The reinsurance industry has long favored arbitration over litigation for resolving disputes, but “cedents” have begun challenging the enforceability of arbitration provisions in reinsurance contracts.  Here is a template for analysis of such challenges.

The place to begin is a determination of whether the reinsurance contract is interstate or international.  This is because different federal acts apply depending on the nature of the contract, and those federal acts interplay differently with state law on insurance.

The Federal Arbitration Act, 9 USC § 1, et seq. (“FAA”) applies to interstate contracts and “establishes a national policy favoring arbitration when the parties contract for that mode of dispute resolution.”  Preston v. Ferrer, 128 S. Ct. 978, 981, 169 L. Ed. 2d. (2008).

Standing alone, the FAA does not apply to international reinsurance contracts.  However, The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 USC §§ 201 – 208 (“the New York Convention”) extended the protections of the FAA, and presumably the policy favoring arbitration, to international agreements.

Even though the FAA and the New York Convention govern respectively all interstate and international insurance and reinsurance contracts that contain an agreement to arbitrate, at least 20 states and two US territories prohibit the arbitration of insurance[1] disputes.[2]  The next step in the enforceability analysis therefore concerns preemption.

The standard preemption rules do not apply to state statutes that regulate the business of insurance.  See McCarran-Ferguson Act, 15 USC § 1012(b).  Instead, state law regulating insurance inversely preempts conflicting federal law.  NAACP v. American Family Mutual Insurance Company, 978 F.2d 287, 293 (7^th Cir. 1992).

Inverse preemption depends on whether the state law specifically relates to the business of insurance.  State statutes of the Arkansas variety that enforce arbitration clauses in general but exclude insurance contracts in particular have been held to be statutes of general applicability rather than statutes specifically directed at the insurance industry. Hart v. Orion Insurance Company, 453 F.2d 1358, 1360 (10^th Cir. 1971); Hamilton Life Insurance v. Republic National Life Insurance, 408 F.2d 606, 611 (2d. Cir. 1969); Triton Lines v. Steamship Mutual Underwriting Association, 707 F. Supp. 277, 279 (S.D. Tex. 1989).  Accordingly, in those states, there should be no inverse preemption and the federal acts should govern enforcement of the arbitration provisions.

Similarly, the inverse preemption doctrine is more likely to apply to interstate reinsurance contracts than to international reinsurance contracts.

Courts considering inverse preemption of the FAA tend to limit themselves to the three criteria of the McCarran-Ferguson Act.  When considering international arbitration agreements and the preemptive effect of state law on the New York Convention, these same courts generally take a more expansive view, finding that the McCarran-Ferguson Act was not intended to regulate international commerce and therefore does not apply to the New York Convention.   Safety National Casualty Corporation 543 F.3d at 751; Antillean Marine Shipping Corporation v. Through Transport Mutual Insurance Limited 02-22196-CIV., 202WL32075793 at *3 (S.D. Fla, October 31, 2002); In re Arbitration between West of England Ship Owners Mutual Insurance Association (Luxemburg) and American Marine Corporation, 91-3645, 91-3798 at *4 (E.D. La., February 18, 1992).  Accordingly, the prevailing view is that inverse preemption will not apply to international arbitration agreements.

Even where inverse preemption applies, there is an argument for not applying state anti-arbitration provisions to reinsurance contracts.  The apparent primary motivation behind the anti-arbitration provisions in the insurance context is to protect consumers against contracts of adhesion.  This concern does not apply in the reinsurance context because reinsurance contracts are not considered contracts of adhesion.  British Insurance Company v. Safety National Casualty Corporation, 136 F.2d 585, 593 (D.N.J. 2001); Stonewall Insurance Company v. Argonaut Insurance Company, 75 F. Supp. 2d 893, 910 (N.D. Ill. 1999); California Joint Powers Insurance Authority v. Munich Reinsurance AM., Inc., CV08-956, 2008WL1885754 at *3 (C.D. Cal. April 21, 2008).  Consequently, Georgia, Kansas, Kentucky, Maryland, Montana, Nebraska, Oklahoma, Rhode Island, and South Dakota exempt reinsurance contracts from their anti-arbitration statutes.

Overcoming statutory hostility to insurance arbitration agreements will not protect parties to a reinsurance contract from undermining their own arbitration provision with other inconsistent contractual terms.  In Continental Casualty Company v. Commercial Risk Reinsurance Company,  07C6912, WL1034951 (N.D. Ill. April 16, 2009) the court found that the reinsurance dispute was not subject to mandatory arbitration even though the reinsurance contracts contained an arbitration provision. The parties had undermined their arbitration clause through a commutation agreement that stated it was to “be interpreted, construed, enforced, and otherwise governed by an in accordance with the laws of the state of Illinois,” and that the parties would “submit to the exclusive jurisdiction of the state and federal courts in the state of Illinois.”  Id. at *1. 

A key benefit of arbitration in lieu of litigation is the confidentiality of positions and results the arbitration affords.  The interest in confidentiality of results can be undermined if one party seeks judicial confirmation of the arbitration award.  Federal courts have subject matter jurisdiction to confirm an arbitration award under both the FAA and the New York Convention. Century Indemnity Company v. Certain Underwriters at Lloyds of London, 592 F. Supp. 2d 825 (E.D. Pa. 2009).

Federal courts recognize a strong common law presumption of public access to judicial records.  This presumption is not absolute and may be rebutted when a court is satisfied, after balancing competing interests, that the need for secrecy outweighs the presumption of access.  In re Cendant Corporation 260 F.3d 183, 194 (3d. Cir. 2001).

To rebut the presumption of public access and to seal judicial records such as the results of a reinsurance arbitration, the proponent of secrecy must show that the material is the kind of information the courts will protect and that disclosure will work a clearly defined and serious injury to the party seeking the protection.  Miller v. IND. Hosp., 16 F.3d 549, 551 (3d Cir. 1994).  Broad allegations of injury are insufficient; the movant must show specific and serious injury.  Id.

In Century Indemnity Company v. Certain Underwriters at Lloyds, supra the court granted the plaintiff’s motion to seal the arbitration award finding a significant privacy interest and a tendency to promote voluntary execution of private arbitration agreements a legitimate purpose.  Both parties to the arbitration had agreed to keep the results confidential including the sealing of the arbitration award in any action to confirm it as a judgment. 

In summary, international arbitration agreements challenged by state anti-arbitration provisions are more likely to be enforced than are interstate arbitration agreements in the context of insurance and reinsurance disputes.  Where this occurs however, demonstration of specific and serious injury may outweigh the presumption of public access to judicial records resulting in the litigation proceeding under seal.

Robert L. Sallander, Jr.

Greenan, Peffer, Sallander & Lally LLP

San Ramon, CA

Mail to:  rsallander@gpsllp.com

If you would like to be a member of the Reinsurance Law subcommittee, please contact Bob Sallander at rsallander@gpsllp.com.