By Joshua Gold, Esq. and Peter A. Halprin, Esq. of Anderson Kill P.C. Commercial insurance companies are marketing cyber risk policies with messages such as, aEURoeJust about any organization that uses technology to do business faces cyber risk.aEUR? In response to such risk, insurance companies are offering scores of aEURoecyberaEUR? insurance products that get tweaked regularly and vary greatly in quality and terms. That lack of uniformity foretells coverage disputes -- and litigation over insurance coverage for cyber claims began to emerge recently. In such cases, the dispute resolution mechanism may pose an important threshold issue. Some cyber insurance policies may purport to require a mediation before litigation can be commenced,¹ while others may have no dispute resolution clause at all. Still others may attempt to bind the policyholder to use mandatory arbitration in the event of a coverage dispute. Mandatory arbitration has its advantages and disadvantages,² and a policyholder should be aware of the implications of such provisions before agreeing to them. In some cases, a mandatory arbitration clause in the policy may prove unenforceable. Some states have laws barring arbitration of insurance disputes, and establishing such a state as the venue for a dispute may enable a policyholder to obtain its day in court. If the dispute involves a foreign entity, however, insurance companies will likely argue that the Federal Arbitration Act and related law preempt state anti-arbitration statutes, rendering arbitration mandatory. State Anti-Arbitration Provisions: Preemption and Reverse Preemption Nearly half the states have laws imposing some form of limitation on the enforceability of mandatory arbitration provisions in insurance disputes.³ The McCarran-Ferguson Act leaves regulation of insurance to the states, providing that aEURoe[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.aEUR? Accordingly, state laws limiting mandatory arbitration provisions in insurance disputes are generally enforced. McCarran-Ferguson therefore aEURoereverse preemptsaEUR? federal law to the extent a federal law invalidates, supersedes, or impairs the state law that regulates the business of insurance. See, e.g., Riverview Health Institute v. Medical Mutual of Ohio (6th Cir. 2010). Reverse preemption generally does not apply however, when a aEURoeforeign elementaEUR? is involved. Such cases are generally subject to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention). See, e.g., Safety National Cas v. Certain Underwriters at LloydaEUR(TM)s, London (5th Cir. 2009); ESAB Group v. Zurich Ins. (4th Cir. 2012). The New York Convention, to which more than 130 countries including the United States are parties, provides for mutual recognition and enforcement of arbitral awards by contracting states, and limits the defenses that may be raised in opposition to the confirmation of an award. To assess whether the New York Convention applies to an arbitration agreement, the following four-factor test is applied: (1) whether a written arbitration agreement between the parties exists, (2) whether the arbitration agreement provides for arbitration in the territory of a signatory of the New York Convention, (3) whether the relationship between the parties involves a commercial subject matter, and (4) whether the relationship between the parties is something other than entirety domestic. See, e.g., Murphy Oil USA, Inc. v. SR IntaEUR(TM)l Bus. Ins. Co. (W.D. Ark. Sept. 20, 2007). Thus, assuming the factors point in favor of applying the New York Convention to a dispute, courts are likely to find that the application of the New York Convention trumps McCarran-Ferguson and applicable state anti-insurance arbitration statutes. The general rationale, as set forth in Murphy Oil, 2007 U.S. Dist LEXIS 69732, is as follows: To allow parties to international agreements to rely on state-law defenses to render arbitration clauses unenforceable would damage the fabric of international commerce and trade and would diminish the willingness of foreign businesses and individuals to enter into international commercial agreements. The Supreme Court has given much deference to principles of international comity in its treatment of international agreements to arbitrate as distinct from domestic agreements. Of course, there are exceptions to every rule, and one such exception comes in the form of a Kentucky appellate court decision denying a motion to compel arbitration, based in large part on the fact that the insurance company was not truly aEURoeforeign.aEUR? See Scott v. Louisville Bedding Co., 404 S.W.3D 870 (Ky Ct. App. July 2013) (a Swiss entity was not aEURoeforeignaEUR? when it conducted all of its business in Texas). Mandatory Arbitration in Cyber Policies: New Hotel Monteleone Early this year, a suit was filed that may be the first cyber coverage dispute to involve the enforceability of an arbitration clause. In New Hotel Monteleone, LLC v. Certain Underwriters at LloydaEUR(TM)s of London, Subscribing to Ascent Policy No. ASC14C000944 et al., a hotel sued LloydaEUR(TM)s of London in Louisiana state court for failing to make payments under a CyberPro policy following a cyber attack. According to the initiatory pleading, the cyber attack resulted in a security breach such that aEURoepayment card numbers allegedly were compromised and were no longer confidential.aEUR? Following the attack, the hotel was held liable for multiple types of losses and received a demand for damages from a payment card processor. The crux of the coverage dispute appears to be the limit of liability applicable to the dispute and, relatedly, the scope of a Payment Card Industry Fines or Penalties Endorsement.