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Fifth Circuit Affirms Ruling That Policy’s Conformity Provision Does Not Negate the Agreement to Arbitrate Despite Statute Prohibiting Arbitration Agreements in Insurance Contracts Covering Property in Louisiana

McDonnel Group LLC obtained a builder’s risk policy for a construction project on a property located in New Orleans, Louisiana. When the insured was denied coverage, it filed suit seeking damages for breach of contract and breach of the duty of good faith and fair dealing. The insurers responded by filing a motion to dismiss for lack of subject-matter jurisdiction and improper venue, invoking the contract’s arbitration provision under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The policy also contained a “conformity to statute” provision stating, “In the event any terms of this Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located, such terms are amended to conform to such statutes.” The insured “responded that any obligation to arbitrate under the Convention did not apply to the instant dispute because the policy’s arbitration agreement was, as a matter of law, invalid” as it was contrary to title 22, section 868(A)(2) of the Louisiana Revised Statutes, “which prohibits arbitration agreements in insurance contracts covering property located in the state.” The insured argued the conformity provision “amended” the arbitration provision out of the contract in order to “conform” with Louisiana law.

Relying on Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714 (5th Cir. 2009), which held that the Convention superseded the Louisiana statute, the district court found that, because the “state statute was preempted by federal law … no conflict existed between the policy and state law so as to trigger the conformity provision of the policy.”

Although Safety National determined the Louisiana statute was preempted by the Convention, the Fifth Circuit now had to determine the impact of the conformity provision. The court held that because the statue does not and cannot apply to the policy, “there is no conflict between the policy and the state statute. With that premise established, the conformity provision is not triggered; its inapplicability leads only to the conclusion that the arbitration provision survives, undiminished by state law.”

McDonnel Grp., LLC v. Great Lakes Ins. SE, UK Branch, 923 F.3d 427 (5th Cir. May 13, 2019)

©2011-2019 Carlton Fields, P.A.

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About this Author

Nora A. Valenza-Frost, Carlton Fields, Insurance lawyer
Associate

Nora Valenza-Frost represents U.S. and international insurers and reinsurers in arbitration and litigation involving complex claims, coverage and regulatory issues across all lines of business.

Nora provides coverage opinions for claims involving several lines of business, including commercial general liability (CGL), professional liability, directors and officers liability (D&O), contractor’s protective professional indemnity (CPPI), errors and omissions (E&O), excess and surplus lines, property, workers’ compensation, business interruption, life and health, pollution,...

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