(Article from Insurance Law Alert, May 2019)
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The Fifth Circuit ruled that an arbitration clause was enforceable notwithstanding a state statute banning arbitration of insurance disputes and a “conformity to statute” clause in the insurance policy. McDonnel Grp., LLC v. Great Lakes Ins. SE, 2019 WL 2082905 (5th Cir. May 13, 2019).
The dispute centered on whether a builder’s risk policy provided coverage for water damage to a construction project. When McDonnel brought suit, the insurers moved to dismiss pursuant to the policy’s arbitration provision. McDonnel argued that the arbitration provision was invalid in light of a “conformity to statute provision,” which stated that “[i]n the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” McDonnel noted that Louisiana statutory law expressly prohibits arbitration agreements in insurance policies covering property located within the state. See La. Rev. Stat. Ann. § 22:868(A)(2).
A Louisiana federal district court dismissed the suit in favor of arbitration, ruling that federal law preempted Louisiana statutory law. The Fifth Circuit affirmed. The Fifth Circuit ruled that the McCarran-Ferguson Act, which allows state statutes governing the business of insurance to reverse preempt federal law, did not apply. Under Fifth Circuit precedent, McCarran-Ferguson reverse preemption is limited to federal legislation and does not encompass an international treaty such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. See Safety Nat’l Cas. Corp. v. Certain Underwriters at Lloyd’s London, 587 F.3d 714 (5th Cir. 2009). Having rejected application of the Louisiana statute barring arbitration, the court concluded that there was no conflict between state law and the policy so as to invoke the conformity provision.
The two other federal circuit courts that have addressed whether reverse preemption pursuant to the McCarran-Ferguson Act extends to the Convention have reached conflicting conclusions. Compare Stephens v. American Int’l Ins. Co., 66 F.3d 41 (2d Cir. 1995) (holding that state law that precludes insurance dispute arbitration reverse preempts the Convention) with ESAB Grp. Inc. v. Zurich Ins. plc, 2012 WL 2697020 (4th Cir. July 9, 2012) (rejecting reverse preemption and reasoning that the McCarran-Ferguson Act applies only to federal statutes, not international treaties such as the Convention) (discussed in July/August 2012 Alert).