District Court Enforces Mandatory Arbitration Clause, Despite State Law Prohibiting Such Provisions in Insurance Contracts

Defendants, Certain Underwriters at Lloyd’s and its third-party claims administrator, CJW & Associates, sought to enforce a mandatory arbitration clause in a Lloyd’s policy issued to the plaintiffs. Enforcement of the provision depended on the interplay between four laws: (1) a Washington statute barring mandatory arbitration clauses in insurance contracts; (2) Article II, Section 3 of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which requires courts to enforce arbitration agreements; (3) the McCarran-Ferguson Act, which provides that state insurance law preempts any conflicting “Act of Congress”; and (4) Chapter 2 of the Federal Arbitration Act (FAA), which Congress amended to implement the Convention as it relates to disputes involving foreign parties.

Lloyd’s being a foreign party, the question before the Washington district court was whether amending Chapter 2 of the FAA was an “Act of Congress” within the meaning of the McCarran-Ferguson Act. If so, then the Washington insurance law would preempt the Convention and bar enforcement of the arbitration clause in the Lloyd’s policy.

While recognizing that federal courts have reached diverging conclusions on the issue, the court was persuaded by a California decision finding that the word “shall” in Section 3 of the Convention expressly directs courts to enforce arbitration agreements and thus gives Section 3 “automatic effect.” In other words, Section 3 was “self-executing,” and, consequently, no “Act of Congress” was necessary for it to be enforced. As such, the court held that the McCarran-Ferguson Act did not apply and that the arbitration clause at issue was not invalidated by Washington law. The court went on to find the clause enforceable under the Convention, as limited by Chapter 2 of the FAA. Although an issue arose as to the requirement that at least one party to the arbitration agreement not be an American citizen, the court found the commercial relationship between the parties was sufficiently tied to a foreign state, as the policy was underwritten by the London insurance market, which was created and remains governed by Parliament. Even though CJW was a nonsignatory to the Lloyd’s policy, as Lloyds’ claims administrator, the court found CJW had acted as Lloyd’s agent and thus was permitted to invoke the policy’s arbitration clause.

CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Ga., LLC, No. 3:19-cv-05785 (W.D. Wa. Dec. 26, 2019).