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S.K.A.V. v. Independent Specialty Ins. Co.: Fifth Circuit Decides Louisiana Statute Invalidating Arbitration Agreements in Insurance Contracts Applies to Surplus Lines Policies

June 27th, 2024 Anti-Arbitration Statutes, Applicability of Federal Arbitration Act, Application to Compel Arbitration, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreement Invalid, Arbitration Law, Arbitration Practice and Procedure, Clear and Unmistakable Rule, Delegation Agreements, Existence of Arbitration Agreement, FAA Chapter 1, FAA Preemption of State Law, FAA Section 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 2, Federal Arbitration Act Section 4, Formation of Arbitration Agreement, Gateway Disputes, Gateway Questions, Insurance Contracts, Louisiana Supreme Court, McCarran-Ferguson Act, Motion to Compel Arbitration, Petition to Compel Arbitration, Practice and Procedure, Pre-Award Federal Arbitration Act Litigation, Questions of Arbitrability, Section 2, Section 4, State Arbitration Law, State Arbitration Statutes, State Courts, Statutory Interpretation and Construction, United States Court of Appeals for the Fifth Circuit No Comments » By Philip J. Loree Jr.

Introduction: LA Stat. Ann. § 22.868 and its Application to Surplus Lines Policies

surplus lines policy regulation

Louisiana has a statute, LA Stat. Ann. § 22.868, that courts have construed to make unenforceable arbitration provisions in insurance contracts, including surplus lines policies. The statute has an exception or savings provision that removes from the statute’s scope “a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance[,]” LA Stat. Ann. § 22.868(D), for example, a venue- or forum-selection provision in a surplus lines policy.

The question before the U.S. Court of Appeals for the Fifth Circuit in S.K.A.V. v. Independent Specialty Ins. Co., ___ F.4th ___, No. 23-30293, slip op. (5th Cir. June 5, 2024), was whether the statute invalidates arbitration provisions contained in surplus lines insurance policies, that is, whether arbitration provisions in such contracts fall within the subsection (D) exception. Predicting how it thinks the Louisiana Supreme Court would rule if faced with the question, the Court held that the subsection (D) exemption did not apply, and accordingly, the statute rendered unenforceable arbitration agreements in surplus lines contracts. The Court accordingly affirmed the judgment of the district court, which denied the arbitration proponent’s motion to compel arbitration.

Pushing the Elephant Out of the Room. . .

Before taking a closer look at how the Court arrived at its conclusion, let’s deal with the “elephant in the room.” Why is the Court in a case governed by the Federal Arbitration Act (“FAA”) even considering enforcing a state statute that would (or could) render unenforceable an FAA-governed arbitration agreement? Doesn’t the FAA preempt state law that puts arbitration agreements on a different footing than other contracts?

The answer is “undoubtedly”, but, as insurance and reinsurance practitioners know, under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, et seq., “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance. . . .” 15 U.S.C. § 1012(b).

LA Stat. Ann. § 22.868 has been construed to be one that “regulat[es] the business insurance[,]” and the FAA is not an “Act [that] specifically relates to the business of insurance. . . .” Section 22.868 thus “reverse preempts” the FAA under McCarran-Ferguson. See slip op. at 2. (See, e.g., here.)

The Court’s Interpretation of Section 22.868, Including its Surplus Lines Policy Exemption

  LA Stat. Ann. § 22.868, provides, in pertinent part:

A. No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state, or any group health and accident policy insuring a resident of this state regardless of where made or delivered, shall contain any condition, stipulation, or agreement either. . . .

(2) Depriving the courts of this state of the jurisdiction or venue of action against the insurer. . . .

. . . .

LA Stat. Ann. § 22.868(A).

The statute also provides an exception, which is set forth in subsection D:

D. The provisions of Subsection A of this Section shall not prohibit a forum or venue selection clause in a policy form that is not subject to approval by the Department of Insurance.

LA Stat. Ann. § 22.868(B).

There was (and could be) no dispute between the S.K.A.V. parties that the surplus lines policies at issue were “not subject to approval by the Department of Insurance.” Id.; see slip op. at 3. Consequently, the case presented a question of statutory interpretation: “whether the policy’s arbitration clause is barred by subsection A(2) or permitted by subsection (D).” Slip op. at 3.

District court judges considering this question, including two from the Southern District of New York, had reached conflicting conclusions on the question. Slip op. at 3-4. Last year an Eastern District of Louisiana Court certified the question to the Supreme Court of Louisiana, but the High Court, over two dissents, did not accept the certification. Id.

Louisiana courts historically interpreted the language of subsection A(2) as barring arbitration provision, despite the absence of any reference to arbitration in the statute. See slip op. at 4-5. The theory, said the Court, was that arbitration agreements divested courts of jurisdiction. See slip op. at 4-5.

The subsection (D) exception—critical to the issue before the Court—was not added to the statute until 2020, at which point it became lawful for insurers to add forum- and venue-selection provisions to surplus lines policies (which are not subject to insurance department pre-approval).

The arbitration proponent (the surplus lines insurer) argued the plain language of the exception removed from the scope of subsection (A)(2) arbitration clauses in surplus lines policies. The argument—based on Louisiana and federal court cases deeming an arbitration provision to be a species of forum- or venue-selection provision—was stated syllogistically as follows:

(A) § 22.868 permits surplus lines insurers to select the forum and venue for their disputes; (B) an arbitration clause is a type of forum- or venue-selection clause; therefore (C) the arbitration clause in this surplus lines insurance policy is valid under § 22.868.

Slip op. at 5.

The Court found the argument “compelling” but was “not persuaded that it is the one best grounded in the text and history of § 22.868.” Slip op. at 5. The Court was further informed by the 2019 Louisiana Supreme Court decision, Creekstone Juban I, L.L.C. v. XL Ins. America, Inc., No. 2018-0748 (La. 5/18/19), 282 So.3d 1042, which prior to the addition of subsection (D) in 2020, determined that venue- and forum-selection provisions “were not barred by [subsection] (A)(2) because they did not ‘deprive[] the courts of this state of the legal authority to hear the dispute (i.e., the jurisdiction).’” Slip op. at 5-6 (quoting No. 2018-0748, p. 6, 282 So.3d at 1047) (emphasis and brackets in original). Creekstone, said the Court, cast no doubt on whether subsection (A)(2) continued to bar arbitration provisions in insurance policies, a point the Court said a Creekstone concurring opinion made. Slip op. at 6.

The upshot of Creekstone was that Louisiana “regarded arbitration clauses a qualitatively different type of forum-selection clause, at least for purposes of § 22.868, because they had jurisdictional import and thus still fell under the prohibition of (A)(2).” Slip op. at 6.

The Court concluded that this “distinguishing jurisdictional feature of arbitration clauses survived. . . the Legislature’s amendments in 2020[,]” which added the subsection (D) exception to § 22.868. Subsection (A)(2) “continued to bar insurance agreements that deprived courts ‘jurisdiction. . . of action,’” slip op. at 6 (quoting § 22.868(A)(2)), but the newly added subsection (D) did not “address jurisdiction at all.” Subsection (D) “instead saved from the general bar of (A)(2) the new addition of ‘venue,’ which the Creekstone. . . Court had previously held to be outside the sweep of (A)(2).” Slip op. at 6.

The Court discerned nothing in subsection (D)’s text to suggest that it authorized—contrary to subsection (A)(2)’s anti-arbitration policy—arbitration provisions in surplus lines policies. If the legislature intended subsection (D) to exempt from subsection (A)(2) arbitration agreements in surplus lines policies, then the Court would “expect the statutory text to be plainer on this point, at least with respect to jurisdiction, given its express inclusion in subsection (A)(2).” Slip op. at 6. The Court simply could not “say that subsection (D) subtlety overtakes the entirety of (A)(2) for surplus lines insurers.” Slip op. at 6-7.

The Court Rejects The Surplus Lines Insurer’s other Arguments

Having concluded its statutory interpretation analysis, the Court addressed and rejected two other arguments made by the arbitration challenger. First, the Court dispatched the argument that freedom of contract concerns, and the unique nature of surplus lines insurance, counseled in favor of enforcing the arbitration provision.  The surplus lines insurer argued that “‘given the risks insured,’ . . . ‘surplus lines insurers have more freedom and flexibility for accepting risks and designing and pricing their policies.’” Slip op. at 7 (quoting surplus lines insurer).

But this was essentially a policy-based argument, and the Court said it was “in no position to second-guess the wisdom of the Louisiana Legislature on this point[,]” for the Court’s “duty” was to “determine, as best we can, how the Louisiana Supreme Court would read” the statute “in this context.” Slip op. at 7. While the Court credited the factual predicate for the insurer’s argument, the Court explained that “[g]eneral principles of contractual freedom however normatively attractive in the surplus lines insurance business, cannot trump specific statutory commands.” Id.

Second, the Court rejected the argument that the parties were required to submit to arbitration the question whether the arbitration agreement fell within subsection (D)’s exception and was therefore valid. The arbitration agreement required the parties to submit “‘[a]ll matters in dispute’” to arbitration, which the Court said “arguably encompass[ed] such ‘gateway’ arbitrability questions[]” as arbitration agreement validity. Slip op. at 7 . “But[,]” explained the Court, according to our precedent, this is a second-order question that follows one we have already answered: whether the parties have a valid agreement to arbitrate.” Slip op. at 7 (citation omitted). Because the answer to that question was no, and because it interpreted § 22.868 to prevent the formation of a valid arbitration agreement, the Court could not compel arbitration of threshold arbitrability questions. Id.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, or  arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related, and other, matters.

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