Is your insurance arbitration agreement enforceable in anti-arbitration US states?

CLMS Management v Amwins Brokerage of Georgia [12 August 2021]

In CLMS Management v Amwins Brokerage of Georgia, the US Court of Appeals for the Ninth Circuit has upheld a decision of the US District Court for the Western District of Washington to enforce a pre-dispute arbitration agreement in an insurance contract pursuant to the New York Convention, finding that the Convention overrides contradictory state law.

Background

In 2016, the plaintiffs entered into an insurance contract, which provided coverage for a townhome complex in Texas. The policy was underwritten by Certain Underwriters at Lloyd’s, London (Lloyd’s) and it contained a mandatory arbitration provision. In August 2017, Hurricane Harvey caused an estimated US$5,660,000 in damages to the townhome complex. Plaintiffs submitted a claim under the policy and Lloyd’s third party claims administrator (CJW & Associates) responded that the policy deductible was US$3,600,000. Plaintiffs filed a complaint in the US District Court for the Western District of Washington alleging that the deductible should be US$600,000. Lloyd’s and CJW filed a motion to compel arbitration and stay the proceedings in the District Court.

The law

It is well known that Article VI, Paragraph 2 of the US Constitution (commonly known as the Supremacy Clause) establishes the rule that federal law preempts (i.e. takes priority over) any conflicting state laws.

The McCarran-Ferguson Act, however, provides that state insurance law can reverse-preempt (i.e. take priority over) conflicting federal law. It states that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance… unless such Act specifically relates to the business of insurance”. As a result, the McCarran-Ferguson Act reverses the Supremacy Clause preemption and gives states the authority to regulate insurance.

In this case, Washington State law prohibited the enforcement of arbitration clauses in insurance contracts. This conflicted with the terms of Article II, Section 3 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which requires US courts to enforce written arbitration agreements between foreign and domestic entities.

The question that arose in this case, therefore, was whether Washington state law, by operation of the McCarran-Ferguson Act, reverse-preempted (i.e. took priority over) the New York Convention.

The court decision

The US District Court for the Western District of Washington held that it was required to enforce the arbitration agreement pursuant to the New York Convention. The US Court of Appeals for the Ninth Circuit reviewed the question anew and agreed. Both found that Article II, Section 3 of the New York Convention was a self-executing provision having automatic force as domestic law and it was not an “Act of Congress” (which does not include a treaty, such as the New York Convention) subject to reverse-preemption (i.e. being overridden) by the McCarran-Ferguson Act.

Lloyd’s arbitration agreement was, therefore, enforceable and the US District Court proceedings had to be stayed.

Commentary

Federal law is pro-arbitration and in 1970, the US adopted the New York Convention, which (amongst other things) provides for the enforcement of written arbitration agreements between foreign and domestic entities. Consistent with this, most US states have adopted legislation that enforces arbitral agreements and awards. Several states, however, have enacted statutes prohibiting arbitration of insurance disputes. In these states, many an insurer has suffered from its arbitration agreement being found to be unenforceable leading to litigation before the state courts, which are predominantly pro insured.

Such anti-arbitration state laws have given rise to a long running debate as to whether the state laws or the New York Convention prevails. In a decision long overdue and to be welcomed by insurers, the US Court of Appeals for the Ninth Circuit has found that Article II, Section 3 of the New York Convention requiring US courts to enforce written arbitration agreements between foreign and domestic entities is a self-executing provision that is not displaced (or, to use the official language, reverse pre-empted by the operation of the McCarran-Ferguson Act) by contradictory state law prohibiting arbitration agreements in insurance. As a result, the arbitration agreement was enforceable and the District Court proceedings had to be stayed. The Court of Appeals was clear as to the preference to avoid state laws frustrating the federal government’s ability to regulate commercial relations with foreign governments.

In light of this decision, insurers should feel more comfortable going forward in the validity and enforceability of their arbitration agreements.

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