The New York Convention Preempts State Law Regulating The Business of Insurance - Fifth Circuit Affirms Dismissal In Favor of Arbitration

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In McDonnel Group, LLC v. Great Lakes Insurance SE, UK Branch (5th Cir. 2019)the Fifth Circuit recently held that the New York Convention trumps state insurance law.  When its insurance claim was denied, McDonnel Group, LLC ("McDonnel") sued the insurers seeking a declaratory judgment that it was entitled to coverage.  The insurers moved to dismiss arguing that the policy contained a provision to arbitrate all disputes between the parties.  The policy, however, also contained a conformity to statute provision, meaning that if any term of the policy conflicts with a state statute, then "the terms are amended to conform to such statutes."  Invoking that provision, McDonnel argued that it had no obligation to arbitrate because the arbitration clause was void as it conflicted with a Louisiana statute forbidding arbitration in insurance contracts.  

 

The district court disagreed and so did the Fifth Circuit. Under the preemption doctrine, when there is a conflict between state and federal law, federal law prevails. The New York Convention is a treaty that Congress implemented under Chapter 2 of the Federal Arbitration Act (FAA). As the Fifth Circuit explained, "[l]ike all treaties, the Convention ordinarily preempts conflicting state laws." The analysis in this case, however, involves more than a treaty and a state statute.  

 

As the circuit court observed, the case "presents a twist," namely the McCarran-Ferguson Act, a federal statute that protects state laws regulating insurance business from the preemptive effect of federal law.  It provides that "[n]o Act of Congress shall be construed" to supersede state law enacted "for the purpose of regulating the business of insurance."  Does the McCarran-Ferguson Act allow state laws to reverse-preempt a treaty like the New York Convention?  No, said the Fifth Circuit, relying on its previous decision Safety Nat'l Cas. Corp. v. Certain Underwriters at Lloyd's, because the New York convention is not an "act of Congress."  Rather, it is a treaty and, therefore, it is not covered by the McCarran-Ferguson Act. This principle applies, as the Fifth Circuit explained, "whether or not the treaty is self-executing or required implementing legislation" such as the FAA, the federal statute that codified the New York Convention.  

 

Unlike the contract in Safety National, however, the policy between McDonnel and the insurers contained a conformity provision. The conformity provision is not triggered, the decision explained. Because the state statute is preempted by the New York Convention, it does not apply to the McDonnel's policy.  Since there is no conflict between the state statute and the policy, the circuit court concluded that the arbitration provision survives.

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