Addressing a complex preemption issue, the Fourth Circuit held that parties to an international arbitration agreement must arbitrate their coverage dispute despite an otherwise applicable South Carolina statute that forbids insurance dispute arbitration. Although state statutes governing the business of insurance typically “reverse preempt” federal law pursuant to the McCarran-Ferguson Act, the Fourth Circuit held that such reverse preemption does not extend to nondomestic (i.e., international) treaties. ESAB Grp. Inc. v. Zurich Ins. PLC, 2012 WL 2697020 (4th Cir. July 9, 2012).
A South Carolina-based manufacturer sought defense and indemnity from its insurers after being named as a defendant in product liability suits. In the coverage litigation that ensued, a threshold issue was whether South Carolina’s statutory prohibition of insurance-related arbitration trumps the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (an international treaty which obligates the enforcement of foreign arbitration agreements), or alternatively, whether the Convention preempts the state statute. The Fourth Circuit concluded that McCarran-Ferguson Act was not intended to “permit state law to vitiate international agreements entered into by the United States.” Two other federal circuit courts that have addressed the issue have reached conflicting decisions. Compare Stephens v. American International Ins. Co., 66 F.3d 41 (2d Cir. 1995) (holding that state law which precludes insurance dispute arbitration reverse preempts the Convention) with Safety Nat’l Cas. Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009) (en banc), cert. denied, 131 S. Ct. 65 (2010) (rejecting reverse preemption and reasoning that the McCarran-Ferguson Act applies only to federal statutes, not treaties such as the Convention). Notably, the decision leaves intact precedent holding that South Carolina law invalidating arbitration agreements in insurance policies reverse preempts the Federal Arbitration Act (which governs domestic arbitration). See Cox v. Woodmen of the World Ins. Co., 556 S.E.2d 397 (S.C. Ct. App. 2001).