The Ninth Circuit has weighed in on the controversy over whether state anti-arbitration provisions in insurance codes reverse preempt the arbitration provisions of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) because of the McCarran-Ferguson Act. The court joined several other circuits in holding that Article II, Section 3 of the New York Convention is self-executing and, therefore, arbitration can be compelled.
In CLMS Management Services Limited Partnership v. Amwins Brokerage of Georgia, LLC, No. 20-35428 (9th Cir. Aug. 12, 2021), a policyholder sought to preclude arbitration of a claims dispute arguing that state insurance law (Washington) barred arbitration of disputes under insurance contracts. The non-US insurer sought to compel arbitration under the New York Convention. The district court granted the motion to compel arbitration and this appeal ensued.
Article II, Section 3 of the New York Convention provides as follows:
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, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
In affirming the order compelling arbitration, the circuit court addressed the circuit split on this issue and, in a concise and well-reasoned decision, explained why McCarran-Ferguson did not apply and how the New York Convention, Art. II, Sec. 3, was self-executing. The court examined the legislative and executive history of the US’s joining the New York Convention and the relationship of the New York Convention to Chapter 2 of the Federal Arbitration Act (“FAA”).
In summary, while the FAA’s Chapter 2 implemented the New York Convention–which may be reverse preempted by application of McCarran-Ferguson where there is an insurance law provision that bars arbitration of insurance disputes because it is an act of Congress–Article II, Section 3 of the New York Convention is self-executing and, as a Treaty and not an act of Congress, is not reverse preempted by McCarran-Ferguson and takes precedence over state law under the Constitution’s Supremacy Clause. Bottom line, the insurance dispute must be arbitrated.
The court’s analysis centered on the language quoted above–“shall, at the request of one of the parties, refer the parties to arbitration“–in holding that Section 3 was self-executing. The court’s analysis included a good discussion of the legislative and executive history of Chapter 2 of the FAA and the New York Convention.
The court made it clear that it respectfully disagreed with the analysis of the Second Circuit in a 1995 case where the court held that the New York Convention was not self-executing. My prediction is that if the issue comes back to the Second Circuit again, the court–as it has shown recently in several cases where it revisited earlier insurance and reinsurance decisions–would agree with the Ninth Circuit on this issue (along with the Fourth and Fifth Circuits).
This decision, of course, does not change the potential for reverse preemption of the FAA by McCarran-Ferguson in the faces of state insurance law anti-arbitration provisions that often arise when US domestic insurers have disputes with US domestic policyholders. What it does, however, is make it a bit more clear that if the New York Convention applies to an insurance dispute with a policy containing an arbitration clause, a request to arbitrate the dispute will be enforced, especially in the Ninth Circuit.