U.S. Supreme Court Refuses to Overturn Decision Permitting International Arbitration Where State Law Prohibited Arbitration Provisions in Insurance Contracts

On October 4, 2010, the United States Supreme Court denied a petition for writ of certiorari in the case of Louisiana Safety Ass'n of Timbermen – Self Insurers Fund v. Certain Underwriters at Lloyd's, London, No. 09-945 (S.Ct.), and therefore left standing a federal decision holding that the New York Convention regarding the enforceability of international arbitration agreements is not reverse preempted by the McCarran-Ferguson Act.

LSAT is a self insurance fund operating in Louisiana that provided workers' compensation insurance for its members.  Certain Underwriters at Lloyd's, London ("Lloyd's") reinsured LSAT's claims for occupational injury occurrences that exceeded LSAT's self insurance retention.  Each reinsurance agreement contained an arbitration provision.  Safety National Casualty Corporation ("Safety National") also provided excess workers' compensation coverage and alleged that LSAT assigned its rights under the Lloyd's reinsurance agreements to Safety National.  When Lloyd's refused to recognize the assignment, Safety National sued Lloyd's in federal district court.  

Lloyd's initially filed an unopposed motion to stay proceedings and compel arbitration, which was granted by the district court.  Lloyd's then commenced arbitration proceedings with Safety National and LSAT.  However, the parties disagreed as to how the arbitrators were to be selected.  As a result, Lloyd's filed a motion to lift the stay in order to join LSAT in the district court action and to compel arbitration to resolve composition of the arbitration panel.  LSAT moved to intervene, lift the stay, and quash arbitration, arguing that the arbitration agreements were unenforceable under Louisiana law.  Specifically, LSAT argued that a Louisiana statute prohibited arbitration agreements in insurance contracts, noting that the Court of Appeals for the Fifth Circuit has recognized the unenforceability of such arbitration clauses under that statute.  (According to LSAT, at least sixteen states have enacted similar statutes.)

The district court ultimately granted LSAT's motion to quash the arbitration, finding that although the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 205 (the "New York Convention") would otherwise require arbitration, the Louisiana statute was controlling.  The district court also found that the Louisiana statute reverse preempted the New York Convention per the McCarran-Ferguson Act (15 U.S.C. §1012(b)), which allows state insurance laws to trump any "Act of Congress" that is not specifically directed at regulating insurance. 

A panel of the Fifth Circuit reversed the district court, finding that the New York Convention is a treaty, not an "Act of Congress," and thus it is not subject to reverse preemption per the McCarran-Ferguson Act.  The en banc court reached the same result and the district court's ruling was vacated and the case remanded for further proceedings.  In effect, the Fifth Circuit's decision will require policyholders in Louisiana to arbitrate disputes with foreign insurance companies despite the Louisiana statute invalidating arbitration provisions in insurance contracts.

LSAT filed a petition for writ of certiorari in the U.S. Supreme Court, arguing that the Fifth Circuit's opinion contradicted a 1995 opinion from the Second Circuit (which held that a Kentucky insurance arbitration statute took precedence over federal law pursuant to the McCarran-Ferguson Act) and that such a conflict would result in different treatment of policyholders based on where the case arose.  Accordingly, LSAT argued that Supreme Court review was warranted to resolve the split in the circuits.  Lloyd's opposed the petition, arguing that the Fifth Circuit's opinion did not directly conflict with the Second Circuit decision and that there was no genuine conflict among the circuits.  At the request of the Supreme Court, the Solicitor General filed an amicus curiae brief, stating the United States' view that the Fifth Circuit reached the correct result and therefore the petition should be denied. 

The Supreme Court's denial of the petition is important, and may assist foreign insurers that wish to compel arbitration even in states that have promulgated specific laws prohibiting the arbitration of insurance disputes. 

Click here for a copy of the Fifth Circuit's opinion.