For decades, those seeking to enforce arbitration clauses in insurance policies have, in certain states, faced a major obstacle: reverse preemption. Reverse preemption is essentially using a state law precluding arbitration clauses in insurance policies to override — or reverse preempt — enforceability of arbitration through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) based on the McCarran-Ferguson Act, which allows state insurance laws that regulate the business of insurance to override general federal laws that are not specific to insurance and, in the case of an international treaty, that are not self-executing. The Second Circuit Court of Appeals, since 1995, has held that the New York Convention was not self-executing. That holding has now been reversed.
Read more: Second Circuit Reverses Reverse PreemptionIn Certain Underwriters at Lloyd’s, London v. 3131 Veterans Blvd LLC, Nos. 23-1268-cv and 23-7613-cv (2d Cir. May 8, 2025), a surplus lines insurer issued policies to two insureds with identical arbitration clauses. The insureds sued the insurer in state court in Louisiana over hurricane losses and the insurers sued in New York federal court to compel arbitration under Chapter 2 of the Federal Arbitration Act and the New York Convention. The insureds argued reverse preemption to dismiss the cases. Both of the underlying decisions held in favor of the anti-arbitration provisions in Louisiana’s insurance law based on reverse preemption and the Second Circuit’s holding in Stephens v. American International Insurance Co., 66 F.3d 41 (2d Cir. 1995), and denied the insurer’s petitions to compel arbitration.
The insurer appealed the dismissals arguing that subsequent U.S. Supreme Court precedent required an abrogation of Stephens and enforcement of the arbitration clauses under the New York Convention. In reversing and remanding, the Second Circuit held that its reasoning in Stephens has been fatally undermined by the Court’s holding in Medellin v. Texas, 522 U.S. 491 (2008). The bottom line is that Stephens has been abrogated to the extent that it held that Article II, section 3 of the New York Convention is not self-executing.
The main issue the court addressed was articulated as follows:
Accordingly, the principal disagreement in this case is whether Article II
Section 3 of the New York Convention is “self-executing,” making it exempt from
reverse-preemption under the MF A, or whether it relies on an Act of Congress
for its effect, such that it can be reverse-preempted by Louisiana law.
The circuit court described how the Court in Medellin identified the hallmarks of a self-executing treaty provision within the larger treaty. Using those hallmarks, several courts, including the First and Ninth Circuits have held that Article II, Section 3 of the New York Convention is self-executing. Based on these cases, the Second Circuit reconsidered its analysis in Stephens and agreed with the First and Ninth Circuits. It found that the text of Article II, Section 3 of the New York Convention was self-executing under the Medellin factors (it provides a directive to domestic courts and that the US “shall” or “must” take a certain action).
Because the court held that under the Medellin test Article 11, Section 3 of the New York Convention is self-executing, it cannot be reverse preempted under the McCarran-Ferguson Act. This should mean that if a case falls under Article 11, Section 3 of the New York Convention, state anti-arbitration laws will not override the policy in favor of international commercial arbitration.
