Tag: arbitration

To Arbitrate or Not to Arbitrate: LA Supreme Court Rejects Federal Court Position

12.10.2024

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.
  1. 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.
  1. 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).

Compelling Arbitration of Commercial Property Insurance Claims under the New York Convention

07.08.2024

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).

Making the Case for Arbitration of Commercial & Construction Disputes

06.29.2023

Clients frequently ask their attorneys whether they should arbitrate their commercial and construction disputes instead of litigating in the court system. This question arises either when drafting the contract or, if the contract contains an arbitration clause, once a claim occurs. Claims that require analysis of complex contracts, government regulations, and technical issues, such as those that arise in the construction, environmental, and energy industries, are well-suited to arbitration.

Parties typically want the quickest and least expensive means to a fair result. This is true even for highly sophisticated businesses where the amount in dispute is high. Arbitration gives parties a high level of control in the dispute resolution process. It is specifically designed to provide an alternative to the onerous and expensive discovery and trial procedures required in litigation. Parties can tailor the discovery and schedule to the needs of the case, which drastically reduces the overall time and cost of reaching resolution.

Arbitration also allows parties to select an arbitrator with specialized knowledge necessary to decide the case, which is especially beneficial in complex cases. Because parties agree to arbitration in their contract, they have control over the process in a way that is not available in litigation. For example, the parties may designate the administrative body and applicable rules, require a three-arbitrator panel for a complex case, name a particular arbitrator, require confidentiality, or dictate the timeframe for the hearing.

The following four factors are key considerations in assessing arbitration:

Expertise of decision-maker – One of the most important benefits of arbitration is the parties’ ability to select the arbitrator. This affords parties an opportunity to designate a decision-maker with specific qualifications and expertise needed to understand the contracts, legal issues, engineering and technical facts, and expert evidence to be presented. The parties can also select someone with strong management skills to handle complex matters or difficult decisions. The benefit is two-fold: Fewer resources are needed to educate the decision-maker in the critical industry background information, and the risk of an unreasonable ruling is reduced. 

Timeframe for resolution – The median time to resolution in commercial arbitrations is less than one year, whereas the time to trial in federal court is two to three years.* Because appeal rights in arbitration are limited, the award typically terminates the dispute and the expense. However, after a trial, the case could linger through the appeal process for several more years, thus increasing the expense. 

In addition to direct cost saving, decreasing the resolution time creates an indirect cost benefit to industry. Because “time is money,” shaving years off the process results in significant savings that likely can be better used advancing the business than litigating a case. Businesses lose billions of dollars every year because of the inherent delays in the litigation process.^ These losses stem from uncertainty in the outcome, capital set aside as reserves for potential losses, open claims reported to insurers, investors, potential clients and auditors, and loss of employee hours and administrative costs expended in litigation. Arbitration offers an alternative to mitigate and control these costs.

Expense – Arbitration typically costs more upfront than litigation. The parties must pay the administrative costs and arbitrator fees, which vary depending on the time and complexity involved, but generally range from $20,000 for a $100,000 claim to $60,000 for a $1 million claim. The costs are shared among the parties, which decreases the per-party cost in multiparty claims.

However, parties can control the cost of arbitration. Discovery, depositions, and document production in complex cases can come with staggering costs. In arbitration, the rules governing discovery and evidence are less formal. Additionally, discovery is more limited, which encourages a streamlined process and reduces costs and time significantly.

Risks – An often-cited risk of arbitration is the lack of appeal right. An arbitration award can only be vacated on limited grounds of fraud, corruption, misconduct, or where an arbitrator exceeds their power.~ However, if the initial decision-maker has expertise in the industry and law involved, the expectation is that the decision will be a well-reasoned one that the parties can accept.

In contrast, a major risk of litigating a complex commercial dispute is the fact-finder’s lack of understanding of the issues, the escalating potential for nuclear verdicts, and the appellate court’s limited power to correct factual findings.

In sum, arbitration is a good choice for dispute resolution where parties want to control the risk of an unreasonable outcome, reduce the time and expense of the process, and select a decision-maker with special expertise in their industry.

About the author: Mary Anne Wolf is an engineer and attorney. She is on the panel of commercial and construction arbitrators for the American Arbitration Association. Her goal as an arbitrator is to assist parties in managing their case for efficient resolution, give a high level of attention to each party’s position, and achieve a fair result.

References:

* AAA, Measuring the Costs of Delays in Dispute Resolution [online]; Micronomics, (March 2017), Efficiency and Economic Benefits of Dispute Resolution through Arbitration Compared with U.S. District Court Proceedings.

^ Efficiency and Economic Benefits, pp. 4-5, 16-23.

~ La. R.S. 9:4210 (LA Binding Arbitration Act); 9 USCA §10 (FAA).