Arbitration Clause Upheld In Coverage Dispute

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Coverage disputes between US policyholders and non-US insurers like Underwriters at Lloyd’s of London continue to raise jurisdictional and related issues in US courts. The issues become further exacerbated when there is an arbitration clause in the insurance contract and the non-US insurer seeks to stay the coverage litigation and compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention), to which the US and the UK and most EU countries are signatories.

In a recent case, a Louisiana federal court, hearing the case after removal from the state court, granted the insurers’ motion to stay litigation and compel arbitration.

In AJ’s Shoes Outlet, LLC v. Independent Specialty Insurance Co., No. 22-1148 (E.D. La. Jan. 23, 2023), a policyholder sued its surplus lines insurers after they rejected a claim for property damage caused by looters during a power outage after a hurricane. The policyholder sued in state court and the insurers removed the case to federal court. In doing so, the insurers clearly stated that they intended to invoke the arbitration clause contained in the policy.

After removal, the insurers moved to stay the litigation and compel arbitration. The policyholder objected on multiple grounds, including waiver of arbitration, jurisdictional issues, citizenship of members of Lloyd’s syndicates, and various issues with the arbitration provision. The court rejected each defense to the motion and granted the motion to compel arbitration under the New York Convention.

There is nothing terribly unusual about the outcome, but the court does provide a nice analysis of each issue and why arbitration was required. Some of the highlights follow.

First, the court noted the purpose behind the New York Convention and the enactment of Chapter 2 of the Federal Arbitration Act, which provides the jurisdictional grant for the federal courts. The court noted that waiver of arbitration rights, even under the New York Convention was possible. Nevertheless, the court rejected the policyholder’s waiver argument.

Although the insurers explicitly reserved their right to seek arbitration in their Notice of Removal and manifested their intent to file amotion compelling arbitration, they did not move to compel arbitration until six months after removal. During that six-month interval, the insurers submitted two sets of initial disclosures, deposed the policyholder’s owner, sent ten subpoenas for depositions, propounded written discovery requests, and untimely responded to requests for admission.

According to the court, these litigation activities were not enough to overcome the presumption against waiver and did not evince an intent to abandon the right to arbitrate.

While Defendants did participate in initial discovery, they did not initiate any dispositive motion practice. Defendants also brought the arbitration clause to the Court’s attention in the Notice of Removal, ensuring all parties were aware of the arbitration clause.

The next big issue that the court addressed was whether anyone on the insurer side was a “foreign” citizen for jurisdictional purposes. This brought up the old battle of whether a Lloyd’s syndicate’s citizenship is based on each of its members or just the lead underwriter. The court outlined the two approaches several federal circuits have taken, noting that the majority view is that the syndicate is a citizen of each jurisdiction where its members are citizens. The court adopted the majority view, which allowed the insurers to invoke the New York Convention.

The policyholder made several arguments why there was no agreement to arbitrate, which were rejected by the court. One of the arguments was that the service of suit clause negated the arbitration clause. The court again followed the majority of other courts holding as follows:

The service of suit clause does not constitute a waiver of Defendants’ rights under the arbitration clauses. The Court finds that the service of suit clause complements the arbitration clause by establishing a forum where the parties may enforce an arbitration award. The inclusion of both provisions does not create ambiguity, and the Court finds it clear there is a written agreement to arbitrate in the policy.

The court rejected each of the policyholder’s arguments and granted the motion to compel arbitration. The court administratively closed the case, leaving it to be reopened after the arbitration if necessary.