If your company requires large limits of property and liability insurance, it will probably have to shop in the London or Bermuda markets. More often than not, policies purchased in those markets contain clauses mandating that all disputes be resolved under arbitration rules and acts of their own jurisdictionsalong with substantive choice-of-law and policy interpretation provisions that are unfavorable to policyholders.
Arbitration clauses in insurance policies issued by domestic insurance companies can be successfully challenged in some cases. Though the Federal Arbitration Act of 1925 (9 U.S.C. §1) creates a presumption in favor of enforcing arbitration agreements in other contexts, the McCarran-Ferguson Act vests the states with the power to regulate the business of insurance. Currently, approximately 26 states have laws that expressly limit or wholly restrict submitting claims arising out of insurance disputes to binding arbitration. Many courts have found that a state’s insurance code can invalidate a policy’s arbitration clause where to impose arbitration would directly or indirectly impair a state law regulating insurance.1
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