(Article from Insurance Law Alert, June 2025)
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Holding
Reversing course on a previous ruling, the Second Circuit held that a state law that precluded arbitration of insurance disputes does not reverse preempt the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”). Certain Underwriters at Lloyds, London v. 3131 Veterans Blvd LLC, 2025 U.S. App. LEXIS 11086 (2d Cir. May 8, 2025).
Background
Two insurance policies each covered a commercial property that was damaged by a hurricane that struck Louisiana in 2021. The assignees of the rights under the policies (the “Respondents”) sought to recover damages and filed suits in Louisiana against certain insurers. The insurers countersued in New York district court, invoking an arbitration clause in the policies, and arguing that arbitration was required under the Federal Arbitration Act (“FAA”) and the Convention, an international treaty governing arbitration of disputes involving non-domestic parties. The insurers also sought to enjoin prosecution of the Louisiana suits. In response, the Respondents argued that Louisiana statutory law precluding arbitration of insurance disputes reverse preempts the FAA and the Convention under the McCarren-Ferguson Act.
In the two New York district court cases, both judges denied the insurers’ motions, ruling that under established Second Circuit precedent in Stephens v. American International Insurance, 66 F.3d. 41 (2d Cir. 1995), state law reverse preempts both the FAA and the Convention.
In a decision addressing both cases, the Second Circuit reversed.
Decision
While federal law generally preempts state law, the McCarran Ferguson Act creates an exception of reverse preemption in the insurance context by providing that “[n]o act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.”
The Second Circuit noted that the FAA was clearly reverse preempted by the Louisiana law under the McCarran-Ferguson Act because the FAA is unequivocally an “Act of Congress.” However, the more complicated issue was whether the Convention was reverse preempted by state law—a question that turned on whether the Convention is “self-executing” or conversely, relies on an “Act of Congress” to take effect. If the Convention is self-executing, there is no reverse preemption under the McCarran-Ferguson Act, but if the Convention requires an Act of Congress to take effect, then reverse preemption applies.
When the Second Circuit previously addressed this question in 1995 in Stephens, the court concluded that the Convention was not self-executing, required an Act of Congress to take effect, and was therefore reverse preempted by state law. In the present case, the court abrogated its ruling in Stephens, reasoning that an intervening Supreme Court decision undermined its analysis in Stephens. In Medellin v. Texas, 552 U.S. 491 (2008), the Supreme Court identified several indicia of a self-executing treaty provision within a larger treaty, including language that indicates a “directive” to courts and use of “shall” or “must” verbiage.
With the benefit of Medellin’s guidance, the Second Circuit concluded that the relevant portion of the Convention was self-executing. The court relied on language stating that courts “shall” refer parties to arbitration, noting that such verbiage constituted a “directive” to courts to take particular action.
Respondents argued that other portions of the Convention, which lacked similar language, were not self-executing and therefore that the entire treaty should be deemed not self-executing. Rejecting this all-or-nothing approach, the court noted that treaties can contain both self-executing and non-self-executing provisions.
Comments
Following the Supreme Court’s ruling in Medellin, the Second Circuit joins the First and Ninth Circuits in ruling that the relevant portion of the Convention is self-executing and therefore is not reverse preempted by state law under the McCarran-Ferguson Act.