New York Law Review

Tag: McCarran-Ferguson Act

  • Matter of Monarch Consulting, Inc. v. National Union Fire Ins. Co., 25 N.Y.3d 661 (2015): FAA, McCarran-Ferguson Act, and Arbitrability of Insurance Disputes

    25 N.Y.3d 661 (2015)

    The McCarran-Ferguson Act does not reverse preempt the FAA when a state law does not regulate arbitration provisions, even if it governs the filing of insurance documents.

    Summary

    The New York Court of Appeals addressed whether the Federal Arbitration Act (FAA) applied to arbitration clauses in workers’ compensation insurance agreements, or if the McCarran-Ferguson Act, which favors state regulation of insurance, preempted the FAA. The court held that the McCarran-Ferguson Act did not apply because the relevant California law, requiring the filing of insurance agreements, did not regulate arbitration itself. Since the parties’ agreements delegated the question of arbitrability to the arbitrator, and the challenge was to the agreement as a whole, the court found the arbitrator, not the court, should determine whether the agreements were enforceable.

    Facts

    National Union Fire Insurance Company issued workers’ compensation policies to several California-based employers. After the initial policies were executed and filed, National Union and the insureds entered into “Payment Agreements” that were not filed with the state, as required by California law. These agreements included arbitration clauses. Disputes arose, and National Union sought to compel arbitration. The insureds argued the Payment Agreements were unenforceable because they were not filed as required by California Insurance Code § 11658, and therefore, the arbitration clauses within were also unenforceable. The trial court granted National Union’s petitions to compel arbitration, which was reversed by the Appellate Division.

    Procedural History

    The trial court initially granted National Union’s petitions to compel arbitration. The Appellate Division reversed, holding that the McCarran-Ferguson Act precluded application of the FAA. The New York Court of Appeals reversed the Appellate Division’s order, finding that the FAA applied.

    Issue(s)

    1. Whether the McCarran-Ferguson Act reverse preempts the FAA, thus making the arbitration clauses unenforceable.

    2. If the FAA applies, whether the enforceability of the Payment Agreements and their arbitration clauses is a question for the courts or the arbitrators.

    Holding

    1. No, because the California law does not regulate the form or content of arbitration clauses in insurance contracts; therefore, the McCarran-Ferguson Act does not reverse preempt the FAA.

    2. Yes, because the agreements contained a valid delegation clause, the enforceability of the arbitration clauses is a question for the arbitrators, not the courts, to decide.

    Court’s Reasoning

    The court applied a three-part test to determine if the McCarran-Ferguson Act applied: (1) whether the FAA specifically relates to insurance; (2) whether the state law at issue was enacted to regulate the business of insurance; and (3) whether the FAA would invalidate, impair, or supersede the state law. The court found that the first two prongs were met. The FAA does not specifically relate to insurance, and the California statute was enacted to regulate the business of insurance. The court held that the third prong was not met. The state filing requirement did not regulate arbitration, so enforcing the FAA would not “invalidate, impair, or supersede” the state law. The court distinguished cases where the state law directly regulated the content of arbitration clauses. Because the parties delegated the issue of arbitrability to the arbitrators, the court deferred to that delegation based on the FAA’s principle of severability of arbitration agreements.

    Practical Implications

    This case emphasizes that the McCarran-Ferguson Act’s impact on the enforceability of arbitration agreements turns on whether state law regulates the *content* of the arbitration agreements themselves. The FAA will be enforced unless a state law directly restricts arbitration’s use or form. When drafting arbitration agreements, clearly state the scope of the arbitration and include a delegation clause. If a party challenges the enforceability of an arbitration clause, it’s critical to determine whether that challenge is directed to the arbitration clause itself or to the contract as a whole, including the delegation clause. Courts are generally obligated to enforce delegation clauses.

  • Corcoran v. Ardra Ins. Co., 77 N.Y.2d 225 (1990): Enforceability of Arbitration Clauses Against Insurance Liquidators Under the UN Convention

    77 N.Y.2d 225 (1990)

    The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards preempts conflicting federal and state law, but exceptions within the Convention allow a state insurance superintendent, acting as a liquidator of an insolvent insurer, to avoid arbitration when state law does not authorize such arbitration.

    Summary

    The New York Superintendent of Insurance, as liquidator of Nassau Insurance Company, sought to recover reinsurance proceeds from Ardra Insurance Company. Ardra, relying on arbitration clauses in their reinsurance agreements and the UN Convention on Recognition and Enforcement of Foreign Arbitral Awards, moved to compel arbitration. The court held that while the Convention preempts conflicting state law, exceptions within the Convention, specifically the inability to perform arbitration under state law, allowed the Superintendent to litigate in state court, maintaining the Supreme Court’s exclusive jurisdiction over liquidation proceedings, since state law did not authorize the Superintendent to engage in arbitration proceedings.

    Facts

    Nassau Insurance Company, a New York insurer, entered into three international reinsurance agreements with Ardra Insurance Company, a Bermuda reinsurer owned by the same principals as Nassau. These agreements contained broad arbitration clauses. Nassau became insolvent, and the Superintendent of Insurance was appointed as liquidator. The Superintendent began settling claims but Ardra stopped paying reinsurance proceeds, repudiating the agreements, after the Superintendent refused to allow Ardra’s direct participation in court proceedings involving claims against Nassau’s insureds. The Superintendent then sued Ardra to recover owed reinsurance balances.

    Procedural History

    The Supreme Court denied Ardra’s motion to dismiss and compel arbitration. The Appellate Division affirmed, holding that exceptions in the UN Convention exempted the Superintendent from arbitration. The case reached the New York Court of Appeals.

    Issue(s)

    Whether the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards requires the New York Superintendent of Insurance, acting as a liquidator of an insolvent insurance company, to arbitrate claims against a foreign reinsurer, notwithstanding state law that does not authorize the Superintendent to engage in arbitration proceedings.

    Holding

    No, because while the Convention preempts conflicting federal and state law, the arbitration clause was “incapable of being performed” and the claims were not “capable of settlement by arbitration” under New York Insurance Law, thus falling under exceptions within the Convention.

    Court’s Reasoning

    The court reasoned that the UN Convention, as a treaty, preempts conflicting federal and state law under the Supremacy Clause. However, the Convention contains exceptions. Specifically, Article II allows a court to refuse arbitration if the agreement concerns a subject matter not capable of settlement by arbitration under domestic law or if the agreement is “null and void, inoperative or incapable of being performed.” The court emphasized that insurance regulation is primarily a state matter under the McCarran-Ferguson Act. New York Insurance Law Article 74 gives the Superintendent plenary powers to manage the affairs of an insolvent insurer, but it does not authorize the Superintendent to participate in arbitration. Citing *Matter of Knickerbocker Agency [Holz], 4 N.Y.2d 245*, the court noted that absent express statutory authority, the Superintendent cannot engage in arbitration as a liquidator. The court also noted that Article V of the Convention allows a court to deny recognition of an arbitral award if the subject matter is not capable of settlement by arbitration under the law of the country where recognition is sought. The court stated, “These exceptions are properly construed to effect New York’s strong public policy concerns by maintaining Supreme Court’s exclusive jurisdiction over liquidation proceedings.” It found that forcing arbitration would be futile because any resulting award would be unenforceable in New York due to the Supreme Court’s exclusive jurisdiction. The court also distinguished this case from typical international commerce disputes, as the principals of both Ardra and Nassau were New York residents and the contracts referred to New York law. Thus, they should have anticipated New York law applying in the event of insolvency. The court emphasized that arbitrators should not decide matters affecting insureds and third-party claimants; that responsibility lies solely with the Superintendent, subject to judicial oversight, acting in the public interest.