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

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

Recent noteworthy decisions:

Absolute Pollution Exclusion Clauses Bar Coverage for Remedial Action Costs

The allegations in a lawsuit against Seattle Collision Center Inc. did not give rise to a duty to defend, the U.S. Court of Appeals for the Ninth Circuit has ruled. That’s because the allegations arose “solely out of violations of Washington’s Model Toxics Control Act” and only claimed “past and future remedial action costs associated with traditional environmental pollution.” The insurance carrier’s pollution exclusion clauses, as interpreted under applicable Washington law, “clearly and unambiguously” excluded liability for such “traditional environmental harms,” the circuit court concluded. [Oregon Mut. Ins. Co. v. Seattle Collision Center Inc., No. 09-36105 (9th Cir. Nov. 16, 2010).]

 Court Dismisses Coverage Action Involving Chinese Drywall  

The insurer that had issued a church insurance policy to the Praise Tabernacle Holiness Church in Mississippi alleged in the declaratory judgment action it filed that the church had constructed a new facility using drywall manufactured in China and that the drywall had caused the church to suffer damages. The insurer asked for a judgment that the policy did not cover the church for any damage or loss allegedly caused by the drywall. The court refused to grant judgment to the insurer. In its decision, the court explained that the insurer had not alleged that the church had filed a claim for damages or had instituted any suit to recover for these alleged damages. It therefore dismissed the action, without prejudice. [Alfa Ins. Corp. v. Praise Tabernacle Holiness Church, No. 2:10cv141KS-MTP (S.D. Miss., Nov. 4, 2010).]