U.S. Supreme Court Asked To Decide Whether McCarran-Ferguson “Reverse Preempts” Federal Arbitration Act

December 31, 2010 | Insurance Coverage


Ernst & Young had been retained as an auditor for a now defunct workers’ compensation self-insurance group.  The rehabilitator appointed pursuant to Kentucky’s Insurers Rehabilitation and Liquidation Law (“IRLL”) asserted tort claims on behalf of the group against Ernst & Young in state court.  Ernst & Young moved to enforce contractual provisions in its retainer agreements calling for such claims to be submitted to binding arbitration under the Federal Arbitration Act (“FAA”).  A Kentucky state court denied the motion, finding that the IRLL gave it broad discretion to retain full jurisdiction over the rehabilitation process, including any lawsuits filed by the rehabilitator.


Ernst & Young appealed to the Kentucky Supreme Court, arguing that the lower court had failed to recognize the supremacy of the FAA and its establishment of a national policy favoring the arbitration of disputes.  The Kentucky Supreme Court rejected Ernst & Young’s arguments, however, and found that the arbitration agreements were not enforceable over the rehabilitator’s objection. The Kentucky Supreme Court reasoned that the federal McCarran-Ferguson Act established a doctrine of “reverse preemption” that expressly exempted from federal preemption state statutes enacted to regulate insurance, leaving the regulation of insurance to the individual state. Simply put, it ruled, the federal policy favoring arbitration was subordinated to the state’s interest in having matters relating to the rehabilitation of an insurance company adjudicated in its courts.


Now, Ernst & Young has asked the U.S. Supreme Court to review that decision. In its papers asking the Court to grant its petition for certiorari, Ernst & Young contended that the claims filed against it had “no apparent connection to the core ‘business of insurance,’ i.e., spreading of risk from insured to insurer.” Ernst & Young argued that the Court should grant certiorari to “cabin the McCarran-Ferguson Act to its proper bounds” and to “vindicate the important policies of the FAA.”


The case is Ernst & Young LLP v. Clark, No. 2007-SC-000770-TG (KY), pet. for cert. filed, Nov. 22, 2010.


Case & Point

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