Louisiana Federal Court Enforces Arbitration Provision of Insurance Policy Despite Gamesmanship by Insured

In a recent case, the United States District Court for the Eastern District of Louisiana compelled arbitration of a Hurricane Ida insurance dispute, even though the insured sued only its domestic insurers in an apparent tactic to avoid the policy’s arbitration provision.

Belmont Commons, LLC filed suit against its insurers in Louisiana state court, claiming they improperly adjusted its claim for Hurricane Ida-related damages to several commercial properties it owns in New Orleans. The Commercial Property Policy issued to Belmont was jointly subscribed to by eleven foreign and domestic insurers. The policy’s arbitration clause required that the parties arbitrate disputes in New York and apply New York law. Belmont named only its nine domestic subscribers in its suit, strategically leaving out the two foreign subscribers.

The insurers filed a separate action in Louisiana federal court to compel arbitration of Belmont’s claims under the policy’s arbitration provision. The insurers also removed Belmont’s state court suit to federal court, where the actions were consolidated. The insurers argued that the court should compel arbitration and ignore Belmont’s “artful pleading” of not suing the foreign insurers, which, according to the insurers, was an effort by Belmont to circumvent enforcement of the policy’s arbitration clause. The insurers argued that, although Belmont did not directly sue the foreign insurers, the court should compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The insurers argued that all four criteria for enforcement of an arbitration clause under the Convention were satisfied. Those criteria are:

• • a written agreement to arbitrate the matter
  • the agreement provides for arbitration in a Convention signatory nation
  • the agreement arises out of a commercial legal relationship
  • a party to the agreement is not an American citizen

Belmont conceded that the first three criteria were met but argued that because it only sought to litigate with the nine domestic insurers, the fourth criteria was not met. The insurers argued that Belmont was equitably estopped from objecting to arbitration because all insurers had acted in concert in evaluating and adjusting Belmont’s insurance claims.

The court agreed with the insurers, finding Belmont cannot subvert the policy’s arbitration agreement and the Convention by selectively suing only the domestic insurers. The court held Belmont was bound by its agreement to arbitrate with all insurers and found that equitable estoppel applies to preclude Belmont from objecting to arbitrate with some, but not all, of its insurers. The court found that allowing Belmont to continue to sue the domestic insurers, while arbitrating its functionally identical claims against the foreign insurers, would render the arbitration clause meaningless.

The issue presented in Belmont is one that may be faced by insurers subscribing to policies that also include international subscribers. The ruling in Belmont highlights that under these circumstances an insured cannot avoid arbitration by strategically excluding foreign insurers from its suit.

Please contact Margaret Zazulak, Thomas Peyton or any member of Phelps’ Insurance team if you have questions or need advice or guidance.