Louisiana Federal Courts Hand Insurers More Wins in Bids to Enforce Arbitration Agreements
Federal courts in Louisiana continue to reject policyholders’ efforts to avoid arbitration by suing only domestic insurers. Louisiana law prohibits arbitration agreements in insurance policies covering property within the state. The New York Convention preempts this prohibition and requires enforcement of arbitration agreements arising under the treaty. For arbitration to be required under the New York Convention, one of the parties to the contract must be a citizen of a foreign signatory nation. In cases where an insurance policy is subscribed to by both foreign and domestic insurers, Louisiana plaintiffs have sought to avoid arbitration under the New York Convention by suing only domestic insurers. Since the foreign citizen requirement is not met when the foreign insurers are not named in the suit, courts must address whether the arbitration agreement can be enforced by the domestic insurers. Courts in Louisiana continue to reject these efforts.
In a recent, published decision, the U.S. Fifth Circuit Court of Appeals reversed a lower court’s ruling, finding that a policyholder was required to arbitrate its coverage dispute with a group of domestic insurers over hurricane-related property damage. The court was tasked with determining whether the commercial property policy’s arbitration clause applied to the eight domestic surplus lines insurers after the policyholder dismissed its two foreign insurers from the suit.
The district court had denied the domestic insurers’ motion to compel arbitration, finding that the policy was comprised of ten separate contracts—one with each insurer—and thus ten separate arbitration agreements. The district court held that the arbitration agreements with the domestic insurers were unenforceable under Louisiana law. The insurers argued that arbitration could be enforced through equitable estoppel because the lawsuit alleged “substantially interdependent and concerted misconduct” by both the foreign and domestic insurers, but the district court reasoned that because the claims against the foreign insurers were dismissed with prejudice, the claims against the domestic insurers were not interdependent.
The Fifth Circuit reversed, ruling that the lower court’s failure to apply the “interdependent and concerted misconduct” test espoused in Grigson v. Creative Arts Agency, L.L.C. was an abuse of discretion. The Fifth Circuit held that under Grigson, the lower court was not entitled to disregard the allegations that the dismissed foreign insurers engaged in the same conduct as the domestic insurers. The Fifth Circuit also acknowledged the substantial risks inherent in the surplus lines market and reasoned that the predictability in resolving disputes provided by the arbitration agreement was the insurers’ bargained for material benefit.
The Fifth Circuit reached the same result in another recent case, in which the Fifth Circuit affirmed a decision by the U.S. District Court for the Eastern District of Louisiana compelling arbitration between a policyholder and its domestic insurers. Though the foreign insurers were not named in the suit, the court found that equitable estoppel applied, which made arbitration agreements with all insurers enforceable. The court also rejected an argument that Louisiana’s statutory bar on arbitration clauses applied to the domestic insurers, finding that the statute includes a carve out for arbitration clauses in a policy issued by surplus lines carriers. In unanimously affirming the lower court’s ruling compelling arbitration, the Fifth Circuit sidestepped the lower court’s equitable estoppel analysis and instead held that the domestic insurers could compel arbitration because Louisiana’s statutory prohibition does not apply to them as surplus lines carriers. The policyholder has sought en banc review of the Fifth Circuit’s decision.
In another Hurricane Laura and Delta case pending in the U.S. District Court for the Western District of Louisiana, the court faces similar questions on enforceability of policy arbitration clauses. The court recently granted a Motion to Certify questions on enforcement of arbitration provisions to the Louisiana Supreme Court. If the Louisiana Supreme Court agrees to consider the issue, it will decide whether Louisiana’s statutory prohibition on arbitration clauses applies to surplus lines carriers and, if it does, whether arbitration can be enforced through equitable estoppel.
The Fifth Circuit’s opinions taken together demonstrate that when domestic insurers subscribe to policies that also include international subscribers, the policyholder cannot avoid arbitration by selectively excluding foreign insurers from its suit. Insurers and policyholders alike should closely monitor the Louisiana Supreme Court’s review of these issues as they consider challenges to, and enforcement of, arbitration provisions.
Please contact Greg Angelico, Caroline Crosby or any member of Phelps’ Insurance team if you have questions or need advice or guidance.
