December 24, 2008

US Appeals Court Upholds Reinsurance Arbitration Clause

The U.S. Court of Appeals for the Fifth Circuit has upheld the arbitration clause in a reinsurance contract between Certain Underwriters at Lloyd’s and a Louisiana-based self-insurance fund. The Court rejected a contention by the Louisiana fund that a 1945 federal statute that commits insurance regulation to state law, permits a state to

deny enforcement of arbitration clauses in insurance contracts.  Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 2008 U.S. App. LEXIS 20917 (5th Cir. Sept. 29, 2008).  The decision represents an important victory for foreign and offshore reinsurance firms, who regularly seek to arbitrate disputes with their U.S.-based clients.

The 1945 law, known as the McCarran-Ferguson Act,  provides in part 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 . . . .”   Louisiana law makes it unlawful for a contract of insurance to deprive Louisiana courts of jurisdiction in an action against the insurer.

If the Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) , a treaty of the United States implemented by the Federal Arbitration Act (“FAA”), were deemed an “Act of Congress” under the McCarran-Ferguson Act,  then the New York Convention would be pre-empted by the Louisiana law, and a Louisiana court or – as in this case –a federal district court applying Louisiana law could properly ignore the command of the New York Convention to enforce agreements to arbitrate disputes in international commercial contracts, and enjoin arbitration of an insurance contract dispute.

The Fifth Circuit held that the New York Convention is not an “Act of Congress” under McCarran-Ferguson. Any treaty, the Court noted, is more than a mere Act of Congress, as treaties are international agreements negotiated by the Executive Branch and ratified by the Senate.  The Court viewed the U.S. accession to the New York Convention as essentially an aspect of the conduct of foreign affairs by the Executive Branch,  and found nothing in the legislative history of McCarran-Ferguson to support the notion that Congress intended to limit the preemption of state law resulting from actions of the Executive Branch in conducting foreign affairs.  If a particular award in arbitration does injustice to a state’s regulatory policies concerning the insurance industry, the Court observed, that situation could conceivably be addressed under provisions of the New York Convention  permitting enforcement to be refused on grounds that the award violates the public policy of the country in which enforement is sought.

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