Fifth Circuit Rejects Surplus Lines Exception to LA Ban on Arbitration Agreements in Insurance Policies
A panel of the U.S. Fifth Circuit Court of Appeals recently rejected a surplus lines insurer’s bid to compel arbitration. It found that Louisiana’s statutory prohibition on arbitration agreements in insurance policies covering property within the state applies equally to surplus lines carriers. The decision directly conflicts with a recent decision from another Fifth Circuit panel, in which a policy arbitration provision was enforced because, according to that panel, surplus lines insurers are exempt from the statutory prohibition on arbitration agreements. This raises questions for both insurers and policyholders.
In S.K.A.V., L.L.C. v. Independent Specialty Insurance Company, the policyholder filed suit against its insurer in the Western District of Louisiana, alleging that the insurer failed to timely and adequately cover hurricane damage to the policyholder’s hotel. The insurer moved to compel arbitration based on the policy’s arbitration provision. The Western District denied the motion, citing its previous decision in Bufkin Enterprises LLC v. Indian Harbor Insurance Company holding that La. R.S. § 22:868(A)(2) preempts the Federal Arbitration Act and thus renders arbitration agreements in insurance policies covering Louisiana property unenforceable. The insurer appealed to the Fifth Circuit.
La. R.S. § 22:868(A)(2) provides that:
A. No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state, or any group health and accident policy insuring a resident of this state regardless of where made or delivered, shall contain any condition, stipulation, or agreement either:
* * * *
(2) Depriving the courts of this state of the jurisdiction or venue of action against the insurer.
Subsection D of La. R.S. § 22:868, added in 2020, provides an exception:
D. The provisions of Subsection A of this Section shall not prohibit a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance.
The Louisiana Supreme Court has not decided whether arbitration agreements in surplus lines policies are barred under subsection (A)(2) or permitted under subsection (D) and, in 2023, expressly declined to answer a certified question on the issue.
On appeal, the insurer in S.K.A.V. argued that the Western District erred in concluding that subsection (A)(2) barred the arbitration provision contained within the policy at issue. The Fifth Circuit first rejected the insurer’s argument that Louisiana and federal courts have ratified surplus lines insurers’ use of arbitration provisions by referring to such provisions as a “type” of forum or venue selection clause exempted under La. R.S. § 22:868(D). The Court then cited Louisiana jurisprudence characterizing arbitration provisions as depriving courts of jurisdiction and reasoned that “[n]othing in subsection (D), moreover, indicates to us that it reversed course on the state’s longstanding anti-arbitration policy.” The Court also rejected the insurer’s argument that, considering the heightened risks inherent in the surplus lines market, the court should not upset the parties’ freedom to contract for alternative dispute resolutions.
The S.K.A.V. decision conflicts with an opinion issued by a separate panel of the U.S. Fifth Circuit earlier this year. In Indian Harbor v. Belmont Commons, LLC, the Fifth Circuit held that La. R.S. § 22:868(D) permits enforcement of arbitration provisions in surplus lines policies. The Belmont panel specifically acknowledged the substantial risks inherent in the surplus lines market, reasoning that the predictability in resolving disputes that arbitration agreements provide is a surplus lines insurer’s bargained for material benefit. The policyholder in Belmont sought en banc review of the decision, which was denied.
The conflict between the S.K.A.V. and Belmont decisions leaves insurers and policyholders with little clarity as to whether arbitration provisions in surplus lines policies are enforceable in Louisiana. The insurer in S.K.A.V. has sought en banc review of the decision. Insurers and policyholders alike should closely monitor the Court’s review of this issue as they consider challenges to, and enforcement of, arbitration provisions.
Please contact Caroline Crosby, Greg Angelico or any member of Phelps’ Insurance team if you have any questions or need advice or guidance.
