Case of the Day: McDonnel Group v. Great Lakes Insurance

The case of the day is McDonnel Group, LLC v. Great Lakes Insurance SE, UK Branch (5th Cir. 2019). McDonnel purchased a builder’s risk policy from a group of insurers. When the insurers denied a claim, McDonnel sued. The insurers argued that the case had to be arbitrated, because the insurance policy contained an agreement to arbitrate. But the policy also had a provision stating: “In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” A Louisiana statute, § 22:868, forbade agreements to arbitrate in certain insurance contracts covering property in the state. Prior cases had already held that the New York Convention preempted the statute; but did it preempt the statute with such force that the “conformity clause” in the insurance agreement has no effect?

The issue was complicated by the McCarran–Ferguson Act, which provides that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance.” Does “reverse preemption” under the Act apply? Prior Fifth Circuit precedent had held that the McCarran-Ferguson does not apply to “reverse preempt” the New York Convention, because the Convention is not an act of Congress. This result is not self-evident, because Chapter 2 of the FAA, which is an act of Congress, is the Convention’s enabling legislation. Nevertheless, the Fifth Circuit precedent on the point was clear.

With that issue out of the way, the court resolved the case as follows:

So, what does the contract between McDonnel and the Insurers provide? We focus on two provisions. First, it contains a conformity provision, which amends the terms of the contract to conform to state statutes. But that provision only applies “[i]n the event any terms of [the] Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located.” Second, the policy contains an arbitration provision. It is the arbitration provision of the insurance policy that is said not to conform with La. Rev. Stat. Ann. § 22:868, a statute prohibiting arbitration agreements. This state statute, however, as we held in Safety National, is preempted by the Convention. Because the state statute, i.e., La. Rev. Stat. Ann. § 22:868, is preempted by the Convention, the statute does not and cannot apply to McDonnel’s policy. And because the statute does not apply to the policy, there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.

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