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Symposium 2016

Practice Note:
Arbitration Wars in Insurance Insolvency

by ~ Natasha C. Lisman (Email) (Web Site)

While the once reigning judicial hostility to arbitration agreements as unenforceable “attempt[s] to wholly oust the courts of jurisdiction1 has generally been consigned to ancient legal history, resistance to honoring arbitration agreements has survived in one environment  insurance insolvency. In that context, the enforceability of arbitration agreements, and specifically, whether an insolvent insurer’s pre-insolvency arbitration agreement with a third party is binding on the insurer’s liquidator as one standing in the insurer’s shoes, is a live, highly controversial, and actively litigated issue. This article presents a general overview of the main legal strands in the extensive case law engendered by this litigation.


The wars over the arbitrability of disputes in insurance liquidations are triggered by a clash of preferences for the resolution forum. Insurance liquidators prefer to submit disputes for adjudication by the state courts supervising liquidations and strenuously resist having to abide by arbitration clauses in the insolvent insurers contracts with third parties, even when seeking to recover under them.2 The third parties, on the other hand, have the exact opposite preference and respond by seeking court orders compelling arbitration.

The ensuing battles have been waged in a number of state and federal jurisdictions and have produced such sharp divisions among, and even within, the courts that on most key issues, for each line of reasoning and conclusion one can find in the case law an equal and opposite line of reasoning and conclusion.

This intersection of insurance and arbitration law is of particular interest to reinsurance practitioners. Reinsurers are disproportionately represented among the targets of liquidators claims because reinsurance contracts are typically the largest and most collectible potential assets that a liquidator can marshall for the insolvent estate. Since reinsurance contracts tend to include arbitration clauses, reinsurers figure prominently as liquidators opponents in the wars over arbitration in insurance liquidation.

The Legal Arsenal

The law supplying the arguments and counterarguments in the arbitration wars depends on whether the arbitration agreement at issue is part of a transaction in intrastate, interstate, or international commerce. For contracts in purely intrastate commerce, the binding effect of arbitration provisions on liquidators turns solely on the state law governing insurance liquidation and arbitration. For contracts in interstate commerce, the analysis begins with the same areas of state law but then requires consideration of federal constitutional and statutory law bearing on preemption, arbitration, and insurance, while cross-border contracts add to that mix an international arbitration treaty and its federal implementing legislation.

State Law

Since the insolvency of a US insurance company is governed by the law of the state in which it is domiciled, the first issue in a case involving any arbitration agreement is whether the law of that state either bars or requires liquidators to abide by such agreements. While most states have adopted general laws favoring arbitration and enforcement of arbitration agreements, laws that expressly address the enforceability of arbitration agreements specifically in the context of insurance insolvency are extremely rare.3 Thus, in most cases, courts confront the significance and consequences of the absence of a specific legislative provision either allowing or prohibiting arbitration in insurance liquidation. The decisions vary, and the outcomes seem rooted in the judges underlying attitudes toward arbitration.

Some courts have found arbitration to be incompatible with insurance liquidation on grounds that echo the traditional jurisdictional turf concerns that once informed judicial hostility toward arbitration generally. These courts have ruled that the reach of state pro-arbitration statutes stops at insurance insolvency and that only legislation expressly and affirmatively authorizing arbitration in insurance liquidation can compel a liquidator to submit to arbitration. In the absence of such authorization, they find prohibition of arbitration implicit in the overall statutory liquidation scheme charging state courts with supervising insurance liquidation proceedings. As one court put it, “it would seem in keeping with the overall scheme and plan of [the liquidation statute], and in view of the fact that [it] contains no statutory authorization for arbitration, that that court may not be ousted of jurisdiction in favor of an arbitrative tribunal.4

By contrast, other courts find general pro-arbitration laws fully applicable in the insurance liquidation context and, invoking the presumption required by these laws in favor of the enforcement of arbitration agreements, hold that this presumption can be overcome only by legislation specifically preventing the enforcement of arbitration agreements against insurance liquidators.5

The resolution of the state law issues is all that is required for contracts in intrastate commerce, and for all other contracts when the state law issues are resolved in favor of the enforceability of arbitration agreements against liquidators. If, however, state law expressly, or as construed, bars such enforcement, cases involving interstate or cross-border agreements implicate federal law, and for the latter, international law as well.

Federal Law

The federal law that bears on the enforceability of interstate arbitration agreements includes the Supremacy Clause of the US Constitution6, the Federal Arbitration Act (FAA)7 and a provision of the McCarran-Ferguson Act.8 The FAA embodies the federal policy favoring arbitration and requires the courts to “rigorously enforce agreements to arbitrate.9 Normally, by operation of the Supremacy Clause, the FAA preempts any conflicting anti-arbitration state law. In the field of insurance, however, the preemptive force of general federal laws can be blocked by the McCarran-Ferguson Act, which protects state laws enacted “for the purposes of regulating the business of insurance from being “invalidat[ed], impair[ed], or supersede[d] by “any Act of Congress that does not “specifically relate[] to the business of insurance. Since this protective effect of the McCarran-Ferguson Act causes state laws to prevail over conflicting federal laws, it is commonly referred to as “reverse preemption.

Consequently, where an arbitration agreement is embedded in a pre-insolvency transaction subject to federal as well as state law, the court must determine whether the McCarran-Ferguson Act applies to insurance liquidation, and, if so, whether it reverse-preempts the FAA. Since the FAA is indisputably an Act of Congress that does not specifically relate to the business of insurance, the determination boils down to the McCarran-Ferguson Act’s other two prongs: is the state law at issue designed to regulate the business of insurance and, if so, would applying the FAA to compel arbitration against an insurance liquidator invalidate, impair or supercede the state law. Once again, the courts have split on both issues.

In some courts view, “the business of insurance within the meaning of the McCarran-Ferguson Act does not encompass the liquidation of insolvent insurance companies either generally or at least with respect to the resolution of the liquidators contract claims. This view leaves the FAA to operate in its normal preemptive manner.10 Other courts, however, have held that the state law governing the winding up of insolvent insurers is an intergral part of regulating the business of insurance and that state anti-arbitration provisions are part and parcel of the regulatory scheme.11

Courts also differ in their assessment of the impact of compelling arbitration of disputes between liquidators and third parties on the state insurance liquidation scheme. These differences, once again, seem strongly colored by the judges underlying attitudes toward arbitration. Echoing the historic “ouster of jurisdiction theme, some courts have held that resolution of liquidators claims in arbitration would undermine the jurisdiction of the courts to which the insurance liquidation scheme entrusted the oversight of insurance liquidations, as well as impair the implementation of the important state policy of orderly liquidation of insurance companies.12 Other courts, however, fail to see why a liquidation court’s jurisdiction cannot accommodate arbitration,13 particularly since liquidators, for reasons of lack of personal jurisdiction or existence of diversity jurisdictions, often find themselves litigating their claims against third parties in judicial forums other than the court overseeing a particular liquidation.14 Courts have also rejected the notion that arbitration is inimical to the public interest in the implementation of state insurance liquidation schemes. Citing “the trend toward arbitration of controversies implicating [diverse] public policy concerns, one court concluded that arbitration in the insurance liquidation setting was equally acceptable.15

International Law

Arbitration agreements in international commerce are governed by the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards and Chapter 2 of the FAA implementing it, both of which express the same pro-arbitration policy as Chapter 1 the FAA, the statute’s domestic portion. The preemptive mandate of the Supremacy Clause, of course, applies to the nation’s international treaties. But, as with the FAA, disputes over arbitration in insurance liquidation have engulfed the Convention as well. The issue in those cases is whether the McCarran-Ferguson Act applies to the Convention and thus can cause it to be reverse-preempted by state law barriers to the enforcement of arbitration agreements in insurance liquidation.

In some judges view, the answer turns on whether the Convention is a self-executing treaty. If so, the Convention operates independently of any implementing legislation and cannot be deemed to be “an Act of Congress within the meaning of the McCarran-Ferguson Act.16 If, on the other hand, the Convention is not self-executing and required the passage of Chapter 2 of the FAA for its implementation, then it is that Act of Congress that governs the enforceability of arbitration agreements in cross-border transactions and, as an Act of Congress, it is subject to the McCarran-Ferguson Act’s reverse preemption doctrine.17 Yet another view is that the self-executing force of the Convention is ultimately immaterial, essentially because Congress could not have intended international treaties, even those legislatively implemented, to be treated the same as domestic federal acts for purposes of the McCarran-Ferguson Act, or to expose the important policy of enforcing international arbitration agreements to the vagaries and inconsistencies of state laws.18


Given the wide divergence of reasoning and conclusions in the decisions that have addressed the enforceability of arbitration agreements against insurance liquidators, and the fact that in many jursidictions the question has yet to be presented or definitively settled, there is no generally accepted answer to the question and each case depends on the state of the law in the jurisdiction in which it arises. Although the issue has significant federal and international law facets - which, in today’s commerce, apply to most arbitration agreements - the US Supreme Court has not yet stepped in to resolve the conflict among the state highest courts and the federal circuits rulings on those facets, as it will inevitably have to.19 In the meantime, lawyers dealing with the issue in a state or federal jurisidiction without a binding decision  which includes Massachusetts20 - have a wealth of conflicting and persuasive precedent to sift through and marshall.

Natasha C. Lisman can be reached at
 2011 Sugarman, Rogers, Barshak & Cohen, P.C. All rights reserved.


1 See, e,g, Bauer v. International Waste Co., 201 Mass. 197, 302-03 (1909).

2 The arbitrability of third party claims against liquidators is normally not an issue because it is generally accepted that such claims are subject to ordinary creditor claim approval or disallowance procedures. See. e.g. Quackenbush v. Allstate Insurance Co., 121 F.3d 1372, 1381 (9th Cir. 1997); Credit General Insurance Company v. Insurance Service Group, Inc., et al., 2007 WL 2198475 (Tenn.Ct.App. 2007).

3 See, e.g. WIS. STAT. ANN.  645.04 (3) (“An arbitration provision of any contract with an insurer that is subject to a delinquency proceeding under subch. III is not enforceable unless the receiver elects to accept arbitration); OKLA. STAT. TITLE 36,  1902 (“Except as to claims against the estate, nothing in this article shall deprive a party in interest of any contractual right to pursue arbitration of any dispute under any law. Where an insurer subject to this article is a party to an arbitration proceeding, the venue of such arbitration proceeding shall be in Oklahoma County.)

4 Knickerbocker Agency v. Holz, 149 N.E.2d 885, 890 (N.Y. 1958); Benjamin v. Pipoly, 800 N.E.2d 50, 59 (Ohio App. 2003). Some courts also rely on the statutory grant of power to liquidators to disavow the insolvent insurers pre-insolvency contractual obligations, even selectively when a liquidator seeks to enforce other duties arising out of a contract containing the disavowed arbitration clause. Hudson v. John Hancock Financial Servs, 2007 WL 4532704, Ohio App. 10 Dist., 2007); Wagner v. Kay, 722 N.W.2d 348 (Neb. App. 2006).

5 Credit General Insurance Company v. Insurance Service Group, Inc., et al., 2007 WL 2198475 (Tenn.Ct.App. 2007)

6 U.S. Const. art. VI, cl. 2.

7 9 U.S.C  1 et seq.

8 15 U.S.C.  10129b).

9 Shearson/American Express, Inc. v. McMahon, 482 U.S. 220 (1987); Nichols v. Vesta Fire Insurance Corp., 56 F.Supp.2d 778, 781-82 (E.D. Ky. 1999).

10 Midwest Employers Cas. Co. v. Legion Ins. Co., 2007 WL 3352339 E.D.Mo. (2007); Everest Reinsurance Co. v. Howard, 950 S.W.2d 800 (Tex.App.-Austin,1997); Costle v. Fremont Indemnity Co., 839 F.Supp. 265 (D.Vt. 1993); Phillips v. Lincoln National Health & Casualty Ins. Co., 774 F. Supp. 1297 (D.C. Colo. 1991); cf. Grode v. Mutual Fire, Marine and Inland Insurance Co., 8 F.3d 953, 959-60 (3d Cir. 1993).

11 Hudson v. John Hancock Financial Servs, 2007 WL 4532704 (Ohio App. 10 Dist., 2007); Munich American Reinsurance Co. v. Crawford, 141 F.3d 585, 592-93, 596 (5th Cir. 1998); Stephens v. American Intern. Ins. Co, 66 F.3d 41 (2d Cir. 1995).

12 Ernst & Young, LLP v. Clark, 2010 WL 3374414, * 4-8 (KY, 2010); Union Indemnity Insurance Co. v. American Centennial Insurance Co., 521 N.Y.S.2d 617, 619-20 (N.Y. Sup. Ct., 1987); Stephens v. American Intern. Ins. Co, 66 F.3d 41 (2d Cir. 1995).

13 In re Liquidation of Integrity Ins. Co., 2006, WL 2795343, *7 (N.J.Super. 2006), (rev’d on other grounds 193 N.J. 86 (2007)); Suter v. Munich Reinsurance Co., 223 F.3d 150, 161 (3d Cir. 2000).

14 Knickerbocker Agency v. Holz, 149 N.E.2d 885 (N.Y. 1958)(dissent). Ainsworth v. Allstate Ins. Co., 634 F.Supp. 52, 57 (W.D. Mo. 1985); Selcke v. New England Ins. Co., 995 F.2d 688, 691 (7th Cir. 1993); Suter, 223 F.3d at 161.

15 Bennett v. Liberty National Fire Insurance Co., 968 F.2d 969, 972-73 (9th Cir. 1992); Phillips, 774 F.Supp. at 1300.

16 Safety National v. Certain Underwriters at Lloyds, London, 2009 WL 37222727 (5th Cir. 2009) (concurring opinion).

17 Stephens, 66 F.3d at 45; Corcoran v. Ardra Insurance Co., 567 N.E.2d 969 (N.Y. 1990).

18 Safety National v. Certain Underwriters at Lloyds, London, 2009 WL 37222727 (5th Cir. 2009); Certain Underwriters at Lloyds, London v. Simon, 2007 WL 3047128 (S. D. Ind. 2007).

19 As of this writing, a petition for certiorari from the decision of the Kentucky Supreme Court in Ernst & Young, LLP v. Clark, 2010 WL 3374414 (KY, 2010), holding the McCarran-Ferguson Act applicable to insurance liquidation, and the FAA reverse-preempted by Kentucky’s anti-arbitration law, is pending. 1010 WL 4852441(Petition).

20 Although there is no Massachusetts law directly on point, in DiMercurio v. Sphere Drake Ins., 202 F3d 71, 79-81(1st. Cir 200), the First Circuit declined to construe a statute voiding provisions in insurance policies that deprive the state courts of jurisdiction over the insurer as invalidating arbitration clauses in insurance policies. The Court cited the state’s pro-arbitration policy and law as a complete rejection of “the old ouster of jurisdiction doctrine and held that arbitration “does not divest the courts of jurisdiction.Choose right replica handbags,replica omega,replica watches and swiss replica watches also can make you shiny.

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