November 28, 2018 Practice Points

Non-Signatory Insurers Able to Compel Arbitration

By Melanie Mohr

A federal district court, relying on the New York Convention and the doctrine of equitable estoppel, required a plaintiff to arbitrate its property damage claims against nine insurance companies, even though the relevant arbitration clause was present in the plaintiff’s contracts with only two of the nine carriers. The court found that the plaintiff’s claims all arose from the same set of facts and that the coverage and damages issues were identical as to each insurer. Accordingly, the court held that the plaintiff’s arbitrable and non-arbitrable claims were intertwined, and it required the plaintiff to arbitrate its claims against all of the insurers. Port Cargo Service, LLC and Michoud Blvd. Commerce Center, LLC v. Certain Underwriters at Lloyd’s London, et al., Case No. 18-6192, 2018 WL 4042874 (E.D. La. August 24, 2018).

Facts and Procedural History

In 2016, Port Cargo purchased a surplus lines insurance policy which included coverage for a warehouse and office facility in New Orleans. The policy risk was shared by nine separate insurance companies, including two based in foreign countries and seven based in the United States. In 2017, Port Cargo’s property was so severely damaged by a tornado that it needed to be rebuilt completely. When the insurance companies did not pay its claims, Port Cargo filed suit in the Parish of Orleans District Court, Louisiana for about $10 million in damages. Defendants removed the case to federal district court and sought to compel Port Cargo to arbitrate.

Removal, the New York Convention, and Federal Jurisdiction

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) is an international treaty that gives citizens of foreign countries the right to enforce arbitration agreements. The Convention Act, which is chapter two of the Federal Arbitration Act, creates federal subject matter jurisdiction for actions arising under the New York Convention. 9 U.S.C. §§201-208. Section 205 of the Convention Act provides that the defendants may remove an action arising under the New York Convention to federal court.

Both of the foreign insurers had an arbitration agreement in their contract with Port Cargo. Port Cargo acknowledged that, under the New York Convention and the Convention Act, the two foreign insurers had the right to remove the case to federal court and to argue for the enforcement of their arbitration agreements under federal law. Port Cargo pointed out, however, that although all nine insurers shared the policy risk, Port Cargo had a separate insurance contract with each of them. Port Cargo successfully argued that the New York Convention did not apply to its insurance contracts with the seven domestic insurers and that the Convention Act did not provide federal subject matter jurisdiction over the claims against the domestic insurers or their motions to compel arbitration. Accordingly, Port Cargo argued that even if arbitration were to proceed with respect to the two foreign insurers, the court should send its claims against the seven domestic insurers back to Louisiana state court.

Non-Signatories and Equitable Estoppel

The seven domestic insurance carriers were not signatories to the insurance contracts that Port Cargo had with its two foreign insurers. Citing Grigson v. Creative Artists Agency L.L.C., 210 F.3d 524, 527 (5th Cir. 2000), the district court analyzed that when under the doctrine of equitable estoppel non-signatories may compel a signatory like Port Cargo to arbitrate. The court noted that, even though Port Cargo had a separate contract with each of the nine insurers, each contract incorporated the exact same insurance terms—the only significant difference being the percentage of loss that each insurer agreed to take. Thus, all of Port Cargo’s claims cited on the same insurance provisions, accused each insurer of breaching those provisions in the same way, and relied on the same evidence. Given these circumstances, the court held that Port Cargo’s claims against all the insurers were interdependent and that it was therefore appropriate under the doctrine of equitable estoppel to require Port Cargo to arbitrate all of its claims. The court added that to permit two separate proceedings to go forward—one in arbitration and one in the courts—would “thwart the intentions of the Convention and the federal policy in favor of arbitration.”

The court cited an additional factor to support its decision. The seven domestic insurance contracts also contained an arbitration clause. Thus, at the time the contracts were made, the parties “contemplated that all disputes against all of the insurers would be determined in one arbitration.” Port Cargo challenged the validity of the arbitration clauses in the seven domestic insurers’ contracts based on the McCarron-Ferguson Act and a Louisiana statute, but the court found it unnecessary to decide the matter. Instead, a combination of federal law and equitable estoppel required Port Cargo to arbitrate all of its insurance claims.

Conclusion

Non-signatories can use the doctrine of equitable estoppel to require a plaintiff to arbitrate when the plaintiff’s claims are intertwined with other claims that are subject to arbitration. Furthermore, although the Federal Arbitration Act does not provide federal subject matter jurisdiction, the New York Convention and the Convention Act may be a source of federal subject matter jurisdiction when the arbitration agreement in dispute includes foreign citizens. 

Melanie Mohr is a law student at Goethe University in Frankfurt, Germany.


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