First Circuit Holds That New York Convention Preempts Contrary State Laws Barring International Arbitration of Insurance Disputes

At a Glance

• The First Circuit Court of Appeals held that state insurance laws prohibiting arbitration as a form of international dispute resolution are preempted by the New York Convention.
• This is a win for the validity of international arbitration agreements and foreign insurers that prefer to arbitrate disputes with U.S.-based parties.
• The decision also contributes to a growing body of circuit court jurisprudence finding that treaties can have both self-executing and non-self-executing provisions.

Background

On May 19, 2023, the First Circuit Court of Appeals ruled in Green Enterprises, LLC v. Hiscox Syndicates Ltd. at Lloyd’s of London that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) preempts state insurance laws that purport to render an arbitration clause in an insurance policy unenforceable.

Green Enterprises, LLC, a Puerto Rican recycling company, sued its insurance underwriters after the underwriters denied its claim following a fire at one of its plants. Pursuant to an arbitration clause in Green’s insurance policy, the insurer moved to compel arbitration, which Green opposed on the grounds that Puerto Rico’s insurance code voids any agreement in an insurance policy that “[d]epriv[es] the insured the right of access to the courts for determination of his rights under the policy in event of dispute.” The district court granted the insurer’s motion and Green appealed.

In reaching its decision, the First Circuit reviewed the intersection of the federal McCarran-Ferguson Act, Puerto Rico’s insurance laws, the New York Convention and the Federal Arbitration Act (FAA) to conclude that the dispute must be referred to arbitration. The court described the unique nature of the McCarran-Ferguson Act’s “reverse preemption” provision, which provides that state insurance laws are not superseded by any act of Congress unless expressly stated by a federal law regulating the business of insurance. For the court to find for the insurer, it had to first consider whether Article II(3) of the New York Convention, which requires enforcement of international arbitration agreements, is “self-executing” — i.e., whether it is “directly enforceable as domestic law” and can operate “without the aid of any legislative provision,” or whether it required separate implementing legislation from Congress. After a thorough analysis relying on U.S. Supreme Court jurisprudence, the court concluded that Article II(3) is self-executing and affirmed the judgment of the district court compelling arbitration.

A Win for Proponents of International Commercial Arbitration

With this decision, the First Circuit joins the Fourth, Fifth and Ninth Circuits in protecting the enforceability of arbitration clauses in insurance agreements between international parties. However, the First Circuit’s reasoning was distinct from the other circuits that have considered the issue. The Fourth and Fifth Circuits found that the McCarran-Ferguson Act does not apply to Chapter II of the FAA because it is a treaty rather than an “Act of Congress.” The Ninth Circuit found Article II(3) to be self-executing, while the Second Circuit, which declined to enforce an arbitration provision, concluded the opposite.

Considering the importance of foreign insurance services to the U.S. market, the First Circuit’s decision is significant. According to U.S. Bureau of Economic Analysis, in 2021, the U.S. imported almost $60 billion in insurance services — much of which was in the reinsurance market and more than four times the amount exported by the U.S. insurance industry. Irrespective of the circuit courts’ varying analyses, decisions upholding the validity of arbitration agreements should give foreign insurers greater confidence that their arbitration agreements with U.S. customers will be enforced notwithstanding various of state insurance laws containing prohibitions on arbitration similar to the Puerto Rico law at issue in Green Enterprises.

Implications for Public International Law

Beyond its impact on insurance law, this case addresses a more fundamental issue of public international law with wide-ranging implications for businesses and governments. Through this opinion, the First Circuit joins the Fifth and Ninth Circuits in holding that a treaty can have both self-executing and non-self-executing provisions. Although the U.S. Supreme Court has not directly addressed this issue, in Medellín v. Texas — the seminal case on self-executing treaties — the Court spoke in less nuanced terms, noting, for example, that “some treaties are self-executing and some are not, depending on the treaty.”

If the analytical approach of these circuit courts is correct, then jurisdictions that subscribe to the self-executing-versus-non-self-executing distinction must carefully dissect individual treaty provisions and determine, on a case-by-cases basis, which provisions are directly enforceable in domestic courts. Additionally, courts and litigants may not be bound by prior caselaw holding that a treaty is self-executing (or not) unless those cases analyzed the specific provision at issue.

Parties raising claims and other arguments arising under international treaties should be careful to analyze the specific provision at issue in the treaty and not assume that courts will treat the inclusion of some self-executing provisions as rendering the entire treaty self-executing and vice-versa.