Reinsurance Update

In this edition, we showcase two federal appellate decisions regarding the construction and enforceability of arbitration clauses.  The first, Safety National, an en banc decision of the U.S. Court of Appeals for the Fifth Circuit, addresses state law bans on the use of arbitration clauses and federal preemption of such laws.  The second, Century Indemnity, a decision of the U.S. Court of Appeals for the Third Circuit, addresses the mixed application of state and federal law in construing arbitration clauses.  Finally, we provide a brief update regarding the progress of the much-anticipated financial services regulatory reform legislation in the U.S. Senate.  

Fifth Circuit Affirms Supremacy of New York Convention 
Safety National Casualty Corp. v. Certain Underwriters At Lloyd's, London et al., No. 06-30262, 2009 WL 3722727 (5th Cir. Nov. 9, 2009).

In conflicts between the federal and state law, federal law generally trumps state law under the U.S. Constitution’s Supremacy Clause.  Under the McCarran–Ferguson Act, however, state law can trump, i.e. reverse preempt, federal law in certain circumstances.  Specifically, the Act provides that state law can trump any “Act of Congress” that would invalidate any state law regulating insurance.

In the Safety National decision, the Fifth Circuit considered the viability of a Louisiana law prohibiting arbitration clauses in insurance policies.  Therein, the court had to decide whether this Louisiana law preempted the New York Convention governing arbitrations, where one party moved to compel arbitration pursuant to applicable reinsurance agreements and the other party moved to quash arbitration as being unenforceable under Louisiana law.  The Court held that the McCarran-Ferguson Act did not apply to bar arbitration because it was the New York Convention that superseded state law and not its implementing legislation, the “Convention Act.”  The Court found that “[t]he text of the McCarran-Ferguson Act does not support the inclusion by implication of ‘a treaty implemented by an Act of Congress.’”  Safety National Casualty Corp. v. Certain Underwriters At Lloyd's, London et al., No. 06-30262, 2009 WL 3722727 (5th Cir. Nov. 9, 2009).  In other words, a treaty such as the New York Convention that was implemented by an “Act of Congress” was not itself an “Act of Congress” within the meaning of the McCarran-Ferguson Act.  Thus, the court concluded that “implemented treaty provisions, self-executing or not, are not reverse-preempted by state law pursuant to the McCarran-Ferguson Act.”  Id.  

The Fifth Circuit noted that its holding in Safety National puts it in direct conflict with a Second Circuit decision which held that because the New York Convention was not a self-executing treaty and depended on acts of Congress for its implementation, it was an “Act of Congress” for purposes of the McCarran-Ferguson Act.  See Stephens v. American International Ins. Co., 66 F.3d 41 (2nd Cir. 1995).  The conflict between the circuits positions this legal dispute as a classic issue for Supreme Court consideration.

Arbitrability – The Intersection of State and Federal Law
Century Indemnity Co. v. Certain Underwriters At Lloyd’s London, No. 08-2924, 2009 WL 3297322 (3d Cir. Oct. 15, 2009).

As indicated by the Safety National case discussed above, arbitration provisions often involve complex interaction between state and federal law.  In an interesting decision involving the arbitrability of reinsurance disputes, the Third Circuit recently confirmed that “ordinary state-law principles that govern the formation of contracts” must be applied in the initial instance to determine whether parties to a contract have agreed to arbitrate a dispute.  Century Indemnity Co. v. Certain Underwriters At Lloyd’s London, No. 08-2924, 2009 WL 3297322 (3d Cir. Oct. 15, 2009) (citations omitted).  However, if the application of state law results in a conclusion that the parties agreed to arbitrate, the court then has to apply federal law to determine whether a particular dispute is within the class of disputes governed by the agreement to arbitrate.  “Inasmuch as ‘federal law applies to the interpretation of arbitration agreements,’ once a court has found that there is a valid agreement to arbitrate…the determination of whether ‘a particular dispute is within the class of those disputes governed by the arbitration clause....is a matter of federal law.’” Id. (citing China Minmetals Materials Import and Export Co., Ltd. v. Chi Mei Corp., 334 F.3d 274, 290 (3rd Cir. 2003)).  When federal law comes into play, “[a]n order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”  Id. (citing AT&T Technologies, Inc. v. Commc’n Workers of America et al., 475 U.S. 643 at 650 (1986)).

Legislative Update – Financial Services Regulatory Reform Gains Steam

The financial services regulatory reform process moved forward this week with Senate Banking Committee Chairman Chris Dodd's release of his much-awaited reform proposal. Unlike the House approach, Dodd's proposal is a single bill of nearly 1200 pages. For the insurance sector, the critical issues are the structure and source of funding for the resolution fund; the scope of responsibilities of the Office of National Insurance and its preemption authority (will foreign reinsurers be the first to take advantage of the new ONI's ability to preempt state laws?); and the extent to which insurance falls under CFPA authority. These specific issues are all in the mix with the global reform issues - systemic risk, banking and securities reform - and huge questions remains as to how the differing approaches of the House and Senate, as well as the Administration, will be reconciled.

 If you have any questions regarding this or any other reinsurance matter, please contact:

John Jacobus, 202.429.6276 or jjacobus@steptoe.com
Jon Neumann, 602.257.5220 or jneumann@steptoe.com

For information regarding Steptoe's Government Affairs & Public Policy Group, please contact:

Scott Sinder, 202.429.6289 or ssinder@steptoe.com