“Oh, Boy!” was my first thought after reading a case which holds that those arbitration agreements requiring policyholders to arbitrate in far-away places could not be stopped by state law. Congress should stop this, and state legislators should write laws to ban those insurance carriers who sell such policies.

Let’s all be honest and agree that these arbitration clauses are as anti-consumer as they come. The insurers and agents selling these products are no friends to policyholders. I warned about these clauses in, Surplus Lines Carriers Select Arbitration and Choice of Law in New York to Pay Less Coverage and Less on Claims.

The case1 involves a builders risk policy covering property in Louisiana that has an arbitration clause which states:

Any dispute, controversy or claim arising out of, relating to, or in connection with this Policy, shall be finally settled by arbitration. The arbitration shall be conducted in accordance with the International Arbitration Rules of the American Arbitration Association in effect at the time of the arbitration. The seat of the arbitration shall be New York, New York, in the United States of America.

The policyholder cited Louisiana law making such an arbitration clause illegal and unenforceable. The policyholder also pointed to the conformity to state law clause in the policy arguing that this clause meant that the policy should be interpreted to find that the Louisiana law making the arbitration clause illegal applied:

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 court disagreed and held:

[T]he policy contains an arbitration provision. It is the arbitration provision of the insurance policy that is said not to conform with [the Louisiana statute,] a statute prohibiting arbitration agreements. This state statute, however, as we held in Safety National, is preempted by the Convention….Because the state statute,….is preempted by the Convention, the statute does not and cannot apply to McDonnel’s policy. And because the statute does not 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.

Property insurance defense attorneys in New York, the most common place where the arbitration is to take place in these surplus lines policies, must be smiling because they will be getting a lot of legal business from far-away places. Surplus lines claims managers who are lowballing offers, delaying payments and denying claims are lighting cigars and fist pumping each other over this result. Surplus lines underwriters are getting flooded with messages to change the policy language and write policies with arbitration clauses in New York.

There is nothing good for policyholders in this decision. Surplus lines markets are growing, and this will give those carriers an ability to sell even cheaper insurance because most policyholders will generally find it too costly to fight for their benefits in an arbitration a long way from home.

Thought For The Day

Good intentions can often lead to unintended consequences. It is hard to imagine a law intended for the workforce known to Henry Ford can serve the needs of a workplace shaped by the innovations of Bill Gates.
—Tim Walberg
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1McDonnel Group, L.L.C. v. Great Lakes Insurance SE, UK Branch, No. 18-30817, — F.3d —, 2019 WL 2082905 (5th Cir. May 13, 2019).

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Photo of Chip Merlin Chip Merlin

Since 1983, Chip Merlin has served as a plaintiff’s attorney with a focus on commercial & residential property insurance claim disputes and bad faith insurance litigation. Chip is a noted national authority on insurance bad faith, lecturing to national trade groups and publishing a number of papers and articles on the subject for organizations such as The American Association for Justice, The Florida Justice Association, The Windstorm Insurance Network, and Trial Magazine.

As founder and president of Merlin Law Group, Chip has dedicated his practice to the representation and advocacy of insurance policyholders in disputes with insurance companies nationwide.

Chip served as Chair for the Bad Faith Insurance Litigation Group and Secretary for the Fire and Property Insurance Litigation Group for the American Association for Justice (formerly known as the Association of Trial Lawyers of America). He was also Vice-Chair for the Subcommittee on Property Insurance Law for the American Bar Association.