District Court Denies Plaintiff’s Argument that McCarren-Ferguson Act Precludes A Federal Court’s Ability to Assert Diversity Jurisdiction

Summary of Mcraith V. American Re-Insurance Co. ET AL (Civil Action No. 09-04027, February 17, 2010):

Plaintiff, acting in his capacity as the statutory and court-affirmed rehabilitator of Centuar Insurance Company, initially filed a lawsuit in Illinois state court, Cooks County, against its reinsurers for failure to pay reinsurance proceeds. Plaintiff alleges that Centuar Insurance Co. issued insurance policies covering the risks involved in the underlying action and secured several facultative reinsurance policies for the same policies. According to the terms and conditions of the reinsurance agreements, specifically the loss settlement provision, all settlements are binding on the reinsurers and, as such, the reinsurers are obligated to pay those sums. According to the complaint, plaintiff alleges the reinsurers failed to compensate Centaur under the reinsurance policies despite the fact that it provided the necessary proof of claim. The reinsurers, in turn, argued that they “lacked sufficient claims data and analysis to support the request for payment under the Certificates of Reinsurance they issued to Centuar.” As a result, the plaintiff requests declaratory relief stating that the reinsurers are obligated “to indemnify Centaur for its share of the Settlement amount under the Certificates of Reinsurance they issued to Centaur.” In addition, plaintiff seeks “interest from the date of the notice of the settlement amount and request for payment of its share of the Settlement amount and on its proportion of allocated loss expense.”

Subsequent to the decision, the defendants made a successful motion to remove the action to Southern District of Illinois on jurisdictional grounds. In this motion to remand, the plaintiff alleges that pursuant to the reverse preemption doctrine contained in the McCarren-Ferguson Act, Illinois’s Insurance Code preempts any claims of federal diversity. The court declined plaintiff’s argument stating that while the policy of “McCarren-Ferguson Act was to leave the regulation of insurers to the states, it did not intend to divest federal courts of the right to apply state law regarding the regulation of insurers in appropriate diversity proceedings.

IMPACT (ARBITRATION): This case is another example of the issues involving the implications of the McCarren-Ferguson Act. Here, plaintiff made the novel argument that the McCarren-Ferguson Act preempts any jurisdictional claims a district court might have. The court, in relying on prior authority from the Third Circuit, found that the McCarren-Ferguson Act was not intended to go that far. That being said, the court did appear to labor through the issue and practitioners need to be cognizant of the expected and perhaps unexpected consequences of the McCarren-Ferguson Act.