(Article from Insurance Law Alert, March 2024)
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Holding
The Fifth Circuit granted domestic insurers’ motion to compel arbitration, finding that a Louisiana statute barring arbitration of insurance disputes did not reverse preempt the Convention on the Recognition and Enforcement of Arbitral Awards (the “Convention”). Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co., 2024 U.S. App. LEXIS 5176 (5th Cir. Mar. 4, 2024).
Background
Bufkin purchased surplus lines coverage from eight domestic insurers and two foreign insurers. Each policy included an arbitration clause, as well as a provision stating that the policy “shall be constructed as a separate contract” between Bufkin and the insurer. The parties disagreed as to whether the policies constituted a “single, all-encompassing agreement” or discrete agreements between each insurer and Bufkin.
When a coverage dispute arose, Bufkin initially sued only the domestic insurers, but subsequently filed an amended petition naming the foreign insurers as defendants for the sole purpose of dismissing them with prejudice and foregoing all rights against them. The domestic insurers moved to compel arbitration pursuant to the Federal Arbitration Act (“FAA”) and the Convention.
The district court denied the motion, ruling that the Convention did not apply because only the domestic insurers remained parties to the dispute. The district court also rejected the insurers’ contention that the Convention could be invoked under an equitable estoppel theory. Having determined that the arbitration provisions were governed only by the FAA, the district court concluded that the FAA was reverse preempted by a Louisiana law barring arbitration of insurance disputes pursuant to the McCarran-Ferguson Act. The district court therefore denied the insurers’ motion to compel arbitration. The Fifth Circuit reversed.
Decision
The Fifth Circuit ruled that the district court abused its discretion by failing to compel arbitration under the Convention pursuant to the equitable estoppel doctrine. The Fifth Circuit explained that the domestic insurers had a right to compel arbitration under the Convention, despite the fact they were non-signatories to Bufkin’s policies with the foreign insurers. The court held that equitable estoppel applies where, as here, allegations involve substantially “interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract.’” More specifically, the court found that Bufkin alleged “substantially interdependent and concerted misconduct” by the domestic and foreign insurers because Bufkin submitted its claim to both the foreign and domestic insurers and its “formal proof of loss ascribed to the insurers, as a group, a common course of conduct.”
The court deemed it irrelevant that Bufkin was no longer pursuing claims against the foreign insurers, emphasizing that the standard for equitable estoppel was met because Bufkin “named the foreign insurers as defendants and accused them of the same malfeasance as the domestic insurers.” The court stated:
in focusing on Bufkin’s dismissal of the foreign insurers, the district court neglected to consider the foreign insurers’ part in the seamless coverage agreement struck by the parties, and Bufkin’s interactions with the insurers. Honing in, that coverage arrangement included the arbitration clause that afforded the insurers — foreign and domestic — “predictability in resolving disputes dealing with the substantial risks presented by a surplus lines insurance policy.”
Comments
The decision highlights an important distinction between motions to compel arbitration pursuant to the FAA (a domestic “Act of Congress” under the McCarran-Ferguson Act) as compared to the Convention (an international treaty). Under Fifth Circuit precedent, a state statute that precludes arbitration of insurance disputes (such as the Louisiana law at issue here), reverse preempts the FAA under the McCarran-Ferguson Act, but does not reverse preempt the Convention. As discussed in previous Alerts, federal courts of appeals are split as to whether a state law barring arbitration of insurance disputes reverse preempts the Convention pursuant to the McCarran-Ferguson Act. The Fourth, Fifth and Ninth Circuit have ruled that there is no reverse preemption of the Convention, whereas the Second Circuit has allowed reverse preemption under the Convention.