Recently, I wrote a reinsurance commentary for IRMI.com on reinsurance issues with captive, pools and other risk-sharing entities. Coincidentally, in January 2023, a Washington federal court had to deal with a risk-sharing pool’s claims of breach of a reinsurance contract and a reinsurer’s motion to compel arbitration.
In Washington Schools Risk Management Pool v. American Re-Insurance Co., No. 21-CV-00874-LK (D. Wash. Jan. 17, 2023), a pool issuing coverage to school districts in Washington state indemnified a school district for a settlement involving allegations of sexual abuse against the school district and a teacher. The pool was reinsured and sought coverage under its reinsurance agreements for the settlement. The reinsurers rejected the claim and the pool brought suit in court (originally Washington state court, but one of the reinsurers removed the case to federal court).
The decision involves a motion to seal certain documents (which the court allowed and is reasonably interesting), but the main focus for our purposes is the court’s approval of a magistrate judge’s report and recommendations to grant a reinsurer’s motion to compel arbitration and to stay the litigation against one of the reinsurers.
This is another case that deals with McCarran-Ferguson reverse pre-emption based on Washington’s anti-arbitration statute in the insurance context. Here, the court and the magistrate judge, following a recent Ninth Circuit case, found that reverse pre-emption did not apply to the non-US reinsurer. This was because the reinsurer was seeking to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and because the Convention was not an act of Congress it was not reverse-pre-empted by application of the McCarran-Ferguson act.
Because one reinsurer was domiciled in the US and the other was not, this led to a split result on arbitration. The magistrate judge recommended granting the motion to compel arbitration of the non-US reinsurer and also recommended that the action against that reinsurer be dismissed. For the US reinsurer, the magistrate judge recommended that the litigation be stayed because it would be inefficient to have two proceedings because the same facts and circumstances apply to both reinsurers and separate results would not make sense.
In states like Washington that have anti-arbitration laws applicable to insurance, McCarran-Ferguson reverse pre-emption can result in this kind of split result on whether an arbitration cause is enforceable. Here the court did the sensible thing by staying the litigation against the US reinsurer given the arbitration that would resolve the same issues and facts with the non-US reinsurer.