Arkansas Federal Court Finds McCarran-Ferguson Act Does Not Supersede the New York Convention or Chapter II of the FAA

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In a case involving an arbitration agreement between foreign nationals and U.S. citizens, which is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its implementing legislation, chapter II of the FAA, the U.S. District Court for the Western District of Arkansas found that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA, therefore directing the plaintiff’s claims for insurance coverage to arbitration.

Plaintiff J.B. Hunt Transport Inc.’s claims arose out of a dispute concerning two insurance policies issued to it by Certain Underwriters at Lloyd’s and Steadfast Insurance Co., under which the plaintiff sought defense and indemnity coverage for claims presented in a separate lawsuit involving the wrongful death of a woman by an employee of one of the plaintiff’s contracted carriers.

Underwriters moved for arbitration pursuant to the arbitration provision in its policy with the plaintiff directing any disputes to an arbitrator. In its motion to compel, Underwriters argued that the Convention, which provides that the “court of a Contracting State … shall, at the request of one of the parties, refer the parties to arbitration,” is controlling law under the Supremacy Clause, rendering the arbitration provision valid and enforceable. Conversely, the plaintiff argued that Arkansas law, which bars the enforcement of binding arbitration clauses in insurance contracts, should control pursuant to the McCarran-Ferguson Act, which creates a system of “reverse-preemption” for state insurance laws. Underwriters responded that the McCarran-Ferguson Act does not apply to the Convention or chapter II of the FAA and that, as a result, the court should enforce the arbitration provision. The lynchpin of Underwriters’ argument was that the Convention and chapter II of the FAA are not “acts of Congress” subject to the McCarran-Ferguson Act. In support of its argument, Underwriters cited a variety of cases concluding that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA.

Steadfast also opposed Underwriters’ motion for arbitration, arguing that it was not a party to the policy between Underwriters and the plaintiff and therefore was not subject to the arbitration provision. Steadfast asked the court to stay the plaintiff’s claims against it in the event the court granted arbitration.

The district court held that the McCarran-Ferguson Act does not supersede the Convention or chapter II of the FAA. The court noted that the McCarran-Ferguson Act does not nullify international agreements, but rather is limited to domestic affairs. As such, the Convention and chapter II of the FAA are not within the scope of the McCarran-Ferguson Act, and the Convention and chapter II of the FAA are not reverse-preempted by Arkansas law barring the enforcement of arbitration agreements in insurance contracts.

After finding the Convention controls, the district court analyzed four factors to determine whether the Convention applied to the arbitration provision at issue: (1) whether a written arbitration agreement exists between the parties; (2) whether the arbitration provision provides for arbitration in the territory of a signatory of the Convention; (3) whether the relationship between the parties involves a commercial subject matter; and (4) whether the relationship between the parties is not entirely domestic. The district court found that the second and third requirements for applying the Convention were easily met where the arbitration provision stated that the arbitration should occur in New York, which is located within the signatory’s territory, and the parties’ insurer/insured relationship is commercial in nature.

As to the first and fourth requirements, the plaintiff argued that the Convention did not apply because the arbitration provision only applies to disputes between reinsurers and that the relationship between the plaintiff and Underwriters was entirely domestic because it obtained the Underwriters policy through a U.S.-based broker. The district court rejected both arguments, finding that the arbitration provision was part of the policy held by the plaintiff, and referenced the policy to which the plaintiff was a party. The court also noted that while the plaintiff may have gone through a U.S. broker, Underwriters is a foreign-based company, and the broker had to go through the U.K.’s insurance market.

The court also stayed the remaining claims against Steadfast until the conclusion of arbitration.

J.B. Hunt Transport, Inc. v. Steadfast Insurance Co., No. 5:20-cv-05049 (W.D. Ark. July 1, 2020).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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