Safety National v Lloyd’s

On November 9, an en banc opinion of the Fifth Circuit Court of Appeals ruled that arbitration provisions in international reinsurance contracts are enforceable despite a Louisiana statute prohibiting arbitration agreements in insurance contracts.

In Safety Nat’l Cas. Ass’n v. Certain Underwriters at Lloyd’s the Underwriters provided reinsurance for excess policies issued to a workers compensation self-insurance fund. After Underwriters refused to recognize as an assignment of the fund’s rights to Safety National, the fund brought suit in a Louisiana federal court. Underwriters moved to compel arbitration. The court ultimately denied the motion, finding that the McCarran-Ferguson Act allowed a Louisiana statute forbidding arbitration provisions in insurance contracts to “reverse-preempt” the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and its implementing legislation, the Convention Act. The McCarran-Ferguson Act provides that no act of Congress is to be construed to invalidate, impair or supersede a state insurance law unless the act of Congress specifically relates to the business of insurance.

The Fifth Circuit reversed, holding that the term “act of Congress” as used in the McCarran-Ferguson Act did not encompass international treaties such as the Convention regardless of whether the treaty was self-executing or required implementing legislation. The court specifically disagreed with the Second Circuit opinion in Stephens v. American Int’l Ins. Co., 66 F.3d 41 (2d Cir. 1995), which had held that the implementing statute, rather than the Convention itself, was the relevant consideration and that state law could invalidate an arbitration provision in an international agreement.

The conflict between the circuits sets the stage for a possible resolution of the issue by the U.S. Supreme Court. Until this resolution occurs, the Safety National opinion constitutes the law of the land in Louisiana, Texas and Mississippi and provides substantial ammunition for non-U.S. insurers and reinsurers to obtain enforcement of arbitration provisions in the face of hostile state law.

The case is Safety Nat’l Cas. Ass’n v. Certain Underwriters at Lloyds’, London No. 06-303262 (5th Cir. Nov. 9, 2009).