In a recent decision of the United States Court of Appeals for the Fifth Circuit, Safety National Cas. Corp. v. Certain Underwriters at Lloyd’s of London, No. 06-30262 (5th Cir. Sept. 29, 2008), the court held that the McCarran-Ferguson Act (“McCarran-Ferguson”) does not cause a state law regulating the business of insurance to “reverse preempt” the provisions of a United States treaty.

The United States District Court for the Middle District of Louisiana had denied a motion to compel arbitration of a contractual dispute among three insurers, concluding that because of McCarran-Ferguson, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention) was reverse preempted by a Louisiana statute that has been interpreted to prohibit arbitration agreements in insurance contracts. Ordinarily a federal law preempts any inconsistent state law , but McCarran-Ferguson reverses this by imposing a rule that state laws enacted for the purpose of regulating the business of insurance do not yield to conflicting federal statutes unless a federal statute specifically requires otherwise. The Fifth Circuit noted that McCarran-Ferguson states that “[n]o 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….” The court considered whether the Convention is an “act of Congress” within the meaning of McCarran-Ferguson, and concluded that it was not.

Citing the United States Supreme Court case of American Insurance Assoc. v. Garamendi, 539 U.S. 396 (2003), the court noted that “the preemptive reach of the McCarran-Ferguson Act was not intended to extend to the conduct of foreign affairs.” The court reasoned that it was unlikely that when Congress crafted McCarran-Ferguson, it intended any future treaty implemented by an act of Congress to be abrogated to the extent that treaty conflicted in some way with a state law regulating the business of insurance. There was nothing in the text or context of McCarran-Ferguson to compel the court to conclude that it contained such an express Congressional direction. Therefore, McCarran-Ferguson did not cause the Louisiana statute in question to reverse preempt the Convention with regard to the dispute, and the court reversed the district court’s denial of the motion to compel arbitration and remanded for further proceedings consistent with the opinion.

Click here to review the Fifth Circuit’s decision.