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Enforceability of Arbitration Agreements in International Insurance Contracts

Blogs, Insurance Coverage

The Fourth Circuit Court of Appeals in ESAB v. Zurich, No 11-1243 (July 9, 2012) held that a South Carolina law invalidating arbitration agreements in insurance policies did not apply to arbitration agreements between a domestic corporation and foreign insurer. 

ESAB Group (“ESAB”), commenced litigation in South Carolina State Court against Zurich Insurance Company (“Zurich”) seeking coverage in an underlying products liability suit. Zurich removed the case to the United States District Court for the District of South Carolina pursuant to the Federal Arbitration Act (“FFA”) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”). Upon removal, ESAB alleged the McCarren-Fergueson Act permitted South Carolina law to govern, and that the court lacked subject matter jurisdiction over the matter because state law invalidates arbitration agreements in insurance contracts. Conversely, Zurich challenged the district court’s exercise of personal jurisdiction, emphasizing its limited contacts with South Carolina. 

The district court rejected both parties’ arguments, finding the Convention preempted state law and ruling Zurich had sufficient contacts in South Carolina for the court to exercise personal jurisdiction. Both parties appealed.

The Court of Appeals affirmed the decision of the district court, rejecting both ESAB and Zurich’s appeals. The court in affirming subject matter jurisdiction found the McCarren-Fergueson act is limited to domestic affairs, and where a dispute involved a foreign party, the Convention is governing law. Additionally, the court affirmed the district courts exercise of personal jurisdiction holding that “by agreeing to furnish a defense to its policyholder within a specified policy territory, [Zurich] indicated its willingness to be hauled into court in foreign forums within its territory.”

The Fourth Circuit’s decision has two significant implications for foreign insurance companies. First, foreign-based insurers can exercise arbitration agreements even though a state law invalidates such agreements. Second, the court in establishing personal jurisdiction over the insurer, found even though Zurich did not have offices in South Carolina and did not draft the contracts in the state, Zurich consented to personal jurisdiction in South Carolina by agreeing to defend a policyholder located in the state.

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