Fifth Circuit Will Not Allow Insured’s Gamesmanship to Defeat Insurers’ Motion to Compel Arbitration

In May 2020, Bufkin Enterprises, L.L.C. (Bufkin) purchased insurance coverage from ten insurers—eight domestic and two foreign—to insure Bufkin’s property in Louisiana. There was one contract, but it stated that it should be treated as a series of  separate contracts between Bufkin and each of the insurers. The contract included a provision calling for arbitration of disputes in New York.  

In August 2020, Hurricane Laura damaged Bufkin’s Louisiana property, and a dispute ensued over insurance coverage. Bufkin first sued the eight domestic insurers. It then amended its complaint to include the international insurers, but the amendment was filed, so says the court, for the sole purpose of then seeking dismissal with prejudice of the claims against the international insurers. That strategy was an attempt to avoid arbitration. It’s a three-dimensional chess move worthy of Mr. Spock of blessed memory.

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The District Court denied the insurers’ motion to compel arbitration. In Bufkin Enterprises, L.L.C. v. Indian Harbor Ins. Co., the Fifth Circuit reversed. The reason for the multiple-dimensional chess is a bit obscure, but it seems to involve “reverse preemption” of the Federal Arbitration Act (FAA) facilitated by the McCarran-Ferguson Act and a Louisiana Statute. 

The Fifth Circuit did not reach that issue because it decided the case on equitable estoppel grounds. The District Court opinion in the case spells out the reverse preemption gambit in basic checkers moves. McCarran-Ferguson provides that state law governs insurance contracts.  Under the last-in-time doctrine, McCarran Ferguson supersedes the FAA.  Louisiana state law prohibits the arbitration of insurance claims. Q.E.D.  According to the District Court, this reverse preemption applies to the FAA but not to the New York Convention, which governs international arbitrations. The contracts with the international insurance carriers are important, as they are governed by the New York Convention, rather than the FAA.

But the District Court erred, said the Fifth Circuit, on the equitable estoppel argument. Equitable estoppel is about fairness. It applies, under relevant Fifth Circuit precedent, in two situations:  when a signatory to an agreement containing an arbitration clause must rely on the terms of the written agreement in asserting its claims against the non-signatory; and when a signatory to a contract containing an arbitration clause raises allegations of substantially “interdependent and concerted misconduct by both the non-signatory and one or more of the signatories to the contract.”   

The Fifth Circuit found that this case falls into the second situation, even if we treat the one contract as ten separate contracts, making the domestic insurers “non-signatories.” In its amended complaint, Bufkin made the same allegations with respect to all defendants, in effect conceding that their conduct was “interdependent and concerted.” Compelling arbitration would not, in this instance, violate Louisiana public policy, because neither the relevant statute nor reverse preemption apply to the New York Convention.  

It seems like the right result, as a matter of law and as an application of precedent, but I wonder why Louisiana would not want to allow arbitration of insurance claims by domestic insurers but allow it for cases involving foreign insurers. It may be that some clever weighing of interests has occurred here — Louisiana’s interest in protecting insureds from the imagined horrors of arbitration versus the need to open Louisiana’s insurance markets to foreign insurers who might not want to be homered in the Louisiana courts. It also might be that the legislators behind Louisiana’s statute gave absolutely no thought to the effect of the New York Convention on their attempt to shield insureds from mandatory arbitration.