The U.S. Second Circuit Court of Appeals reversed its earlier decision, ruling that arbitration clauses established under the New York Convention take priority over Louisiana state law, which prohibits mandatory arbitration in insurance contracts.
The dispute arose from two separate cases involving commercial properties insured by surplus lines carriers at Lloyd’s.
Both properties sustained damage during Hurricane Ida in 2021. After receiving claim settlements, both policyholders filed lawsuits in Louisiana.
In response, the insurers filed actions in the U.S. District Court for the Southern District of New York, asserting that the arbitration clauses in their policies were enforceable under the New York Convention.
The Second Circuit had previously held that Article III, Section 3 of the New York Convention was not self-executing, which allowed Louisiana law to override the treaty.
That interpretation relied on the notion that a treaty provision requires implementing legislation from Congress to take effect unless it is considered self-executing.
Under the McCarran-Ferguson Act, state insurance laws may override any non-self-executing treaty provision. This reasoning supported the application of Louisiana’s arbitration ban in the earlier ruling.
However, the U.S. Supreme Court’s decision in Medellin v. Texas revised the legal standard for determining whether a treaty provision is self-executing.
The Court identified that provisions are self-executing when they include directives to U.S. courts and use mandatory language such as “shall” or “must.” Provisions are not self-executing if they only recommend actions by member states.
Following this standard, multiple circuit courts have concluded that Article III, Section 3 of the New York Convention qualifies as self-executing.
It provides a direct instruction to U.S. courts, which aligns with the Supreme Court’s criteria. The Second Circuit acknowledged this and agreed with other circuits.
The court admitted that its earlier decision overlooked the possibility that a treaty could contain both self-executing and non-self-executing provisions.
Based on this recognition, the court reversed all orders grounded in the assumption that the New York Convention was non-self-executing.
The hurricane-related insurance lawsuits have now been sent back to their original district courts for continued legal proceedings.
