Affirming a trial court's denial of a motion to stay proceedings pending arbitration, an Ohio appellate court held that an arbitration agreement between two insurance companies does not bind the Ohio State Insurance Commissioner, acting as the statutory liquidator of an insolvent insurer, because McCarran-Ferguson "reverse-preempts" the FAA.

In Hudson v. John Hancock Financial Servs., No. 06AP-1284, 2007 WL 4532704 (Ohio. Ct. App. Dec. 27, 2007), a dispute arose between insurance company John Hancock and the liquidator for insurer Credit General, the state insurance commissioner. Specifically, the liquidator asserted that John Hancock owed Credit General more than $100,000,000 under 13 reinsurance agreements. Litigation over the reinsurance agreement began in 1999 when Credit General sued John Hancock under one of the agreements. The Federal District Court for the Northern District of Ohio ordered the parties to arbitrate the dispute, as the reinsurance contract had an arbitration agreement.

After Credit General went into liquidation, the liquidator abandoned the reinsurance arbitration and sued John Hancock for breach of contract and bad faith on the thirteen reinsurance agreements. John Hancock moved for a stay pending arbitration arguing the reinsurance agreements obligated the liquidator to arbitrate disputes. The trial court denied the motion. John Hancock appealed, arguing the trial court erred by refusing to enforce the arbitration agreements while allowing the liquidator to sue based on the contract containing the arbitration agreements.

The Court held that the Ohio Liquidation Act precludes enforcement of the arbitration agreements against the Ohio State Insurance Commissioner acting as liquidator for an insolvent insurance company. The Act requires courts to construe the liquidator's powers liberally to maximize the assets available to claimants, shareholders, and creditors. Further, arbitration agreements violate public policy when they impinge upon the powers vested by the legislature in a state official for "the General Assembly did not contemplate turning over the administration of liquidation proceedings and incidental actions to private arbitrators."

Additionally, the Court rejected John Hancock's argument that the FAA preempts the Ohio Liquidation Act because the McCarran-Ferguson Act, which provides that state statutes will supersede conflicting applicable federal statutes when regulating the insurance industry, "reverse-preempts" the FAA. Because Congress sought to ensure that states primarily regulated insurance it enacted McCarran-Ferguson to prevent application of federal law that would "invalidate, impair, or supersede," state laws regulating insurance.

Under the McCarran-Ferguson Act, a state law governing the business of insurance reverse-preempts a federal statute when (1) it does not specifically relate to the business of insurance, (2) the state enacted the statute to regulate insurance, and (3) the federal statute would invalidate, impair, or supersede the state statute.

Here, the Ohio Liquidation Act expressly provides that a liquidation court will hear claims involving an insolvent insurer's liquidation. Additionally, the FAA is not a federal statute specifically governing insurance. Finally, mandating arbitration would impair the application of the Ohio Liquidation Act.