International arbitration update: New York Convention not reverse preempted by state law

In Certain Underwriters at Lloyds, London v. 3131 Veterans BLVD, LLC, the United States Court of Appeals for the Second Circuit held that Article II Section 3 of the New York Convention is self-executing and not reverse-preempted by Louisiana law.  2025 WL 1335829 (May 8, 2025).  Certain surplus lines insurers at Lloyd’s London (“the Insurers”) issued insurance policies covering commercial properties that were damaged by Hurricane Ida.  Id. at *2.  The insurance policies contained identical arbitration provisions requiring: (1)  the parties to arbitrate all matters in dispute; (2)  the seat of arbitration to be in New York; and (3) New York law as the governing law.  Id. at *1.

3131 Veterans Blvd LLC (“3131 Veterans”) and Mpire Properties LLC (“Mpire”) filed lawsuits in Louisiana state court to recover under the policies.  Id. at *2.  The Insurers filed countersuits in the United States District Court for the Southern District of New York, seeking to compel arbitration under the Federal Arbitration Act (“FAA”) and New York Convention.  Id.  3131 Veterans and Mpire responded by arguing that a Louisiana state insurance law, La. R.S. § 22:868, voided the arbitration provisions in their policies, because under the McCarren Ferguson Act (the “MFA”), Louisiana law “reverse preempted” the FAA and the New York Convention.  Id.  The district courts in both cases denied the Insurers’ petition to compel arbitration, holding that Louisiana law prohibits arbitration clauses in insurance contracts, and that Louisiana law, not the New York Convention or the FAA , applied, because – as the Court held in Stephens v. American International Insurance, 66 F.3d 41, 45 (2d Cir. 1995) (“Stephens I”), the New York Convention was reverse preempted under the MFA.  Id.  The Insurers appealed both decisions.  Id.

The principal issue before the Second Circuit was the extent to which Article II Section 3 of the New York Convention is self-executing such that it cannot be reverse preempted by Louisiana law under the MFA.   Id. at *5.  Article II Section 3 of the New York Convention provides, in part, that when a party before a contracting nation’s court seeks to enforce an arbitration agreement made in a different nation, that court “‘shall refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.’”  Id. at *4 quoting New York Convention, art. II § 3.  The MFA's reverse-preemption rule applies specifically to Acts of Congress.  Therefore, under the MFA, state law can reverse-preempt a provision contained in a treaty, such as the New York Convention,  only when that treaty provision relies on an Act of Congress to take effect – or is not self-executing.  Id.  In other words, if the treaty provision is self-executing and does not rely on an Act of Congress to be implemented, the MFA does not apply.  Id.   

The Second Circuit had previously held, in Stephens I, that the New York Convention is not self-executing and is therefore subject to reverse-preemption under the MFA.  Id. at *5.  However, the Insurers argued that the test established in Medellín v. Texas, 552 U.S. 491 (2008)  undermined the Second Circuit’s analysis in Stephens I.  Id.  In Medellín¸ the Court identified several key factors of a “self-executing” treaty provision: “(1) that it provides ‘a directive to domestic courts’ of the contracting nation; (2) that it ‘provide[s] that the United States ‘shall’ or ‘must’’’ take a particular action, and (3) that the ‘text, background, negotiating and drafting history’ regarding the provision indicate the Senate and/or the President's intention that the ratified treaty take ‘immediate legal effect in domestic courts.’”  Id. quoting Medellín, 552 U.S. 491, 508, 523 (2008).  The Medellín Court further held that “[a] non-self-executing treaty provision, in contrast, would merely ‘call upon [member] governments to take certain action.’”  Id. quoting Medellín, 552 U.S. at 508.  Applying each of the factors established in Medellín v. Texas, the Second Circuit held that Article II Section 3 of the New York Convention is self-executing, and cannot be reverse preempted by Louisiana law under the MFA, thereby abrogating its contrary ruling in Stephens I.  Id. at *9.[1]

This case is important for alien insurers that wish to enforce arbitration clauses in their insurance contracts.  As with Louisiana, which does not permit arbitration clauses in insurance contracts, the Second Circuit now recognizes that New York Convention cannot be reverse pre-empted by state law.

 

 

 

[1] In addition to this holding, the Second Circuit held that: (1) Louisiana law prohibiting arbitration clauses in insurance contracts applies to surplus lines contracts;  and (2) the FAA and its delegation principles are reverse preempted by Louisiana law.  Following the Louisiana Supreme Court case Police Jury of Calcasieu Parish v. Indian Harbor Ins. Co., 395 So. 3d 717, 725 (La. 2024), the Second Circuit rejected the Insurers argument that a 2020 Amendment to La. R.S. § 22:868 exempted surplus lines insurance contracts from the law precluding arbitration agreements in insurance contracts.  Id. at *3.

The Second Circuit next held that the FAA and its delegation principles are reverse preempted by Louisiana law.  Id. at *4.  The court acknowledged that ordinarily the FAA would preempt a state law that extinguishes the power to enforce arbitration agreements.  Id. at *3.  However, “[u]nder the MFA, state laws enacted ‘for the purpose of regulating the business of insurance’ are generally exempt from preemption.”  Id.  Pursuant to the MFA, “the normal rules of preemption apply to a state insurance law only when an incompatible federal law exists that also relates to insurance.”  Id.  (emphasis in original) (citation omitted).  It was not disputed that the Louisiana law regulated the business of insurance, and that the FAA did not specifically relate to insurance.  Id. at *4. Rather, the Insurers argued that the arbitration provisions delegated the issue of arbitrability to the arbitrators.  Id.  The Court declined to delegate the issue of arbitrability in this matter to arbitration as that right of delegation flows from the FAA, which was held to be preempted by Louisiana state law.  Id.