Second Circuit Reverses Reverse Preemption

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.

In 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.

Louisiana Anti-Arbitration Statute Stymies Surplus Lines Arbitration

Several states have anti-arbitration statutes that apply to insurance. In Louisiana, a state with such a statute, it as been an open question whether its anti-arbitration statute applies to surplus lines contracts. The Fifth Circuit, as answered that question.

In S.K.A.V. LLC v. Independent Specialty Insurance Co., 103 F.4th 1121 (2024), a dispute arose over a hurricane loss. The insured brought suit against the insurer and the insurer moved to dismiss the action and compel arbitration. The district court denied the motion and the Fifth Circuit affirmed based on reverse preemption under section 22:868 of the Louisiana Revised Statutes.

In affirming, the court carefully analyzed Louisiana case and statutory law. The argument to avoid reverse preemption and sustain the arbitration clause rested with paragraph D of the statute, which provides:

The provisions of Subsection A of this Section shall not prohibit a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance.

The question was whether arbitration, which is a “forum,” means that an arbitration clause in a surplus lines insurance contract–a policy form that is not subject to regulatory approval–may go forward in Louisiana in spite of the anti-arbitration statute. The circuit court answered that question in the negative. The court found that if the legislature when amending the statute to add paragraph D meant to allow arbitration under surplus lines contracts it would have said so. Additionally, it appeared that the legislature considered an arbitration clause a qualitatively different form of forum selection clause in the face of long-standing anti-arbitration history in Louisiana.

In rejecting the insurer’s arguments, the court held that:

General principles of contractual freedom, however normatively attractive in the surplus lines insurance business, cannot trump specific statutory commands. We are in no position to second-guess the wisdom of the Louisiana Legislature on this point; our duty is only to determine, as best we can, how the Louisiana Supreme Court would read § 22:868in this context.

Finally, in rejecting the principle that questions of arbitrability go to the arbitrator where there is a broad arbitration clause, the court concluded:

But, according to our precedent, this is a second-order question that follows one we have already answered: whether the parties have a valid agreement to arbitrate. We have already concluded, of course, that they do not, and if that is correct, we need not go any further. When a statute prevents the valid formation of an arbitration agreement, as we read § 22:868 to do, we cannot compel arbitration, even on threshold questions of arbitrability.

Arbitration Clause Upheld In Coverage Dispute

Coverage disputes between US policyholders and non-US insurers like Underwriters at Lloyd’s of London continue to raise jurisdictional and related issues in US courts. The issues become further exacerbated when there is an arbitration clause in the insurance contract and the non-US insurer seeks to stay the coverage litigation and compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention), to which the US and the UK and most EU countries are signatories.

In a recent case, a Louisiana federal court, hearing the case after removal from the state court, granted the insurers’ motion to stay litigation and compel arbitration.

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