5th Circuit: Louisiana Law Voids Arbitration Clause in Surplus Lines Policies

June 7, 2024 by

A panel of the 5th Circuit Court of Appeals ruled this week that a Louisiana statute voids the formation of an arbitration clause in a surplus lines insurance contract.

In its opinion, the appellate court reasoned that the general principles of contractual freedom found in the surplus lines business cannot surpass specific statutory commands, like Louisiana’s anti-arbitration policy for most insurance contracts.

The underlying case in front of the 5th Circuit involves the owner of a Best Western hotel in Abbeville that suffered damage from Hurricane Laura in 2020 and its surplus lines insurer, Independent Specialty Insurance Company.

The hotel owner, SKAV, L.L.C., submitted a claim on a surplus lines insurance policy it had purchased from Independent Specialty. Though the policy contained a broad arbitration clause directing all matters in dispute to be resolved by arbitration, SKAV sued Independent Specialty in the Western District of Louisiana, alleging the insurer had timely and adequately cover the hotel’s hurricane damage under the policy’s terms.

After months of unsuccessful court-directed mediation, Independent Specialty moved to compel arbitration. The district court denied the motion, citing a prior decision in which the court determined that §22:868 of the Louisiana Revised Statutes reverse preempts the Federal Arbitration Act. Independent Specialty appealed.

The parties dispute what effect, if any, the statute has on a surplus lines insurance policy’s arbitration clause. The statute prevents insurance policies from ousting Louisiana courts of jurisdiction. It also permits, in limited cases, forum- and venue- provisions for policy forms that are not subject to approval by the Louisiana Department of Insurance.

The 5th Circuit noted that many district courts in Louisiana are split on the issue of whether a surplus lines insurance policy’s arbitration clause is barred by one subsection or permitted by another. The Louisiana Supreme Court declined to answer a certified question on the issue last year.

As a federal court exercising diversity jurisdiction, the 5th Circuit decided to resolve the case as it thinks the Louisiana Supreme Court would.

The appellate court panel noted that Louisiana courts from the start have viewed §22:868 as an anti-arbitration policy. While the statute does not expressly mention arbitration, it bars insurance policies from depriving Louisiana courts of action against the insurer.

In 2020, the Louisiana Legislature added a subsection to the statute that allows surplus lines insurers to include forum- and venue-selection clauses in their policies. Some district courts have since adopted arbitration clauses as a type of forum- or venue-selection clause, but the 5th Circuit disagreed. The panel said arbitration clauses are a qualitatively different type of forum-selection clause based on past Louisiana Supreme Court opinions.

“This distinguishing jurisdictional feature of arbitration clauses survived, in our view, the Legislature’s amendments in 2020,” the panel’s opinion says.

The court addressed Independent Specialty’s argument that surplus lines insurers should have a wide degree of freedom to choose where and how to resolve disputes because of the acutely high risks in their business.

The panel said that surplus lines insurers’ quest to have more freedom and flexibility for accepting risks and designing and pricing their policies makes “no difference” to its statutory analysis.

The court also rejected Independent Specialty’s argument that the issue of the arbitration clause’s validity should itself go to arbitration.

“When a statute prevents the valid formation of an arbitration agreement, as we read § 22:868 to do,20 we cannot compel arbitration, even on threshold questions of arbitrability,” the opinion reads.

The case, SKAV, L.L.C. v. Independent Specialty Insurance Company, can be found here.