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May 2019

Arbitration Agreement in International Builder’s Risk Policy Upheld Despite Louisiana Law Barring Arbitration Agreements in Insurance Policies – Conformity to Statute Clause Does Not Result in Reverse-Preemption of Preempted Statute

On Monday, May 13, 2019, the US Court of Appeals for the Fifth Circuit upheld a district court’s decision that dismissed the plaintiff/construction contractor’s federal lawsuit against its builder’s risk insurers in favor of arbitration. In McDonnel Group, L.L.C. v. Great Lakes Ins. SE, UK Branch, C.A. No. 18-30817 (5th Cir. May 13, 2019), the contractor obtained a builder’s risk policy from U.K. insurers for a construction project in New Orleans, Louisiana. The policy contained an express agreement to arbitration any disputes that arose under the policy. The contractor made a claim under the policy which was denied by the insurers. This prompted the contractor to file a lawsuit for breach of contract and bad faith in federal court. The contractor disregarded the arbitration agreement in the policy, and instead, relied on Louisiana law that bars arbitration agreements in insurance policies1 because the policy also contained a “conformity to statute” provision. That provision of the policy states: “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.”

However, because the builder’s risk policy at issue was an international agreement, the insurers moved to dismiss on the basis that the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention”), as implemented through the Federal Arbitration Act2 (FAA), preempted the conflicting Louisiana law barring such arbitration agreements. Not so fast, said the contractor and pointed the Court to the McCarran-Ferguson Act3, which was enacted by the U.S. Congress to protect states’ insurance regulations from unintended federal interference. An en banc panel of the Fifth Circuit had previously addressed whether the McCarran-Ferguson Act allowed Louisiana law to reverse-preempt the preemptive effect of the Convention and found that it did not. That ruling, in Safety Nat’l Cas. Corp. v. Certain Underwriters at Lloyd’s, 587 F.3d 714 (5th Cir. 2009), was based on the fact that the McCarran-Ferguson Act disallowed “Acts of Congress” to conflict with state insurance law. The Convention, the Safety National Court ruled, was not an Act of Congress but was treaty and remained so, notwithstanding its implementation through the FAA.

In a valiant but failed attempt to escape Safety National, the contractor argued that its policy and case were distinguishable due the “conformity to statue” provision. As a result, the contractor argued, the arbitration agreement contained in the policy was amended out of the policy ab initio. The Court didn’t buy it. Instead, the Court reasoned that the “conformity to statue” provision only applies if there is a conflict. Since the Louisiana anti-arbitration statute was preempted by the Convention, there was no conflict that would trigger the “conformity to statue” provision.
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1 La. Rev. Stat. Ann. Section 22:868(A)(2).
2 9 U.S.C. Section 1, et seq.
3 15 U.S.C. Sect. 1011.

Construction

Julie M. Araujo


Construction