Opinion ID: 2271349
Heading Depth: 2
Heading Rank: 1

Heading: Reverse Preemption of the Federal Arbitration Act Under The McCarran-Ferguson Act-The Forsyth Test

Text: KRS 304.33-010(6), one of the initial provisions of the IRLL, states: [i]f there is a delinquency proceeding under this subtitle, the provisions of this subtitle shall govern those proceedings, and all conflicting contractual provisions contained in any contract between the insurer which is subject to the delinquency proceeding and any third party shall be deemed subordinated to the provisions of this subtitle. However, notwithstanding the foregoing, in any delinquency proceeding commenced against an insurer after July 15, 1996, nothing in this subtitle shall be construed to subordinate or restrict the rights of parties to submit their disputes to arbitration pursuant to a contractual arbitration clause contained in a reinsurance agreement. Delinquency proceeding, as defined by KRS 304.33-030(5), includes any proceeding commenced against an insurer for the purpose of . . . rehabilitating . . . such insurer. Consequently, any provisions of the agreements between Ernst & Young and AIK Comp that conflict with KRS 304.33 shall be subordinated to the provisions of [KRS subtitle 304.33, the IRLL] unless as Appellants argue, the Federal Arbitration Act preempts KRS 304.33-010(6). Under the conventional application of the supremacy clause and rules of statutory construction, the Federal Arbitration Act, a federal statute, would preempt Kentucky's Liquidation Act, a state statute, [9] insofar as the Liquidation Act contravenes the Federal Arbitration Act. Stephens v. American Int'l Ins. Co., 66 F.3d 41, 43 (2d Cir.1995). However, the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq., establishes a doctrine of reverse preemption that expressly exempts from federal preemption state statutes enacted to regulate insurance, leaving the regulation of insurance to the individual state. Under McCarran-Ferguson, [n]o 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 [federal] Act specifically relates to the business of insurance. 15 U.S.C. § 1012(b) (1994). The United States Supreme Court created a three-part test to determine when reverse preemption of federal law through McCarran-Ferguson occurs. The test is whether: 1) the state statute was enacted for the purpose of regulating the business of insurance; 2) the federal statute involved does not specifically relat[e] to the business of insurance; and 3) the application of the federal statute would invalidate, impair, or supersede the state statute regulating insurance. Humana Inc. v. Forsyth, 525 U.S. 299, 307, 119 S.Ct. 710, 142 L.Ed.2d 753 (1999). In this matter, the first step of the Forsyth test is clearly satisfied. There can be no reasonable doubt that the IRLL, of which KRS 304.33-010(6) is a part, was enacted to regulate the business of insurance. Stephens, 66 F.3d at 41; National Home Ins. Co. v. King, 291 F.Supp.2d 518 (E.D.Ky.2003). We can hardly overstate the degree to which the regulation of insurance permeates this controversy. The very claims which Ernst & Young would take to arbitration arise directly out of Kentucky's intense interest in the regulation of worker's compensation insurance. The audits that form the core of the Rehabilitator's claims were performed by Ernst & Young for AIK Comp to comply with state insurance regulations which include a review of such audits by the state's insurance commissioner to monitor the solvency of AIK Comp. The IRLL is itself the ultimate measure of the state's regulation of the insurance business: the take-over of a failing insurance company. The second step of the Forsyth test is satisfied because the Federal Arbitration Act does not specifically relat[e] to the business of insurance. See Munich Am. Reinsurance Co. v. Crawford, 141 F.3d 585, 590 (5th Cir.1998); Davister Corp. v. United Republic Life Ins. Co., 152 F.3d 1277, 1279 (10th Cir.1998). The third step of the Forsyth test presents the question of whether the application of a federal law, in this case the Federal Arbitration Act, would invalidate, impair, or supersede provisions of a state statute regulating insurance, the IRLL. In essence, this returns us to KRS 304.33-010(6) because the question of whether the Federal Arbitration Act (with its strong preference for arbitration) invalidates, impairs, or supersedes a state law regulating insurance is, as a practical matter, virtually the same question we started with: whether the arbitration clauses of the engagement letters conflict with any provisions of the IRLL. If, as the Rehabilitator argues, arbitration is inconsistent with parts of the IRLL, then KRS 304.33-010(6) commands that the arbitration clauses be overridden, and for that same reason, the final part of the Forsyth test would be satisfied.