Court Holds Federal Law Governs FAA Arbitration Dispute Related to Surplus Lines Insurance Contract, Compels Arbitration Under Fifth Circuit Preemption of State Law

Carlton Fields

Carlton Fields

Harbor Homeowner’s Association Inc. sued its insurers in Louisiana state court seeking to recover damages allegedly caused by the insurers’ failure to pay claims related to Hurricane Ida. The insurers removed to federal court, arguing that the action related to an arbitration agreement falling under the Federal Arbitration Act (FAA) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), and filed a motion to compel arbitration.

The plaintiff argued in response that arbitration provisions in surplus lines insurance contracts are not enforceable under Louisiana law. The plaintiff also argued that, because the policy included a choice-of-law provision selecting New York law, the court should follow Second Circuit precedent holding that, pursuant to the McCarran-Ferguson Act, the New York Convention did not preempt contrary state law.

The court disagreed, noting that arbitrability under the FAA is a question of federal law, not state law, whereas a choice-of-law clause in an insurance policy provides the substantive insurance law applicable to the contract. As such, the choice-of-law clause did not bear on the arbitrability of the dispute.  Moreover, the court noted that “application of New York state law does not entail application of Second Circuit federal law simply because New York sits within the Second Circuit; a Second Circuit case construing federal law is not New York state law.”

Based on the above, the court found that it was constrained to follow Fifth Circuit precedent holding that the New York Convention preempts contradictory state law, including Louisiana law prohibiting the enforcement of arbitration provisions in insurance contracts, and ordered the parties to arbitrate their dispute.

Harbor Homeowner’s Association, Inc. v. Certain Underwriters at Lloyd’s London, No. 2:23-cv-05043 (E.D. La. Jan. 12, 2024).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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