Arbitration Clauses Adverse to Public Policy? Louisiana Supreme Court Says “Yes”
Arbitration Clauses Adverse to Public Policy? Louisiana Supreme Court Says “Yes”
By David A. Gauntlett*
Introduction
In Police Jury of Calcasieu Par. v. Indian Harbor Ins. Co.,[1] the Louisiana Supreme Court recently answered three certified questions addressing a group of insurers’ attempts to enforce an arbitration clause. The court’s answers all favored the policyholders and maintained Louisiana’s stance that arbitration clauses in insurance policies ran counter to public policy in the state. This safeguarding of policyholders’ rights should make Louisiana law attractive for application to insurance disputes.
Background Facts
The underlying lawsuit addressed damage caused by Hurricanes Laura and Delta in 2020 to approximately 300 properties owned by the policyholder Police Jury of Calcasieu Parish, a political subdivision of the State of Louisiana. Defendants, eight domestic insurers, sought to compel arbitration. The arbitration would take place in the state of New York before an arbitration tribunal comprised of insurance executives applying New York law to Calcasieu's approximately 300 property damage claims.
The district court sought guidance on the proper application of Louisiana law in the form of three questions, only two of which are addressed here:
Whether a 2020 amendment to La. R.S. 22:868(D) allowing forum or venue selection clauses in certain types of insurance contracts implicitly repealed La. R.S. 22:868(A)’s prohibition of arbitration clauses in all insurance contracts.
Whether a domestic insurer may invoke the doctrine of equitable estoppel to enforce an arbitration clause contained in another insurer's policy, thereby circumventing the prohibition of arbitration clauses under La. R.S. 22:868(A)(2).[2]
Rules of Construction and Public Policy Support Prohibition of Arbitration Clauses
The court began its analysis of the interplay between subsections (A) and (D) of La. R.S. 22:868 by acknowledging that the prohibition of arbitration clauses in insurance contracts is rooted in public policy concerns. The court then concluded that subsection (D) did not expressly repeal subsection (A) and rejected the insurers’ arguments that it did so implicitly. As the court observed, implicit repeal of a statute is disfavored and will only be found where “two acts are irreconcilably inconsistent or repugnant.”[3] That was not the case here. As the court explained:
On its face, La. R.S. 22:868(D) provides for limited circumstances in which the use of a forum or venue selection clause is permissible in an insurance policy issued in Louisiana. Although we have previously characterized an arbitration clause as a type of alternative venue, we cannot simplify the definition of an arbitration clause to be synonymous with a forum or venue selection clause under La. R.S. 22:868(D). We have consistently maintained that jurisdiction is a distinct concept from venue. Now, we must draw a similar distinction between arbitration clauses and forum or venue selection clauses based on their primary functions.
Forum selection clauses primarily concern the location where parties may pursue litigation. . . . In contrast, arbitration clauses primarily concern the method of dispute resolution, depriving any court of jurisdiction over an action.[4]
In the absence of a direct conflict with subsection D, the court upheld subsection (A)’s prohibition, thereby thwarting the insurers’ first attempt to enforce the arbitration provision.
Estoppel Inapplicable Due to Applicable Statute
The second certified question addressed the insurers’ attempts to circumvent the state’s prohibition of arbitration clauses through the doctrine of equitable estoppel.[5] The court determined that the common law doctrine was not applicable. A contrary finding would (1) violate Louisiana's positive law prohibiting arbitration in Louisiana-issued insurance policies; and (2) invite domestic insurers’ misuse a doctrine of “last resort” to ceaselessly rely on insurance policies of foreign insurers to compel arbitration.[6] The court also addressed Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co.,[7] concluding that the Fifth Circuit’s use of the doctrine to compel arbitration was “flawed and not supported by Louisiana law.”[8]
Coverage Counsel Can Sway Choice of Law Decisions by Strategically Choosing Venue
While the Calcasieu rationale may be persuasive to courts applying other states’ laws, the simplest method to take advantage of the decision’s effect is to have Louisiana law applied to the coverage dispute. Knowing the differences in coverage law for each state will help set a goal, but the states’ choice of law doctrines are key to achieving that goal. Experienced coverage counsel will consider the potential venues for a coverage dispute and analyze the result of the state’s choice of law test.
In Frankenmuth Mutual Ins. Co. v. Hockey Cup, LLC,[9] a company was accused of producing counterfeit and trademark infringing sports memorabilia secured defense benefits following tender. The insurer sued its insured in Illinois where it was located in a coverage lawsuit while the underlying action was in New York. It claimed that “delayed notice” of a cease and desist letter, not a lawsuit, precluded coverage because the insurer was not apprised of the possibility of litigation evidenced by this demand letter before it issued its policy.
The insurer sued in Illinois seeking to secure New York law. Applying Illinois’ “most significant contacts” test,[10] which places “special emphasis” on the location of the insured risk, the court determined that New York law applied. Had the insurer filed in New York, the court would have used New York’s “center of gravity” approach,[11] potentially resulting in the choice of Illinois law where prejudice was a factor under an umbrella policy. [12]
“Under New York law, ‘compliance with the notice provision of an insurance contract is a condition precedent to all of the insurer's duties and liability under the policy, including the duty to defend.’”[13] The policy at issue required notification “as soon as practicable” of “an offense which may result in a claim.”[14] Few entities who receive multiple cease and desist letters view their often questionable grounds for attack as an indication of a subsequent likely lawsuit, especially where there is a cogent response to letters by retained intellectual property counsel. Nonetheless, the court held that the cease and desist letters left “no doubt that the NHL intended to enforce its trademark rights against [the insured],” so the insured was aware “of [a] demand that could be defended, settled, and paid by the insurer.”[15]
This view of the law is a narrow construction shared by few courts and evidences a minority rule. Even in New York, this strict requirement is often alleviated by a statute[16] requiring prejudice before defective notice can absolve an insurer of its duties in personal and advertising injury cases,[17] but it was not applicable here because the statute is limited to insurance policies issued or delivered in New York. Defense or coverage counsel who fail to advise clients of the importance choosing a forum to dispute coverage issues in certain cases may face professional liability exposure. [18]
Conclusion
The Calcasieu decision leaves no doubt that Louisiana courts will deny an insurer’s attempts to enforce an arbitration clause. This policy is a great boon to policyholders, for whom litigation is generally preferable for a variety of reasons (e.g., greater availability of discovery). Experienced coverage counsel can help determine if this, or any other policy unique to a particular state, is beneficial for a particular dispute and analyze potential litigation strategies to determine if any of them would make that state’s law applicable. Arbitrators who are “mutually acceptable” are those that insurers believe they can influence to reach “acceptable” resolutions that will encourage a continuing flow of insurer business.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Police Jury of Calcasieu Par. v. Indian Harbor Ins. Co., Case No. 2024-CQ-00449, 2024 WL 4579035 (La. Oct. 25, 2024).
[2] The remaining question addressed a statute only applicable to the state and its subdivisions. Analysis is omitted here since it does not pertain to the average policyholder.
[3] Police Jury of Calcasieu Par. v. Indian Harbor Ins. Co., 2024 WL 4579035 at *3.
[4] Id. at *5.
[5] Id. at *15 (“Equitable estoppel is a ‘jurisprudential [common law] doctrine involving the voluntary conduct of a party whereby he is precluded from asserting rights against another who has justifiably relied on such conduct and changed his position so that he will suffer injury if the former is allowed to repudiate the conduct.’”)
[6] Id.
[7] Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co., 96 F.4th 726 (5th Cir. (La.) 2024).
[8] Police Jury of Calcasieu Par. v. Indian Harbor Ins. Co., 2024 WL 4579035 at *15.
[9] Frankenmuth Mutual Ins. Co. v. Hockey Cup, LLC, No. 18 C 8142, 2019 U.S. Dist. LEXIS 160278 (N.D. Ill. Sep. 20, 2019).
[10] Lapham–Hickey Steel Corp. v. Protection Mut. Ins. Co., 655 N.E.2d 842, 845 (1995) (“[I]nsurance policy provisions are generally governed by the location of the subject matter, the place of delivery of the contract, the domicile of the insured or of the insurer, the place of the last act to give rise to a valid contract, the place of performance, or other place bearing a rational relationship to the general contract.“) (quotation marks and citation omitted).
[11] Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 N.Y.2d 309, 317 (1994) (The test examines several factors in order to determine the state with “the most significant relationship to the transaction and the parties.”) (quoting Restatement (Second) of Conflict of Laws § 188(1)).
[12] Country Mut. Ins. Co. v. Livorsi Marine, Inc., 222 Ill. 2d 303, 346 (2006) (“’[A] lack of prejudice may be a factor in determining the question of whether a reasonable notice was given in a particular case’ . . . .”) (quoting Simmon v. Iowa Mut. Cas. Co., 3 Ill. 2d 318, 321 (1954)).
[13] Frankenmuth, 2019 U.S. Dist. LEXIS 160278 at *6 (quoting Gelfman v. Capitol Indem. Corp., 39 F. Supp. 3d 255, 268 (E.D.N.Y. 2014)).
[14] Frankenmuth, 2019 U.S. Dist. LEXIS 160278 at *6.
[15] Id. at *9.
[16] N.Y. Ins. Law § 3420(a)(5).
[17] See, e.g., Bullseye Rest., Inc. v. James River Ins. Co., 387 F. Supp. 3d 273, 284 (E.D.N.Y. 2019).
[18] See David A. Gauntlett, Avoiding Malpractice by Providing Prompt Notice of Intellectual Property Claims to Insurers, https://www.gauntlettlaw.com/news/avoiding-malpractice-by-providing-prompt-notice-of-intellectual-property-claims-to-insurers (July 15, 2021).