Law Practice treatise. He is the editor of the ARIAS•U.S. Quarterly. Mr. Schiffer received his J.D. from Albany Law School, where he graduated cum laude, was a member of the Albany Law Review and a member of the Justinian Society, and received his B.A. magna cum laude from Brooklyn College of the City University of New York. He was admitted to practice in New York in 1980.

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