By: Dominic Charles; Junior Staffer
With the passage of the Competitive Health Insurance Reform Act (CHIRA) of 2020, on January 13, 2021, Congress signaled that the world of insurance arbitration may soon change dramatically. Competitive Health Reform Act of 2020, PL 116-137, January 13, 2021, 134 Stat 5097; James W. Lowe McCarran-Ferguson Act Amended Repeal Long-Standing Federal Antitrust Exemption for the “Business of Health Insurance,” Sidley (January 27, 2021), https://www.sidley.com/en/insights/newsupdates/2021/01/mccarran-ferguson-act-amended-to-repeal-long-standing-federal-antitrust-exemption/. CHIRA’s passing weakened and partially appealed the long-standing McCarran-Ferguson Act (McCarran). Passed in 1945, McCarran mandates that any entity engaged in “the business of insurance” is subject to states’ insurance codes, not federal law. Legislators sought to shield insurers from federal regulation, including the Federal Arbitration Act (FAA), to ensure that insurers could continue engaging in cooperative rate making practices. California Antitrust and Unfair Competition Law § 7.01 (California Lawyers Association 2021). With McCarran under assault, now is the time for plaintiffs’ attorneys and insurers to assess the impact of a potential McCarran repeal in insurance disputes.
Under McCarran, federal insurance regulation is overridden by state authority removing federal preemption from insurance claims. Nearly one-third of states prohibit or restrict arbitration in disputes with insurers, nullifying the FAA which mandates the enforcement of contracts’ insurance clauses. In Hawaii, Louisiana, Massachusetts, Virginia, and Washington, arbitration clauses in insurance contracts are entirely unenforceable. Brian A. Briz & César Mejía-Dueñas, Which Law is Supreme? The Interplay Between the New York Convention, 74 Univ. Miami L. Rev. 1124, 1126-1127. A McCarran repeal would seemingly allow thousands of disputes to be resolved through arbitration. Still, the impact of its reversal may be muted due to the exceptions that courts have previously found to McCarran and may bar victims of fraud from achieving justice in court.
Parties have successfully enforced arbitration clauses by pleading that contracts fail the Fabe test. The Fabe test was established after McCarran to determine if a contract falls under state or Federal regulation. Under Fabe, courts ask if a state statute was enacted to regulate insurance; if the applicable federal statute does not specifically relate to the business of insurance; and if enforcement of the federal statute would invalidate a state statute. Id. at 1129. Federal circuits, with the exception of the Sixth circuit, have used Fabe, to determine that reinsurance contracts do not fall under state statutes because they are not insurance issuers. Additionally, many state and federal courts have ruled that state department of insurance rules do not apply to McCarran because they are not state statutes. Most circuits have also agreed that any insurers falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) are not subject to McCarran. See Gulf Ins. Co. v. Neel-Schaffer, Inc., 904 So. 2d 1036, 1046 (Miss. 2004); Steven Pitt et al., Couch on Insurance § 2:5 (3rd ed.. 2022); Business and Commercial Litigation in Federal Courts § 108:26 (Robert L. Haig ed.., 5th ed. 2022).
The Convention covers international insurance contracts and mandates the enforcement of arbitration clauses in those contracts. Most circuits have concluded that, despite McCarran, contracts involving international insurers cannot be subject to state regulation because the Convention is “self-executing,” and not an “Act of Congress.” See Lloyds Underwriters v. Netterstrom, 17 So. 3d 732, 737 (Fla. Dist. Ct. App. 2009). These circuits follow the logic of Lloyds Underwriters v. Netterstrom. In Loyds, the First District Court of Appeal of Florida acknowledged the reverse-preemption brought on by McCarran but compelled arbitration because the insurer was an international entity. See id. However, the Seventh and Eighth Circuit follow Foresight v. Certain London Market Insurance Co’s logic. In Foresight, the Eastern District of Missouri determined that an amendment of the FAA to accommodate for the Convention meant that the Convention was not “self-executing” and that it was an Act of Congress. With the Convention embodied in an amendment to the FAA, the court ruled that McCarran applied and did not compel arbitration. See Foresight Energy, LLC v. Certain London Mkt. Ins. Companies, 311 F. Supp. 3d 1085, 1096-1101 (E.D. Mo. 2018).
More broadly, McCarran has barred the enforcement of arbitration clauses involving contracts between American insurers and individual consumers where state law prohibits arbitration clauses. In those states, McCarran has preserved the rights of victims of insurance fraud to litigate. In recent years, health share ministries have been some of the most notorious perpetrators of insurance fraud. Troy Sepion, Judge: Faux Health Care Sharing Ministry not Exempt from Insurance Laws, 28 No. 06 WJCLA 11. Health share ministries like Aliera, Trinity Health Share, and others proliferated in the wake of the passage of the Affordable Care Act with promises of faith-based health insurance alternatives. These entities commonly promise to act like other health insurers but refuse to pay claims they supposedly cover, leaving their customers with crippling medical bills. Reed Abelson, It Looks Like Health Insurance but It’s Not. ‘Just Trust God’, Buyers are Told, N.Y. Times (Jan. 2, 2020), https://www.nytimes.com/2020/01/02/health/christian-health-care-insurance.html/. State laws barring arbitration have allowed Plaintiffs across the country to pursue justice in court against these entities. So, while McCarran’s reversal may lead to more efficient conflict resolution for insurers and consumers alike, it may also prevent those like Trinity and Aliera from seeing their day in court.