Arbitration & Mediation

Tugboat Accident Triggers Federal Arbitration Act, McCarran-Ferguson Act, and New York Convention on the Recognition of and Enforcement of Foreign Arbitral Awards

By Christopher B. Hopkins, Esq.

In a decision which could find its way to the U.S. Supreme Court, the Second District held that, as an exception to an exception to a general rule (yes, you read that correctly), disputes over insurance policies involving parties in differing countries (like Lloyd's of London policies) can be arbitrated. This solves a "problem" many insurance and arbitration scholars may not have realized even existed...

Judge Padovano leads the way through the international thicket in Lloyds Underwriters and Osprey Underwriting Agency, Ltd. v. Rebecca Netterstrom, The M/V or T/B Jefferson and Mar-K Towing, Inc. (Barfield and Webster concurred).

In this case, an employee died in a marine accident and his wife sued the employer (Mar-K) who filed an insurance claim which was denied. Mar-K ultimately filed suit and the insurance company filed a Motion to Compel Arbitration. The trial court denied arbitration, finding ambiguity in the contract language and that state law prohibits the arbitration of insurance claims.

The appellate court held that, if an ambiguity existed, it was a matter of conflicting clauses which the court could interpret if they could be reconciled. Here, clause #1 was the arbitration clause and clause #2 was the "service of suit clause." That latter allowed Lloyds to be sued in the U.S. (presumably in order to enforce arbitration). Of note, as addressed elsewhere, suing Lloyds of London can be a trick name-game. In this case, the 2nd DCA reconciled the two by finding that the two clauses were in harmony assuming that Lloyds would be sued to pay an adverse arbitration award. Hence, no ambiguity.

Next, comes the interesting part. The FAA favors arbitration. The Act generally takes precedence over state laws on arbitration, including states which prohibit (like Alabama) or limit (like Florida, sometimes...!) arbitration. So that's the general rule.

But there is an exception. A state law regulating insurance can preempt federal law according to the McCarran-Ferguson Act, 15 USC 1012. This is known by the catchy-law school phrase, "reverse preemption." Thus, the Second DCA concluded, if the insurance contract was between a Florida resident and an insurance company in the US, the M-F Act would apply as an exception and state law would bar arbitration.

But there is an exception to the exception. The New York Convention on the Recognition of and Enforcement of Foreign Arbitral Awards, which is incorporated into the FAA, holds that this does not apply to international agreements. Relying upon federal precedent out of Georgia, the Panel held that the M-F Act applies only to arbitration agreements within the U.S. and that it has no effect on international arbitration agreements.

Full post as published by Florida Arbitration Law on July 28, 2009 (boomark / email).