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Fourth Circuit Court of Appeals holds that state law cannot preempt international treaty enforcing arbitration agreements between international parties for insurance coverage

ESAB Group, Inc. v. Zurich Insurance PLC
No. 11-1243 (4th Cir. July 9, 2010)

by Wayne Heavener, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

In ESAB Group, Inc. v. Zurich Insurance PLC, the United States Court of Appeals for the Fourth Circuit held that a South Carolina law invalidating arbitration agreements in insurance policies, S.C. CODE ANN. § 15–48–10 (2012), did not apply to arbitration agreements between a domestic corporation and foreign insurer. The Court found that South Carolina could not “reverse preempt” a federal treaty recognizing and enforcing arbitration agreements between domestic and foreign entities under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, which otherwise generally permits states to preempt federal statutes regulating the insurance business. The Court of Appeals affirmed a decision by the United States District Court for the District of South Carolina, compelling arbitration between South Carolina-based manufacturer ESAB Group (ESAB) and Swedish insurer Zurich Insurance PLC (Zurich). In reaching its conclusion, the Court rejected arguments by appellant ESAB that federal courts did not have subject matter jurisdiction over the dispute, and therefore affirmed the District Court’s order compelling arbitration in Sweden for claims arising from the parties’ 1989 to 1993 policies. The Court also rejected arguments by cross-appellant Zurich that federal courts did not have personal jurisdiction over the foreign insurer. Therefore, the Court of Appeals affirmed the District Court’s exercise of jurisdiction over this case, decision to compel arbitration for claims arising out of the parties’ 1989 to 1993 policies, and discretion in remanding all nonarbitrable claims between the parties to state court.

This case occurred against the backdrop of a complex legal history regulating insurance. In 1944, the Supreme Court found that the federal government could regulate insurance as interstate commerce, United States v. S.-E. Underwriters Ass’n, 322 U.S. 533, 552–53 (1944), raising the threat of implied federal preemption of state insurance regulation. The following year, Congress passed the McCarran-Ferguson Act, which permitted states to reverse preempt generally applicable federal laws regulating insurance. The McCarran-Ferguson Act was an attempt by Congress to “restore the states’ preeminent position in insurance regulation.” ESAB Group, Inc. v. Zurich Insurance PLC, No. 11-1243, slip op. at 4–5 (4th Cir. July 9, 2010).

Contrastingly, Congress federalized the country’s arbitration policy under the Federal Arbitration Act (FAA), favoring the enforcement of written arbitration agreements. 9 U.S.C. §§ 1–16. Consistent with this policy, the United States entered into the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention), adopted June 10, 1958, 21 U.S.T. 2517 (entered into force with respect to the United States Dec. 29, 1970). The Convention obligated the United States to recognize and enforce international written arbitration agreements. To alleviate concerns over procedural requirements, Congress enacted chapter two (2) of the FAA (the Convention Act), providing for enforcement of the Convention in United States courts.

The dispute between ESAB and Zurich arose out of a conflict between South Carolina law and the Convention. While South Carolina generally enforces arbitration agreements, the law creates an exception for arbitration agreements between “any insured or beneficiary under any insurance policy." S.C. CODE ANN. § 15–48–10(b)(4) (2012). ESAB is a South Carolina manufacturer of welding materials, with several foreign parent companies. One such parent company—the Swedish company ESAB AB— entered into several insurance policies with a Swedish insurer, which eventually transferred its obligations to Zurich. When ESAB became embroiled in numerous products liability actions, it sought legal defenses and indemnification from its insurers, including Zurich. When Zurich refused coverage, ESAB filed suit in South Carolina state court; Zurich removed the case to the United States District Court for South Carolina.

In the District Court, ESAB argued that the Court had no subject matter jurisdiction because the McCarran-Ferguson Act permitted South Carolina to reverse preempt the Convention, such that the parties’ arbitration agreements in their 1989 to 1993 policies were not valid. Zurich disputed the Court’s exercise of personal jurisdiction because Zurich operated no offices in South Carolina, and the insurance contracts in question were negotiated and executed in Sweden by two Swedish companies. The District Court rejected both arguments, and found that the McCarran-Ferguson Act applied only to federal statutes, and not to international treaties. Therefore, traditional rules of preemption applied, and the parties’ 1989 to 1993 arbitration agreements were enforceable under the Convention, irrespective of South Carolina law. The Court also held that Zurich had sufficient minimum contacts such that the Court could exercise personal jurisdiction. The District Court used its discretion in declining to exercise supplemental jurisdiction over any remaining, nonarbitrable claims, and remanded claims arising from the parties’ 1994 to 1995 policies to state court. Both parties appealed.

Affirming the District Court’s ruling in its entirety, the Court of Appeals held that the McCarran-Ferguson Act was limited to domestic legislation only. Therefore, South Carolina law did not serve to reverse preempt the Convention; rather, traditional preemption applied. The Court refrained from deciding whether the Convention itself was self-executing, because even the Convention Act—serving as the Convention’s implementing act—did not fall within the scope of the McCarran-Ferguson Act. Rather, the McCarran-Ferguson Act was reserved only for domestic commerce legislation, and not arbitration or treaties. To permit South Carolina to reverse preempt a United States treaty in this manner would hinder the country’s ability to “speak with one voice” concerning commercial regulation with a foreign government. Therefore, the Convention preempts South Carolina law, and gives the Court subject matter jurisdiction over this case

The Court also concluded that it had personal jurisdiction over Zurich. Though Zurich neither had offices in South Carolina, nor drafted its insurance agreements in the state, the Court acknowledged that personal jurisdiction over insurers is unique. “[B]y agreeing to furnish a defense to its policyholder within a specified policy territory, an insurer indicates its willingness to be haled into court in foreign forums within this territory.” ESAB, No. 11-1243, slip op. at 26. Zurich, as ESAB’s policy holder, was amendable to personal jurisdiction in the United States.

The Court also affirmed the discretion of the District Court in remanding nonarbitrable cases between the parties to South Carolina state court. The Court observed that federal courts may exercise supplemental jurisdiction over an entire controversy where at least one (1) claim raises a well-pleaded federal question, except where otherwise inappropriate. The Court interpreted the Convention Act to authorize federal jurisdiction over all claims within an action where one (1) claim arose under the Convention. All “tag along” claims not arising out of the Convention, however, are supplemental in nature, and under the inherent authority of the District Court to remand.


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