CLMS Mgmt. Servs. Ltd. v. Amwins Brokerage of Ga., LLC, CASE NO. 3:19-cv-05785-RBL

CLMS MANAGEMENT SERVICES LIMITED PARTNERSHIP;ROUNDHILL I, L.P., Plaintiffs, v. AMWINS BROKERAGE OF GEORGIA, LLC; AMRISC, LLC;C.J.W. & ASSOCIATES, INC.; CERTAIN UNDERWRITERS AT LLOYD'S, Defendants.

CASE NO. 3:19-cv-05785-RBL

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT TACOMA

December 26, 2019

HONORABLE RONALD B. LEIGHTON

ORDER ON DEFENDANTS CERTAIN UNDERWRITERS AT LLOYD'S AND CJW & ASSOCIATES, INC.'S MOTION TO COMPEL ARIBTRATION AND STAY PROCEEDINGS

DKT. # 22

INTRODUCTION

THIS MATTER is before the Court on Defendants Certain Underwriters at Lloyd's and CJW & Associates, Inc.'s Motion to Compel Arbitration and Stay Proceedings. Dkt. # 22. This case is an insurance dispute concerning coverage for flood damage to a residential development in Houston, TX, that is owned by Roundhill I, L.P., and managed by CLMS Management Services, L.P. Complaint, Dkt. # 1, at 3. Defendants move to enforce the Policy's mandatory arbitration clause, which requires all disputes be resolved in New York. Policy, Dkt. # 23, Ex. 1, at 37 (26 of 48). However, enforcement of the arbitration clause turns on a clash between two sources of law: RCW 48.18.200, which bars mandatory arbitration clauses in insurance contracts, and the Convention on the Recognition of Foreign Arbitral Award, Art. II, Sec. 3, which requires U.S. courts to enforce arbitration clauses upon request. At the fulcrum of these two is the McCarran-Ferguson Act, which provides that state insurance law preempts conflicting federal law. The question is whether the Convention—an international treaty implemented by a congressional statute—is preempted by RCW 48.18.200.

For the following reasons, the Court holds that the Convention is not preempted and GRANTS Defendants' Motion to Compel Arbitration and Stay Proceedings.

BACKGROUND

Plaintiffs' Houston residential development, Roundhill Townhomes, allegedly sustained $5,660,000 worth of damage as a result of Hurricane Harvey in August of 2017. Dkt. # 1, at 3. The property was insured through August 30, 2017 under Commercial Insurance Policy No. AMR-39768-02 with the Lloyd's Underwriters. Id.; Policy, Dkt. # 23, Ex. 1, at 5. This Policy constitutes one coverage part of a larger insurance agreement between CLMS and Defendant Amrisc, LLC, which acts as the "program manager for the companies" providing coverage. Policy, Dkt. # 23, Ex. 1, at 5. The agreement with Amrisc effectively creates "a separate contract between the [CLMS] and each of the Underwriters." Id. at 8 (1 of 4). CJW, a Florida company, is the third-party claims administrator for the Lloyd's Underwriters. Id. at 39 (28 of 48); Dkt. # 1 at 3.

The citizenship of the Lloyd's Underwriters, meanwhile, is a bit more complicated. Plaintiffs allege simply that the Lloyd's Underwriters are "a British business entity with its principle place of business in London, England." Dkt. # 1, at 2. However, as the Eleventh Circuit explained in Underwriters at Lloyd's, London v. Osting-Schwinn:

The Society of Lloyd's, London, is not an insurance company, but rather a British organization that provides infrastructure for the international insurance market. Originating in Edward Lloyd's coffee house in the late seventeenth century, where individuals gathered to discuss insurance, the modern market structure was formalized pursuant to the Lloyd's Acts of 1871 and 1982. . . . Lloyd's itself does not insure any risk. Individual underwriters, known as "Names" or "members," assume the risk of the insurance loss. Names can be people or corporations; they sign up for certain percentages of various risks across several policies. . . .

Names underwrite insurance through administrative entities called syndicates, which cumulatively assume the risk of a particular policy. . . . The syndicates are not incorporated, but are generally organized by Managing Agents, which may or may not be corporations. The Managing Agents determine the underwriting policy for the syndicate and accept risks on its behalf, retaining a fiduciary duty toward the underwriting Names. . . .

613 F.3d 1079, 1083 (11th Cir. 2010).

After their property was damaged, Plaintiffs submitted a claim under the Policy. Dkt. # 1 at 3. Plaintiffs allege that they made inquiries about their claim that went unanswered until CJW sent them a letter in May 2018 stating that the Policy's deductible was $3,600,000. Id. Plaintiffs contend that the deductible should instead be $600,000. Id. at 4. This disagreement is at the center of Plaintiffs' Complaint. Id.

Defendants' Motion to Compel is based on the arbitration provision in the Policy's "Conditions" section. It reads as follows:

ARBITRATION CLAUSE: All matters in difference between the Insured and the Companies (hereinafter referred to as "the parties") in relation to this insurance, including its formation and validity, and whether arising during or after the period of this insurance, shall be referred to an Arbitration Tribunal in the manner hereinafter set out.

. . .

The seat of the Arbitration shall be in New York and the Arbitration Tribunal shall apply the law of New York as the proper law of this insurance.

. . .The award of the Arbitration Tribunal shall be in writing and binding upon the parties who covenant to carry out the same.

Policy, Dkt. # 23, Ex. 1, at 37 (26 of 48). "Companies" is defined as synonymous with "Underwriters" and "Insurers." Id. at 45 (34 of 48).

DISCUSSION

In most cases, the enforceability of arbitration clauses is governed primarily by Chapter I of the Federal Arbitration Act. See 9 U.S.C. §§ 1-16. However, in 1970, the U.S. acceded to the Convention on the Recognition of Foreign Arbitral Awards. Convention Done at New York June 10, 1958, T.I.A.S. No. 6997, 21 U.S.T. 2517, 1970 WL 104417, at *5 (Dec. 29, 1970). Article II, Section 3 the Convention provides that "[t]he court of a Contracting State . . . shall, at the request of one of the parties, refer the parties to arbitration . . . ." Id. at *1. Contemporaneous to the U.S.'s accession, the FAA was amended so that Chapter II now implements the Convention in disputes involving foreign parties or related to a foreign state. 9 U.S.C. §§ 210, 202.

In opposition to the FAA, Washington law bars the enforcement of binding arbitration clauses in insurance contracts. See State, Dep't of Transp. v. James River Ins. Co., 176 Wash. 2d 390, 399 (2013) (interpreting RCW 48.18.200(1)(b)). Although the FAA would normally preempt a conflicting state law under the Supremacy Clause, the McCarran-Ferguson Act creates a system of "reverse-preemption" for insurance law. See United States Dep't of Treasury v. Fabe, 508 U.S. 491, 501 (1993). Under McCarran-Ferguson, "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 . . . unless such Act specifically relates to the business of insurance." 15 U.S.C. § 1012(b). Courts have held that, under the McCarran-Ferguson Act, RCW 48.18.200 preempts Chapter I of the FAA. See James River, 176 Wash. 2d at 402;Landmark Am. Ins. Co. v. QBE Ins. Corp., No. C15-1444 RSM, 2015 WL 12631550, at *6 (W.D. Wash. Dec. 9, 2015).

Plaintiffs argue that the same outcome should apply for Chapter II of the FAA and the Convention. According to Plaintiffs, the Convention is only enforceable in the U.S. through Chapter II of the FAA, which is an "Act of Congress" that is subject to the McCarran-Ferguson Act. See 15 U.S.C. § 1012(b). Consequently, because RCW 48.18.200 relates specifically to insurance and would be impaired by applying Chapter II of the FAA, the federal statute is preempted and the Convention is thus unenforceable. Defendants respond that, first, Article II, Section 3 of the Convention is self-executing, which means it does not require Chapter II of the FAA or any other implementing legislation to be enforceable domestically. Second, Defendants contend that, even if the Convention is non-self-executing, Chapter II of the FAA is not an "Act of Congress" within the meaning of the McCarran-Ferguson Act because it implements an international treaty.¹

1. Overview of Case Law Analyzing the Convention on the Recognition of Foreign Arbitral Awards and the McCarran-Ferguson Act

Courts addressing the interplay between the McCarran-Ferguson Act and the Convention have applied divergent reasoning and reached conflicting outcomes. In a brief discussion, the Second Circuit concluded that the entire Convention is non-self-executing and that its implementing legislation is an "Act of Congress" that is preempted by state law underMcCarran-Ferguson. Stephens v. Am. Int'l Ins. Co., 66 F.3d 41, 45 (2d Cir. 1995); see also Foresight Energy, LLC v. Certain London Market Insurance Companies, 311 F. Supp. 3d 1085, 1097-1101 (E.D. Mo. 2018) (agreeing with Stephens). Stephens does not explain why the Convention is non-self-executing but appears to rely on the mere existence of Chapter II of the FAA as proof that the Convention requires implementing legislation to be enforceable in the U.S. See id. (citing 9 U.S.C. §§ 201-208 (1994)).

The Fifth Circuit reached a contrary conclusion in Safety National Casualty Corp. v. Certain Underwriters at Lloyd's, London, 587 F.3d 714 (5th Cir. 2009) (en banc). After hemming and hawing about whether Article II, Section 3 of the Convention is self-executing, id. at 721-22, the court bypassed the issue by holding that the phrase "Act of Congress" in the McCarran-Ferguson Act does not include treaties and their implementing legislation because it would make no sense for Congress to "permit state law to preempt implemented, non-self-executing treaty provisions but not to preempt self-executing treaty provisions." Id. at 723-24. In another, somewhat confusing explanation, the court also concluded that Chapter II of the FAA only gains substance by referencing the Convention, which means the Convention itself supersedes Louisiana law. Id. at 724-25.

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