30 Years Later: Second Circuit’s Road to Arbitral Preemption

Originally published in Law360.

The enforceability of international arbitration agreements in insurance policies has long been an unsettled area of U.S. law.

Central to this historical uncertainty has been the complex interplay between numerous legal instruments: (1) the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention; (2) the Federal Arbitration Act, or FAA; (3) the McCarran-Ferguson Act; and (4) individual states’ insurance laws.

The U.S. Court of Appeals for the Second Circuit’s May 8 decision in Certain Underwriters at Lloyds, London v. 3131 Veterans Blvd. LLC creates a much-needed consensus among U.S. circuit courts, confirming that the correct approach is to enforce parties’ international arbitration agreements notwithstanding state insurance laws that would otherwise invalidate those agreements.[1]

Notwithstanding the U.S.’ long-standing pro-arbitration policy, nearly half of all 50 U.S. states have enacted legislation aimed at limiting or altogether invalidating arbitration agreements contained in insurance policies. In accordance with the supremacy clause of the U.S. Constitution, the FAA — a federal statute — would ordinarily preempt any contradictory state anti-arbitration laws.

However, the MFA upends that presumption by allowing state insurance laws to reverse-preempt conflicting federal statutes of general application, like the FAA. But that analysis shifts, yet again, when the arbitration agreement in question is subject to the New York Convention — an international treaty designed to ensure the enforcement of international arbitration agreements in national courts.

For decades, U.S. courts struggled to reach a consensus on the threshold question regarding the enforceability of international arbitration agreements in insurance policies: Is the New York Convention subject to the MFA’s reverse-preemption requirement? The Second Circuit’s decision in 3131 Veterans Blvd. should provide the clarity and uniformity that insurers and policyholders have long sought.

By expressly abrogating its prior precedent and aligning itself with more recent decisions of its sister circuits, the Second Circuit has endorsed the New York Convention’s primacy over the MFA. In doing so, the Second Circuit has solidified the presumptive enforceability of international arbitration agreements in insurance policies notwithstanding the existence of state laws purporting to negate those agreements.

Historical Framework

New York Convention and U.S. Policy Favoring Arbitration

Since its promulgation in 1958, the New York Convention has played a significant role in shaping the contours of international commerce. By ensuring the global enforceability of international arbitration agreements and awards, the New York Convention has proven to be a reliable mechanism for parties engaging in international business to avoid the cost, time and unpredictability associated with national court litigation.

In 1970, the U.S. Congress enacted Chapter 2 of the FAA to implement the U.S.’ recent ratification of the New York Convention.[2] In doing so, Congress affirmed the U.S.’ affinity for arbitration — which had long been embodied at the domestic level via Chapter 1 of the FAA — on an international scale.[3]

The New York Convention’s incorporation into U.S. domestic law was met with widespread approval, including by the U.S. Supreme Court, which emphasized that the U.S. federal policy favoring arbitration “applies with special force in the field of international commerce” in its 1985 Mitsubishi Motors v. Soler Chrysler-Plymouth decision.[4]

Among other things, Chapter 2 of the FAA established the presumptive validity and enforceability of international arbitration agreements, so long as those agreements fall under the convention.[5]

To meet that criteria, the arbitration agreement in question must (1) arise out of a commercial relationship that involves at least one non-U.S. party, (2) involve performance or property abroad, or (3) bear some other reasonable relation with a foreign state.[6]

If the agreement at issue meets that standard, Article II(3) of the convention dictates that U.S. courts “shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”

The McCarran-Ferguson Act and the Reverse-Preemption Conundrum

Congress enacted the MFA in 1945 to “restore the supremacy of the States in the realm of insurance regulation,” in the words of the Supreme Court in its 1993 decision in U.S. Department of the Treasury v. Fabe.[7]

Whereas the U.S. Constitution’s supremacy clause dictates that federal laws will preempt conflicting state laws, the MFA prescribes that state laws regulating the insurance industry will reverse-preempt acts of Congress, thereby ensuring that insurance activities will remain exclusively within the purview of state regulation.[8]

Emboldened by this perceived carte blanche to regulate insurance activities, since the MFA’s enactment, 23 states and territories have passed laws purporting to restrict the enforceability of arbitration agreements in insurance policies. Although the supremacy clause would ordinarily require those state anti-arbitration measures to yield to the FAA, where the arbitration agreement involves a domestic insurance transaction, the MFA gives primacy to those state laws. This is because the FAA constitutes an act of Congress within the scope of the MFA’s reverse-preemption mandate.

The application of the MFA is not so straightforward, however, where the arbitration agreement in question falls under the New York Convention. Unlike in the domestic context, whether an international arbitration agreement survives the potential negating effects of state anti-arbitration insurance legislation turns on the more complex question of whether the New York Convention, particularly its implementing legislation in Chapter 2 of the FAA, constitutes an act of Congress within the ambit of the MFA.

Judicial resolution of this debate has focused primarily on whether the New York Convention is a self-executing treaty — i.e., directly enforceable in U.S. courts without the need for further congressional legislative action.

If the New York Convention or its provisions are deemed self-executing, then it does not constitute an act of Congress for purposes of the MFA, because no congressional act is required for its application by U.S. courts. And if the New York Convention falls outside the scope of the MFA, then the convention does not risk reverse-preemption by state insurance laws.

Until recently, circuit courts substantially disagreed on this issue.

On one end of the spectrum, the U.S. Courts of Appeals for the First and Ninth Circuits have each concluded that the New York Convention is self-executing and, thus, beyond the scope of the MFA. On the other end of the spectrum, the Second Circuit has long held that the New York Convention is not self-executing, and therefore subject to the MFA’s reverse-preemption mandate.

In between those two judicial poles, the U.S. Courts of Appeals for the Fourth and Fifth Circuits have each concluded that the MFA should not encompass the New York Convention but have reached that result circuitously, without directly addressing the self-executing question.

In 3131 Veterans Blvd., the Second Circuit was given the opportunity to revisit its prior decision, settle the existing rift among circuit courts, and bring much-needed judicial uniformity to this critical issue affecting the enforcement of international arbitration agreements in insurance policies.

U.S. Courts Diverge, Then Converge

The Second Circuit Then

Circuit courts first began grappling with the intersection of the New York Convention and the MFA in the Second Circuit's landmark 1995 decision in Stephens v. American International Insurance Co., known as Stephens I.[9] Stephens I involved a motion to compel arbitration brought by a group of insurers against an insolvent reinsurer. The Second Circuit was asked to determine whether the New York Convention preempted a Kentucky state law that precluded the arbitration of disputes between insurance companies.

Applying the text and purpose of the MFA, the Second Circuit determined that the New York Convention was not self-executing, because it relied on an act of Congress for its implementation, namely Chapter 2 of the FAA. Consequently, the court refused to enforce the arbitration agreement in question pursuant to the Kentucky statute.[10]

Several months after Stephens I was issued, the Second Circuit raised doubts about its broad reasoning. In Stephens v. National Distillers & Chemical Corp., the Second Circuit was asked to examine the application of the MFA’s reverse-preemption mandate on the Foreign Sovereign Immunities Act.[11]

The specific question before the Second Circuit in Stephens II was whether a New York insurance law requiring out-of-state insurers to post security reverse-preempted the FSIA’s prohibition against attaching property of a foreign sovereign.

The Stephens II court concluded that a narrow application of the MFA was appropriate, because with the FSIA, Congress had chosen to exercise its “authority over foreign commerce and foreign relations.” In contrast to Stephens I, the Second Circuit determined that it was compelled to apply federal law in the context of the insurance industry, notwithstanding state insurance laws to the contrary.

Although numerous lower federal courts subsequently concluded that Stephens I was incorrectly decided based on, inter alia, the reasoning in Stephens II, Stephens I remained the controlling precedent in the Second Circuit for nearly three decades. Accordingly, Stephens I stood as a barrier to reaching a consensus among federal courts on the proper interplay between the MFA and the New York Convention.

Fifth Circuit

In 2009, 14 years after the Second Circuit’s decisions in the Stephens cases, the U.S. Court of Appeals for the Fifth Circuit, in Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, held that the New York Convention falls outside the MFA, regardless of whether the convention is “self-executing.”[12]

Finding support in Title 9 of the U.S. Code, Section 203, which provides that “[a]n action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States,” the Fifth Circuit held that congressional implementation of a treaty does not convert that treaty into an act of Congress under the MFA.

According to the court, Section 203 was a direct indication that Congress intended the New York Convention to have a distinct status beyond just an act of Congress.

The Fifth Circuit also observed that the implementing legislation in Chapter 2 of the FAA directed U.S. courts to various provisions of the New York Convention when construing and applying its provisions. For these reasons, the court concluded that the New York Convention, not the FAA, provides a “judicially enforceable remedy” that preempts conflicting state law and renders the MFA’s reverse-preemption principle inapplicable.

Fourth Circuit

Three years after the Fifth Circuit’s decision in Safety National, the U.S. Court of Appeals for the Fourth Circuit, in ESAB Group Inc. v. Zurich Insurance PLC, also concluded that state insurance laws invalidating international arbitration agreements do not supersede the New York Convention.[13]

Like the Fifth Circuit, the Fourth Circuit expressly declined to “wade into the murky waters” of whether the New York Convention is self-executing. Instead, the court focused on the broader interaction between the MFA and the New York Convention.

Relying on the Supreme Court’s 2003 decision in American Insurance Association v. Garamendi, the Fourth Circuit reasoned that the MFA is primarily directed toward domestic commerce legislation and should not be interpreted to allow state laws to invalidate international treaties, like the New York Convention, regardless of any associated implementing legislation.[14]

Ninth Circuit

The U.S. Court of Appeals for the Ninth Circuit’s 2021 decision in CLMS Management Services Ltd. Partnership v. Amwins Brokerage of Georgia marked a turning point in the federal judiciary’s analysis of the interplay between the MFA and the New York Convention.[15]

Like the Second Circuit in Stephens I, the Ninth Circuit focused its analysis on whether the convention is self-executing. Unlike the Stephens I court, however, the Ninth Circuit answered that question in the affirmative, concluding that the New York Convention does not qualify as an act of Congress within the scope of the MFA.

In reaching this result, the Ninth Circuit relied on the Supreme Court’s 2008 decision in Medellin v. Texas, which post-dated Stephens I by over 12 years.[16] Applying a “time-honored textual approach” to treaty interpretation, the Ninth Circuit reasoned that Article II(3) of the convention contains “precisely the elements” the Medellin court was looking for when designating treaty provisions as self-executing, namely, “mandatory language directed to courts rather than aspirational language directed to the political branches.”[17]

First Circuit

Before the Second Circuit’s decision in 3131 Veterans Blvd., the U.S. Court of Appeals for the First Circuit in Green Enterprises LLC v. Hiscox Syndicates Ltd. was the last circuit court to disagree with Stephens I and join the growing majority of courts to hold that state anti-arbitration insurance laws do not reverse-preempt the New York Convention.[18]

Citing Medellin, the First Circuit held in 2023 that the mandatory language in Article II(3) of the convention “leaves no discretion to the political branches of the federal government whether to make enforceable the agreement-enforcing rule that [Article II(3)] prescribes.”

The First Circuit gave the Second Circuit’s conclusion in Stephens I short shrift, observing that “Stephens predated Medellín, offered no analysis of Article II(3), and contained little explanation for why the Convention was in relevant part non-self-executing.”

By contrast, as the First Circuit remarked, “with the benefit of Medellin, we find that the text of Article II(3) manifests precisely the type of directive to United States courts that is a hallmark of a self-executing treaty provision.”[19]

Second Circuit Now

On May 8, the judicial saga returned to where it began 30 years earlier, with the Second Circuit: 3131 Veterans Blvd. involved two identical arbitration agreements contained in two separate insurance policies issued by several surplus lines insurers. After the policyholders filed suit in Louisiana state court, arguing that Title 22, Section 868, of the Louisiana Revised Statutes voided the arbitration clauses in the policies, the insurers countered by moving to compel arbitration under Chapter 2 of the FAA before the U.S. District Court for the Southern District of New York.

The district court sided with the policyholders based on a plain application of the Second Circuit’s precedent in Stephens I and voided the arbitration clause.

The insurers then appealed, arguing that the Second Circuit was compelled to reconsider Stephens I in light of the Supreme Court’s intervening decision in Medellín, which established a specific test for determining whether a treaty is self-executing that the Stephens I court necessarily failed to consider.

The Second Circuit agreed with the insurers, observing that its prior analysis in Stephens I had been “fatally undermined by the Supreme Court’s subsequent decision in Medellín” and had failed to consider that a treaty could have both self-executing and non-self-executing provisions.

The Second Circuit also found persuasive the reasoning of the First and Ninth Circuits, which had each already concluded under Medellín that Article II(3) is self-executing. As a result, the Second Circuit abrogated Stephens I to the extent it held that Article II(3) is not self-executing.

By doing so, the Second Circuit squarely aligned its precedent with the First and Ninth Circuits, all of which now confirm that the New York Convention is not an act of Congress under the MFA — and therefore not subject to reverse preemption by state anti-arbitration insurance laws.

A Consensus Toward Greater Uniformity and Predictabilty

The business of insurance is about identifying, managing and allocating risk. For many years, non-U.S. policyholders and insurers have been unable to accurately predict a fundamental aspect of that risk analysis: whether international arbitration agreements contained in their insurance policies would be enforceable notwithstanding certain states’ anti-arbitration insurance legislation.

By repealing its outdated and outlier precedent favoring application of those local anti-arbitration laws, the Second Circuit’s decision in 3131 Veterans Blvd. has now likely closed the door on any future inconsistent application of the New York Convention and MFA that would undermine the primacy of parties’ international arbitration agreements.[20]

Not only does 3131 Veterans confirm that federal district courts in the Second Circuit will operate in lockstep with district courts in the First and Ninth Circuits — and reach the same result, albeit likely with different reasoning, as district courts in the Fourth and Fifth Circuits — but the decision also portends that district courts in circuits yet to directly address this issue will likely follow suit as well.[21]

To be clear, an insurer and a policyholder must, as an initial matter, still carefully evaluate the specific contours of their commercial relationship to ensure that any international arbitration agreement they choose to incorporate into their insurance policies falls under the New York Convention. But with that threshold met, parties should now have greater confidence that their bargained-for arbitration agreements will be enforced according to their terms without the threat of nullification by contrary state insurance laws.

[1] The Second Circuit’s opinion consolidated and resolved two separate cases: Certain Underwriters at Lloyds, London et al. v. 3131 Veterans Blvd. LLC, Case No. 23-1268-cv and Certain Underwriters at Lloyds, London et al. v. Mpire Properties LLC, Case No. 23-7613-cv. 

[2] Act of July 31, 1970, Pub. L. 91-368, 84 Stat. 692, codified at 9 U. S. C. §§ 201-208; id. § 201.

[3] See Scherk v. Alberto-Culver Co., 417 U. S. 506 n.15.

[4] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985).

[5] 9 U.S.C. §§ 202-203.

[6] Id. § 202.

[7] Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 40 (1996) (quoting U.S. Dep’t of Treasury v. Fabe, 508 U.S. 491, 113 S. Ct. 2202, 124 L. Ed. 2d 449 (1993).

[8] 15 U.S.C. § 1012(b) (“No 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.”).

[9] Stephens v. American International Insurance Co., 66 F.3d 41 (2d Cir. 1995) (“Stephens I”).

[10] Stephens v. Am. Int’l Ins. Co., 66 F.3d 41 (2d Cir. 1995), abrogated by Certain Underwriters at Lloyds, London v. 3131 Veterans Blvd LLC, No. 23-1268-CV, 2025 WL 1335829 (2d Cir. May 8, 2025).

[11] Stephens v. National Distillers & Chemical Corp., 69 F.3d 1226 (1995) (“Stephens II”).

[12] Safety Nat. Cas. Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009).

[13] ESAB Grp., Inc. v. Zurich Ins. PLC, 685 F.3d 376 (4th Cir. 2012).

[14] Am. Ins. Ass’n v. Garamendi, 539 U.S. 396 (2003).

[15] CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Ga., 8 F.4th 1007 (9th Cir. 2021).

[16] Medellin v. Texas, 554 U.S. 759 (2008).

[17] CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Georgia, LLC, 8 F.4th 1007 (9th Cir. 2021).

[18] Green Enters., LLC v. Hiscox Syndicates Ltd., 68 F.4th 662 (1st Cir. 2023).

[19] Green Enters., LLC v. Hiscox Syndicates Ltd. at Lloyd’s of London, 68 F.4th 662 (1st Cir. 2023).

[20] Although the Second Circuit’s decision theoretically remains subject to U.S. Supreme Court review at the time this article was published, any petition for certiorari is highly unlikely to succeed because (a) as described in this article, there is no longer any meaningful split among the circuits, and (b) the Supreme Court has twice denied certiorari on previous occasions involving the interplay of the MFA and the New York Convention (first in 2010 in the Fifth Circuit’s decision in Safety National, and then in 2022, in with the Ninth Circuit’s decision in CLMS Mgmt.). 

[21] For example, district courts in both the Eighth and Eleventh Circuits have each signaled their approval of an approach favoring the application of the New York Convention over the MFA, but have not foreclosed the possibility of the opposite result.