[co-author: William de Sierra-Pambley*]
On August 12, 2021, the Ninth Circuit Court of Appeals ruled whether Washington State law conversely pre-empted the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention de New York ”), in which case state law would prohibit the application of arbitration clauses in insurance contracts in states with similar anti-arbitration laws. CLMS Management Services LP et al. vs. Amwins Brokerage of Georgia LLC et al., –F.4th—, 2021 WL 3557591 (9th Cir. 2021). While the Ninth Circuit has agreed with the defendants that state law does not pre-empt the Convention, the plaintiffs have indicated that they will seek a review from the United States Supreme Court. The plaintiffs point to a circuit split, as the Second Circuit previously ruled that an anti-arbitration provision in Kentucky’s insurance law trumps the New York Convention. If plaintiffs follow through on their request for certiorari, and the High Court grants a review, the court’s decision should provide insurance companies with clearer guidance regarding arbitration clauses in their non-domestic policies, as the companies should be able to determine whether they can invoke international arbitration in states that prohibit arbitration clauses in insurance contracts.
In CLMS management services, the plaintiffs CLMS Management Services Limited Partnership (“CLMS”) and Roundhill I, LP (“Roundhill”) entered into an insurance contract with the defendant Amrisc, LLC (“Amrisc”), underwritten by the defendants Certain Underwriters at Lloyd’s London (“Lloyd’s”). The contract provided for all disputes arising from the contract to be resolved by arbitration in New York. In August 2017, Hurricane Harvey damaged a Texas townhouse complex owned by Roundhill and operated by CLMS. The damages were estimated at $ 5,660,000 and the plaintiffs filed a claim. Lloyd’s third-party claims administrator and defendant CJW & Associates (“CJW”) responded that the policy deductible was $ 3,600,000. The plaintiffs filed a lawsuit in the Western District of Washington, making several claims and alleging that the deductible should be $ 600,000. Lloyd’s and CJW filed a motion to compel arbitration, citing the arbitration clause in the contract and arguing that the arbitration provision fell within the scope of the New York Convention. The plaintiffs opposed the petition, arguing that Washington State law prohibits the application of arbitration provisions in insurance contracts and that because of federal McCarran-Ferguson law, the law of the state prevails over the New York Convention.
The McCarran-Ferguson Act is a federal law in the United States that delegates the right to regulate insurance business to states. The law states that “continued state regulation and taxation of the insurance industry is in the public interest, and silence on the part of Congress should not be interpreted as imposing an obstacle. to the regulation or taxation of this type of business. by the various states. 15 USC § 1011. The law also states that “[n]o The law of Congress will be interpreted as invalidating, altering or replacing any law enacted by a state for the purpose of regulating the insurance industry. . . unless this law relates specifically to the insurance business. 15 USC § 1012 (b).
In granting Lloyd’s and CJW’s motion to require arbitration, the district court held that Article II, Section 3 of the New York Convention is directly applicable and not a “law of Congress” under of the McCarran-Ferguson Act. (The Federal Arbitration Act is an act of Congress, but it does not relate specifically to the insurance industry.) As a result, the district court ruled that the New York Convention was not preempted by the McCarran Act. -Ferguson. On appeal, the complainants argued that Article II, Section 3 of the New York Convention is only a “general proclamation” which “provides no further guidance as to the enforcement mechanism. [ ] an arbitration agreement. CLMS management services. LP, 2021 WL3557591, at * 5. The Ninth Circuit disagreed, holding that Article II, Section 3 of the New York Convention is directly applicable because it: (i) applies directly to national courts; (ii) require national courts to “apply” arbitration agreements; and (iii) “leaves no discretion to the political branches of the federal government to enforce the rule of application of the agreements it prescribes”. Username. Thus, the Ninth Circuit determined that Article II, Section 3 of the New York Convention met the self-execution requirements to be specific and mandatory. Username. to * 5 (“A treaty is directly applicable and automatically has the force of law as internal law” when it functions of itself without the aid of any legislative provision “.” “) (citing to Medellin v. Texas, 552 US 491, 505, 128 S.Ct. 1346 (2008)).
The Ninth Circuit stressed that its ruling is aligned with the decisions of the Fourth and Fifth Circuits. See ESAB Group, Inc. v. Zurich Ins. API, 685 F.3d 376, 387 (4th Cir. 2012) (acknowledging that there is “much to recommend” the position that Article II, section 3 is directly applicable); see also Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714, 722 (5th Cir. 2009) (explaining that “[t]The Convention expressly provides that national courts “impose” arbitration at the request of a party to an international arbitration agreement “). Although the Fourth Circuit and the Fifth Circuit stopped before deciding whether Article II, Section 3 is directly applicable, the Ninth Circuit noted that both circuits recognized that the language of the treaty in Article II, Section 3 makes enforcement compulsory in national courts. Username.
If the Supreme Court grants certiorari and finds that Article II, section 3 of the Convention is directly applicable, companies should expect their arbitration clauses in insurance contracts to be enforceable regardless of state laws. anti-arbitration that could otherwise override federal law. . The ruling will be particularly significant in the 20 or so states that have similar anti-arbitration laws that prohibit arbitration clauses in insurance contracts.
* William de Sierra-Pambley is legal assistant in Sheppard Mullin’s New York office.