Marc J. Goldstein Arbitrator & Mediator NYC
July 17, 2012

US Court Upholds Arbitrability of Cross-Border Insurance Dispute, Rejects “Reverse Pre-emption” of New York Convention

If you practice arbitration law internationally from a base of operation outside the United States, you might consider that the arbitrability of cross-border disputes involving insurance is rather non-controversial. After all, arbitration lawyers wish to have large and growing practices, and insurance disputes help enormously. Simple. You would think.

But here in the United States, with our great legal tradition of making simple matters difficult, this subject is fertile ground for controversy, large legal fees, and lengthy opinions from appellate courts. To understand this quagmire, readers might study ESAB Group, Inc. v. Zurich Insurance PLC, 2012 WL 2697020 (4th Cir. July 9, 2012). Or they might read this post and have time remaining for the crossword puzzle.

It is another chapter in the perpetual power struggle between the federal Montagues and the state Capulets (whose descendants, when they came ashore in South Carolina, changed their respective family names to Hatfield and McCoy).

By tradition, the issuance of an insurance policy was, in America, viewed as a local matter, and was regulated by the governments of the several States. But the Supreme Court in the 1940s held that federal power to regulate interstate commerce allowed the US government to regulate insurance, and Congress swiftly stepped in to restore home field advantage to the states, with a law called the McCarran-Ferguson Act. McCarran-Ferguson said “no Act of Congress shall be construed” to interfere with state regulation of insurance, unless it does so explicitly.

Many states took advantage of this Congressional restoration of state hegemony to pass laws prohibiting arbitration of insurance disputes. The Federal Arbitration Act was considered to be an “Act of Congress,” and compelling arbitration of an insurance dispute under the FAA would entail construing the FAA to regulate insurance. Hence it came to be understood that state law could and did, via McCarran-Ferguson, “reverse pre-empt” the FAA, and require a judicial forum for insurance cases.

Then along came the New York Convention. Rather slowly, to be sure, as the US dallied from 1958 to 1970 before giving legislative blessing to a treaty thrashed out on the shores of the East River. And it was only a matter of time before a state law requiring a judicial forum for an insurance dispute was held to apply to a transnational dispute and thus came into a collision with a motion to compel arbitration based on the New York Convention and FAA Chapter Two.

Last week’s decision from the federal Fourth Circuit Court of Appeals arose from an insurance coverage dispute between a South Carolina manufacturer and the Swedish insurance firm that issued global coverage to the manufacturer’s Swedish parent company. The Court affirmed the ruling of the federal district court, which had accepted jurisdiction under the New York Convention and granted the motion to compel arbitration made by Zurich Insurance as the assignee of the Swedish insurer’s loss portfolio.

Credit the Fourth Circuit for shaping its analysis of this “reverse pre-emption” issue around a central, fundamental policy premise: that the United States seeks to speak with one (federal) voice in foreign affairs, including the regulation of foreign and international commerce.

Invokintedg that premise to guide its inquiry into Congress’s intent, the Court conclude that the “Act[s] of Congress” referenced in McCarran-Ferguson, i.e. those that shall not be construed to impair state regulation of insurance, could not have been meant include statutes like FAA Chapter Two that implement treaties. In other words, Congress did not intend for the New York Convention to take a back seat to state regulation of insurance. The result surely was greeted warmly at Zurich Insurance, who executives must have wondered what dysfuntionality of the US legal system could force them to litigate a high stakes coverage dispute in a US court, despite Zurich having inherited from its Swedish assignor a standard arbitration clause that originated between a Swedish insurer and a Swedish insured.

Aficionados of treaty-interpretation jurisprudence among US readers will take note that the Fourth Circuit panel, following in the path set by the Fifth Circuit in an en banc opinion three years ago (Safety Nat’l Casualty Corp. v. Certain Underwriters at Lloyd’s, 587 F.3d 714 (5th Cir. 2009) (en banc), cert. denied, 131 S.Ct. 65 (2010)), decided that it did not need to decide whether the New York Convention is a “self-executing treaty” under US law. The anti-arbitration argument made in each case was that (i) the Convention is not a complete self-contained direct mandate to courts of the Contracting States, (2) therefore FAA Chapter 2 was needed to make the Convention effective as US law, and (3) therefore a court asked to compel arbitration of an insurance dispute, in contradiction of a state law guranteeing a judicial forum for insurance disputes,  is invited to construe an “Act of Congress,” FAA Chapter Two, as interfering with state insurance regulation, in violation of McCarran- Ferguson.

The Fifth Circuit had rejected this argument by finding that, whether or not the Convention was a self-executing treaty, a motion to compel arbitration in a Convention case calls upon the Court to construe the Convention, not FAA Chapter Two.  The Fourth Circuit’s rejection is more broadly stated: FAA Chapter Two, as legislation implementing a treaty, is not among the “Act[s] of Congress” covered by McCarran-Ferguson, which concerned only Congressional legislation regulating domestic commerce. Perhaps the Fourth Circuit approach offers more predictable protection for international arbitration, as it avoids controversy that might arise in a particular case about the meaning of particular language in FAA Chapter Two.

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