(Article from Insurance Law Alert, October 2023)
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Holding
A New York district court denied an insurer’s motion to compel arbitration and enjoin a state court action, ruling that Louisiana law reverse preempts the Federal Arbitration Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) under the McCarran-Ferguson Act. Certain Underwriters at Lloyd’s, London v. Mpire Props., LLC, 2023 U.S. Dist. LEXIS 175864 (S.D.N.Y. Sept. 28, 2023).
Background
Property owners filed claims with their insurers seeking reimbursement for storm-related damage. After the insurers paid $1.27 million, Mpire, which purchased the properties and the owners’ rights, sued the domestic insurers in Louisiana state court seeking additional funds. Relying on an arbitration clause in the policies, the insurers moved to compel arbitration and enjoin the state court action pursuant to the FAA and the Convention.
Decision
The court ruled that the Louisiana Insurance Code reverse preempts the FAA and the Convention pursuant to the McCarran-Ferguson Act. The McCarran-Ferguson Act establishes an exception to the general rule requiring federal preemption over state law where such state law regulates the business of insurance and the federal law does not specifically relate to insurance. The court held that the controlling state statue, La. Stat. Ann. Section 22:868, rendered the arbitration clauses unenforceable. Section 22:868 provides, among other things, that “[n]o insurance contract delivered or issued for delivery in this state . . . shall contain any condition, stipulation or agreement. . . (2) [d]epriving the courts of this state of the jurisdiction or venue of action against the insurer.”
The insurers argued Section 22:868 does not prohibit arbitration because sub-part (D) of that provision states that “this Section does not prohibit a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance.” Rejecting this assertion, the court explained that arbitration clauses are jurisdictional, and not akin to forum or venue selection provisions.
As the court noted, another New York district court recently addressed this issue and reached the same conclusion. See Certain Underwriters at Lloyd’s, London v. 3131 Veterans Blvd. LLC, 2023 U.S. Dist. LEXIS 144956 (S.D.N.Y. Aug. 15, 2023).
Comments
The court acknowledged that under Fifth Circuit precedent, state law does not reverse preempt the Convention under the McCarran-Ferguson Act. However, as the court emphasized, the Second Circuit has reached a contrary conclusion, ruling that the Convention is not “self-executing” (i.e., it requires an act of Congress, the FAA, for implementation) and therefore is subject to the same reverse-preemption as the FAA where, as here, state law specifically relates to the business of insurance. As discussed in previous Alerts, federal circuit courts are split on this particular issue.