THE RISING TIDE OF ARBITRATION CLAUSES CLAIMS MARITIME INSURANCE AS ITS NEXT VICTIM.

• Author: Johns, Callan J.

TABLE OF CONTENTS I. Introduction 79 II. The McCarran-Ferguson Act 80 A. Legislative History Leading to the McCarran-Ferguson Act 80 1. Paul v. Virginia 80 2. South-Eastern Underwriters Association 81 B. The Inception of the McCarran-Ferguson Act 81 C. The Impact of Willburn Boat Co 82 D. The Circuit Split Between the Ninth Circuit and the Fifth Circuit 83 1. The Ninth Circuit: Certain Underwriters at Lloyds v. Intel Fisheries Inc 84 2. The Fifth Circuit: Albany Ins. Co. v. Anh Thi Kieu 85 III. The Federal Arbitration Act 87 A. Arbitration Defined 87 B. Before the Federal Arbitration Act 87 C. The Federal Arbitration Act Today 88 D. State Statutes Working with and Against the FAA 89 IV. The Battle Between the McCarran-Ferguson Act and the FAA 90 V. Galilea, LLC u. AGCS Marine Ins. Co., a Ninth Circuit Case 92 A. The Facts and Procedural History 92 B. An Analysis of the Court's Reasoning in Galilea 95 1. The Court Correctly Reasoned that the Application is Not a Contract 95 2. While the Insurance Policy is a Contract, the Policy Should Not Have Been Subject to the FAA 96 3. The FAA Should Not Constitute Established Federal Maritime Law for "Maritime Transactions" 96 4. The FAA Should Have Been Precluded by Montana Law under the McCarran-Ferguson Act 99 5. Federal Maritime Law is not Precluded by Montana Law under The Bremen 103 (1) The Bremen discussed forum selection clauses, but not federal maritime law rules about choice-of-law clauses 104 (2) "The Bremen considered whether the public policy of the forum where suit was brought--there, federal public policy as supplied by federal maritime law--outweighed the application of the law of other countries".105 6. The Kittlers Should Not Be Classified as a Sophisticated Party 106 VI. An Alternative Analysis Available to the Ninth Circuit in Galileo, 108 VII. Conclusion 109 I. INTRODUCTION

The tide of arbitration clauses is rising in contracts and insurance policies across virtually every area of law. Arbitration was designed as an alternative mechanism for litigation between individuals in contract disputes. However, arbitration clauses have become entrenched within almost every employment and consumer contract and is used as a vehicle to resolve a vast variety of tort law ranging from personal injury to sexual harassment and discrimination in the work place. Today, arbitration has engulfed insurance policies and general maritime law. A lofty concern facing courts today is whether there is an established principle of maritime law respecting arbitration clauses in policies of marine insurance. Marine insurance is defined as insurance against "the losses incident to the marine adventure." (1) Marine insurance is generally comprised of three elements: (1) a contract of indemnity against loss; (2) the indemnity is triggered by an accident or fortuitv; and (3) the 'adventure' or peril insured against must be specifically maritime in character. (2)

A recent decision from the Ninth Circuit, Galilea, L.L.C. v. AGCS Marine Ins. Co., has determined an arbitration provision in an insurance policy constitutes "established maritime law" under the Federal Arbitration Act ("FAA"). Galilea could have a chilling effect on future cases as it seeks to establish the FAA as established federal maritime law. This case signals a trend among courts that applies both to marine insurance disputes and to every dispute nationwide. While the McCarran-Ferguson Act has come under fire over several decades, the McCarran-Ferguson Act has been one of the last lines of defense against arbitration provisions in insurance contracts. However, the McCarran-Ferguson Act failed to preempt the arbitration provision in the insurance policy in Galilea. The Ninth Circuit's reasoning for rejecting the McCarran-Ferguson Act by favoring the application of the FAA as established federal maritime law is flawed and will have devastating consequences if upheld. This comment will analyze why the FAA should not be considered established federal maritime law and why the McCarran-Ferguson Act should have been upheld in Galilea.

2. THE MCCARRAN-FERGUSON ACT

   1. Legislative History Leading to the McCarran-Ferguson Act

      1. Paul v. Virginia

         In 1868, the Supreme Court decided Paul v. Virginia. The Court held that insurance is not interstate commerce and that "issuing a policy of insurance is not a transaction of commerce." (3) As a result, Paul was cited for seventy-five years stipulating that the insurance industry was to be regulated by the states and the "legislative power that the interstate commerce clause grants to Congress could not be used to enact a comprehensive scheme of federal insurance regulation." (4) States developed the system for insurance that exists today such as "licensing of insurers and agents, filing of periodic reports by insurers, establishment of capital and other financial standards for insurers, prior approval of policy forms and property/casualty rates and prohibitions against unfair insurance practices." (5) Congress enacted statutes which govern specific aspects of the insurance industry. (6) However, the federal government did not have authority over the business of insurance under the Commerce Clause. (7)

      2. South-Eastern Underwriters Association

         In 1944, the Supreme Court overruled Paul v. Virginia by deciding United States v. South-Eastern Underwriters Association ("SEUA"). (8) The Supreme Court in SEUA held that insurance is to be considered interstate commerce, which "implied that the collective setting of property/casualty rates, which was required by insurance laws of most states, would violate the federal antitrust laws." (9) The decision upset many in the insurance business, as "the Court held both that the insurance industry was subject to federal regulation under the Commerce Clause, and that the Sherman Act applied to insurance transactions because [both] were 'commerce' as contemplated in Article I of the Constitution." (10) Insurance companies decided whether to "[incur] criminal penalties for violating the federal antitrust laws or ignoring the provisions of the state insurance laws." (11) Essentially, the decision placed insurance companies in the impossible position of having to choose which laws to follow and which to violate. (12)

   2. The Inception of the McCarran-Ferguson Act

      The McCarran-Ferguson Act was enacted in 1945 with its goal being the "preservation of the state insurance regulatory system and contains not a single substantive rule concerning the conduct of the business of insurance." (13) The McCarran-Ferguson Act also "provides that the regulation of insurance generally is a matter to be governed by state law." (14) The McCarran-Ferguson Act states in relevant part:

      [section]1011. Declaration of policy

      The Congress hereby declares that the continued regulation and taxation bv the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to iniDose anv barrier to the regulation or taxation of such business by the several States. (15)

      [section]1012. Regulation by State law; Federal law relating specifically to insurance

      (a) State regulation. The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

      (b) Federal regulation. 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, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. (16)

      However, if a conflict between state and federal authority over insurance exists, which law applies? The Fifth Circuit answers this question in, Munich Am. Reinsurance Co. v. Crawford, which states, "folrdinarily, federal law pre-empts conflicting state law by virtue of the Supremacy Clause. (17) "The McCarran-Ferguson Act reverses that effect in the narrow range of cases involving state regulation of the insurance industry." (18) The McCarran-Ferguson Act "assure[s] the primacy of the states in the area of insurance regulation . by means of a series of provisions that favor state insurance law in the event of a conflict with federal law." (19)

   3. The Impact of Willburn Boat Co.

      In Wilburn Boat Co. v. Fireman's Fund Insurance Co., the plaintiff secured an insurance policy to cover fire loss of a houseboat used for commercial carriage of passengers. (20) The insurance company denied the plaintiffs claim after the boat caught fire, because the title of the boat was transferred without the insurer's permission, voiding the warranty. (21) The trial court held and appellate court affirmed that federal admiralty law applied and that the plaintiff was barred from recovery for breach of warranty. (22) The Supreme Court held that while states cannot override federal admiralty law, states have a great deal of regulatory power and control in the absence of a federal admiralty rule. (23) When congressional statutes and judicial rules are not present in the field of marine insurance, the state is free to adjudicate the marine insurance dispute. (24) However, the court did not create a judicial rule regarding marine contracts where it was best left to Congress to determine. (20) The central questions in Wilburn Boat Co. that courts apply to cases today are: "(1) Is there a judicially established federal admiralty rule governing these warranties? (2) If not, should [the court] fashion one?" (26)

      After the Supreme Court decision in Wilburn Boat Co. u. Fireman's Fund Insurance Co., substantive state laws and insurance regulations apply to maritime insurance contracts in the absence of an established federal maritime rule. (2)'

   4. The Circuit Split Between the Ninth Circuit and the Fifth Circuit

      There is a circuit split between the Ninth Circuit and the Fifth Circuit concerning how...