Arbitration: Losing Your Day in Court with a Click of the Mouse?

Hurricanes Laura and Delta caused substantial damage in Louisiana, resulting in extensive litigation that continues to develop. In a July 8, 2024 blog post, we reported that the U.S. Fifth Circuit Court of Appeals, in Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., affirmed that equitable estoppel applied to allow domestic insurers to compel arbitration under the New York Convention even where the insured dismissed the foreign insurers with prejudice. Click here to read more.

New case law from the LA Supreme Court warrants supplementation of our prior blog post. The Police Jury of Calcasieu Parish (“Calcasieu”) filed suit in federal court to recover alleged underpaid and untimely insurance claim payments. Various domestic insurers moved to compel arbitration pursuant to arbitration clauses found in two foreign insurers’ policies. The foreign policies required all claims be submitted to arbitration in New York under New York law. The insurers relied upon Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., and Calcasieu moved to certify questions to the LA Supreme Court.

The U.S. District Court for the Western District of LA certified questions to the Louisiana Supreme Court to address this issue. In Police Jury of Calcasieu Parish v. Indian Harbor Insurance Co., the Louisiana Supreme Court held:

1. Arbitration is prohibited by statute. The case involved the interpretation of La. R.S. 22:868, as amended in 2020. Generally, La. R.S. 22:868(A) prohibits the use of arbitration clauses in insurance policies. The Court held this prohibition is rooted in public policy because compulsory arbitration clauses deprive courts of jurisdiction over actions against insurers. The Court noted it historically has held arbitration clauses within insurance policies are unenforceable, and it did not deviate from its historical position.

2. As a matter of first impression, an insurance policy with a political subdivision is a “public contract” within meaning of the statute banning any provision in public contracts which requires a suit or arbitration proceeding to be brought in a forum or jurisdiction outside of the state. It was undisputed that Calcasieu is a political subdivision of this state. Also, it was undisputed the Defendants contracted with Calcasieu to provide insurance coverage for approximately 300 properties that Calcasieu owned for the benefit of the public. No private actors involved. Thus, the Court found, “The Defendants’ insurance policies clearly covered public properties owned by Calcasieu, purchased with public funds––taxpayer dollars. As such, we easily find insurance contracts with political subdivisions, like the policies at issue, are public contracts within the meaning of La. R.S. 9:2778.” Thus, the statute precludes arbitration or venue outside of LA, or the application of foreign law, in claims involving the State and its political subdivisions.

3. A domestic insurer may not use equitable estoppel to enforce arbitration via a foreign insurer's policy. Citing its disagreement with the Federal Court’s ruling in Bufkin Enterprises, L.L.C. v. Indian Harbor Ins., the Court held “[E]quitable estoppel is not available under these circumstances because it conflicts with the positive law of La. R.S. 22:868, which prohibits the use of arbitration clauses in Louisiana-issued insurance policies. As such, domestic insurers may not employ this common law doctrine to compel arbitration through the clause of another insurer's policies, as it clearly contravenes La. R.S. 22:868(A)(2). A contrary finding would (1) violate Louisiana's positive law prohibiting arbitration in Louisiana-issued insurance policies; and (2) invite domestic insurers’ misuse a doctrine of ‘last resort’ to ceaselessly rely on insurance policies of foreign insurers to compel arbitration.”

References:

Police Jury of Calcasieu Parish v. Indian Harbor Insurance Co., 2024 WL 4579035 (La.), 9, 2024-00449 (La. 10/25/24).

Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co. 96 F.4th 726 (5th Cir. 2024).

In the wake of recent hurricanes, Louisiana courts were flooded with cases property owners filed against their insurers alleging improper denial or underpayment of hurricane claims. Many of those cases were stayed and the parties were compelled to arbitration, despite Louisiana law prohibiting arbitration provisions in insurance contracts, La. R.S. 22:868(A)(2).

In a typical case involving commercial property, a property owner filed suit against its insurers, often including both domestic and foreign companies. One or more insurance policies contained an arbitration agreement requiring all disputes to be resolved by arbitration in a specified U.S. city. Undeterred, the insured filed suit in Louisiana state court. The insurers removed the case to federal court and filed a motion to compel arbitration.

The foreign insurers sought to enforce the arbitration agreement under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (aka the New York Convention). The New York Convention is an international treaty that requires signatory countries to enforce an arbitration agreement where four requirements are met: (1) a written arbitration agreement exists, (2) that provides for arbitration in a signatory country, (3) which arises from a commercial legal relationship, and (4) at least one party is not a U.S. citizen. These conditions are met where a foreign insurer issues a commercial policy that contains an arbitration provision to a U.S. property owner. Under such circumstances, the courts were bound to compel the parties to arbitration.

The cases presented some interesting questions. For example, could domestic insurers also compel arbitration? Yes. Under the doctrine of equitable estoppel, where the claims against the insurers are interdependent, the domestic insurers, even if they were not signatories to the arbitration agreement, could compel arbitration.

Does the McCarran-Ferguson Act, a federal law that maintains the states’ power to regulate the insurance industry, cause Louisiana’s law prohibiting arbitration in insurance contracts to reverse-preempt the Convention? No, the Act does not apply to treaties.

What about the arguments that the contract was not freely negotiated, or that under conflict of laws principles Louisiana law should apply, or that the federal courts should abstain because the state has a vital interest in regulating insurance? The courts rejected these arguments as well.^

Recently, the U.S. Fifth Circuit Court of Appeals, in Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., affirmed that equitable estoppel applied to allow domestic insurers to compel arbitration under the New York Convention even where the insured dismissed the foreign insurers with prejudice.* However, the U.S. Second Circuit has held the opposite in two recent cases involving insurance contracts between foreign insurers and Louisiana property owners – that Louisiana law applied to prohibit the enforcement of the arbitration provision in the insurance policy.^^

With the exception of the Second Circuit split, the numerous cases arising from recent hurricanes confirm a strong policy favoring arbitration under the New York Convention, which overrides potential state law obstacles to enforcing arbitration provisions in insurance policies.

Mary Anne Wolf is an arbitrator on the commercial, construction and large, complex cases panels of the American Arbitration Association and is a neutral at Perry Dampf Dispute Solutions.

References:

^ See for example, General Mill Supplies, Inc. v. Underwriters at Lloyd’s, London, et al, 23-6464, 2024 WL 216924 (E.D. La. 1/19/2024), - F.Supp.3d – (2024); Dryades YMCA v. Certain Underwriters at Lloyds, London, et al, 23-3411, 2024 WL 398429 (E.D. La. Jan. 31, 2024); Parish of Lafourche v. Indian Harbor Ins. Co., et al, 23-3472, 2024 WL 397785 (E.D. La. Feb. 2, 2024).

* Bufkin Enterprises, LLC v. Indian Harbor Ins. Co., et al, 96 F.4th 726 (5th Cir. Mar. 26, 2024).

^^ See Certain Underwriters at Lloyds, London v. 3131 Veterans Blvd. LLC, 22-9849, 2023 WL 5237514 (S.D.N.Y. Aug. 15, 2023); and Certain Underwriters at Lloyd’s, London v. Mpire Properties, LLC, 22-9607, 2023 WL 6318034 (S.D.N.Y. Sept. 28, 2023) (appeal filed).

Almost everyone has signed a phone contract, home-repair agreement, or other contract filled with terms and provisions they might not fully understand, or navigated a website only to receive a prompt to “accept these terms and conditions” before continuing. Most, and hopefully all attorneys, have that moment of hesitation- right before they click "yes."

If you clicked "yes" or signed the contract, and the contract included an “arbitration clause,” you may have just signed away your right to access the court system; and you didn’t even know it. But are such arbitration agreements enforceable? Generally, these clauses are enforceable and found to be consistent with a strong public policy in favor of arbitration. However, a recent decision from the Louisiana Supreme Court places arbitration clauses in consumer transactions under scrutiny and may render arbitration provisions unenforceable in some cases.

In Duhon v. Activelaf, LLC, 2016-0818 (La. 10/19/16), the plaintiff brought a negligence suit against an indoor trampoline park. In an effort to prevent a formal trial, the defendants attempted to enforce the arbitration clause found in the Participant Agreement, Release, and Assumption of Risk document that was electronically signed by plaintiff to gain entry into the trampoline park. In this setting, the Court applied a "contract of adhesion" analysis to test the validity of the arbitration clause.

The Court set forth the following factors to gauge the enforceability of the arbitration clause: (1) the physical characteristics of the arbitration clause; (2) the distinguishing features of the arbitration clause; (3) the mutuality of the arbitration clause; and (4) the relative bargaining strength of the parties.

Under the facts in Duhon, the Court found that the lack of distinguishing features and the specific placement of the text served to conceal the arbitration clause from the plaintiff. While the arbitration language was consistent in size and font with the other contractual provisions, the clause was located in the eleventh line of a paragraph that covered multiple topics. The arbitration agreement also required only the plaintiff to arbitrate any dispute. Further, it required the plaintiff to pay $5,000 if he ignored the arbitration clause and instead filed a lawsuit. According to the Court, this “lack of mutuality” supported its conclusion that the arbitration clause was adhesionary.

Ultimately, the Duhon Court struck down the arbitration clause. While courts generally uphold arbitration clauses, especially in a commercial setting, Duhon shows that arbitration clauses are not per se valid and that the consumer, in some cases, still may have their day in court.