Supreme Court Declines To Revisit Enforcement of Arbitration Clause by Foreign Insurer

Background

In 2016, CLMS Management Services Limited Partnership (“CLMS”) and Roundhill I, LP (“Roundhill”), both American entities, entered into an insurance contract with Amrisc, LLC to provide coverage for a townhome complex in Texas that Roundhill owns and CLMS operates (the “Policy”). The relevant portion of the Policy was underwritten by Certain Underwriters at Lloyd’s London (“Lloyd’s”), a foreign organization based in the United Kingdom. The Policy provided for arbitration of any disputes: “All matters in difference between the Insured and the Companies … in relation to this insurance, including its formation and validity, and whether arising during or after the period of this insurance, shall be referred to an Arbitration[.]”

In August 2017, Hurricane Harvey—a category 4 storm—caused massive flooding in Texas and Louisiana. Harvey wreaked havoc across the region, and caused an estimated $5,660,000 in damages to the townhome complex. CLMS and Roundhill submitted a claim under the Policy. Lloyd’s, however, declined to cover the full amount until a $3.6 million deductible was paid. After CLMS and Roundhill disputed Lloyd’s calculation of the deductible, claiming it should only be $600,000, they sued for coverage in the US District Court for the Western District of Washington.

Lloyd’s then moved to compel arbitration based on the clause in the Policy. But CLMIS and Roundhill invoked a Washington State law that prohibits binding pre-dispute arbitration agreements in insurance contracts. Wash. Rev. Code § 48.18.200. Thirteen states, including Washington, have such “anti-arbitration” laws that prohibit arbitration clauses in insurance contracts like the one in this case. Lloyd’s countered that the Policy’s international arbitration clause falls within the scope of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”), implemented by the Federal Arbitration Act (“FAA”), under which US courts must enforce international arbitration agreements (i.e., between foreign and domestic entities.)

Normally, federal laws like the FAA (implementing the Convention) would trump state laws like Washington’s. But the McCarran-Ferguson Act, a 1945 federal statute, dictates that state insurance law supersedes conflicting federal law and gives states the authority to regulate insurance.

Both the District Court and the Ninth Circuit rejected this argument, finding that the arbitration clause was enforceable. See CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Georgia, LLC, 8 F.4th 1007 (9th Cir. 2021).

The McCarran-Ferguson Act limits the federal laws that are superseded for insurance purposes to laws that “specifically relate[] to the business of insurance.” 15 USC § 1012(b). Thus, a federal insurance statute will not preempt a state insurance statute.

But the Convention is not an “Act of Congress” that must yield to the Washington State law, the Ninth Circuit concluded, it is a treaty. “Because treaties require only the approval of the Senate,” the panel held, “a treaty is more accurately described as an exercise of executive power constrained by the Constitution, not as an ‘Act of Congress.’” The McCarran-Ferguson Act does not apply to treaties, the Ninth Circuit concluded. Additionally, the Ninth Circuit ruled that the Convention is self-executing—that is, automatically enforceable in domestic courts like an ordinary statute, with no further act of Congress required. “We therefore conclude it is the Convention itself that requires enforcement of the parties’ arbitration agreement,” the Ninth Circuit held. This piece of its ruling seemed to conflict with decades-old decision from the Second Circuit in Stephens v. American International Insurance Co., 66 F.3d 41 (2d Cir. 1995), which concluded that the Convention was not self-executing. (That case was not brought before the Supreme Court.)

CLMS and Roundhill file a petition for certiorari, asking the Supreme Court to reverse the Ninth Circuit’s decision. But the Court denied that request without comment, leaving intact the Ninth Circuit’s ruling to compel international arbitration despite Washington State’s anti-arbitration law.

The Supreme Court Declines Review

Our comment: Any denial of certiorari by the Supreme Court leaves room for speculation as to what the Court might do in the future, depending upon how other circuits address the conflict between the Convention and the McCarran-Ferguson Act. The Supreme Court may simply want more circuits to consider the issue before putting its thumb on the scale. In any event, the Supreme Court adopted the pro-arbitration position advanced by Lloyd’s. This outcome should give foreign insurers comfort in relying upon international arbitration for resolution of coverage disputes.