(Article from Insurance Law Alert, June 2023)
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Holding
The First Circuit ruled that a Puerto Rico law that prohibits mandatory arbitration of insurance disputes does not reverse-preempt the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”) and therefore granted the insurer’s motion to compel arbitration. Green Enters., LLC v. Hiscox Syndicates Ltd., 2023 U.S. App. LEXIS 12421 (1st Cir. May 19, 2023).
Background
Green Enterprises, LLC (“Green”), a Puerto Rican recycling company, sought coverage from its insurer following a fire at one of its plants. When the insurer denied coverage, Green filed suit. The insurer moved to compel arbitration pursuant to an arbitration clause in the insurance policy. A Puerto Rico district court granted the motion, and the First Circuit affirmed.
Decision
The central question before the First Circuit was whether the Puerto Rico statute prohibiting mandatory arbitration of insurance disputes reverse-preempted the Convention under the McCarran-Ferguson Act, which provides that “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” The issue before the court turned on whether the Convention was a “self-executing” treaty: if the Convention constituted a “self-executing treaty,” it would not require an “Act of Congress” to be effectuated as domestic law, and it would therefore not be subject to reverse-preemption under the McCarran-Ferguson Act.
The First Circuit concluded that the provision of the Convention that states that courts “shall” refer parties to arbitration was self-executing and did not require an “Act of Congress” to be enforceable as domestic law. Therefore, the court held that there was no reverse-preemption and that the arbitration clause must be enforced pursuant to the Convention.
Comments
The First Circuit’s decision is noteworthy in several respects. First, the court held that a treaty can have both self-executing and non-self-executing provisions. The decision therefore leaves open the possibility that a different provision of the Convention is not self-executing and might thus be subject to reverse-preemption by a state law. Second, the decision signals a growing consensus among federal circuit courts on this issue. While the Second Circuit has ruled that the Convention is not self-executing and therefore that state law prohibiting arbitration of insurance disputes reverse-preempts the Convention, the Fourth, Fifth, and Ninth Circuits have reached contrary conclusions. Notably, the Ninth Circuit expressly ruled on the “self-executing” issue, whereas the Fourth and Fifth Circuits did not reach that issue and instead held that, regardless of whether the Convention is self-executing, the McCarran-Ferguson Act does not apply to international treaties and instead limits reverse-preemption to the domestic Federal Arbitration Act.