Beachcorner Props. v. Indep. Specialty Ins. Co.

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BEACHCORNER PROPERTIES, LLC v. INDEPENDENT SPECIALTY INSURANCE COMPANY

Civil Action No. 23-1287

United States District Court, E.D. Louisiana

November 3, 2023

SECTION M (2)

ORDER & REASONS

BARRY W. ASHE UNITED STATES DISTRICT JUDGE

Before the Court is a motion of defendant Independent Specialty Insurance Company (“ISIC”) to compel arbitration and stay proceedings.^[1] Plaintiff Beachcorner Properties, LLC (“Beachcorner”) responds in opposition,^[2] and ISIC replies in further support of its motion.^[3]Having considered the parties' memoranda, the record, and the applicable law, the Court issues this Order & Reasons granting ISIC's motion to compel arbitration.

I. BACKGROUND

This case arises from an insurance coverage dispute following Hurricane Ida, which made landfall on August 29 2021.^[4] Beachcorner alleges coverage for property it owns under a surplus lines insurance policy issued by ISIC.^[5] On February 16, 2023, Beachcorner filed this suit against ISIC in state court seeking insurance proceeds and asserting claims for breach of contract and bad faith in handling Beachcorner's insurance claims.^[6] ISIC removed the suit on grounds of diversity subject-matter jurisdiction under 28 U.S.C. § 1332.

The policy includes the following arbitration clause:

4. Arbitration Clause

All matters in dispute between you and us (referred to in this policy as “the parties”) in relation to this Insurance, including this policy's formation and validity, and whether arising during or after the period of this insurance, shall be referred to an Arbitration Tribunal in the manner described below.

Any Arbitration hearing shall take place in Nashville Tennessee, unless some other locale is agreed by the Arbitrator or Arbitration Tribunal.

The Arbitration Tribunal may not award exemplary, punitive, multiple or other damages of a similar nature.^[7]

On April 21, 2023, ISIC filed a motion to compel arbitration pursuant to this arbitration clause.^[8]Subsequently, but before the Court ruled on the merits of the motion, the parties filed a joint motion to stay the case pending mediation, which the Court granted.^[9] Accordingly, the motion to compel arbitration was denied as moot, without prejudice to its being refiled once the stay was lifted or expired.^[10]

The stay expired on August 14, 2023, after mediation failed to resolve all claims, and on August 18, 2023, ISIC filed the instant renewed motion to compel arbitration.^[11] During the stay, however, another section of this court certified a question to the Louisiana supreme court regarding the enforceability of the exact arbitration clause at issue here.^[12] The certified question was “[w]hether La. R.S. 22:868 prohibits the enforcement of arbitration clauses in insurance contracts for surplus lines insurers.”^[13] Due to the certified question, on September 19, 2023, the Court held a status conference to discuss the instant motion to compel, during which the parties agreed that the matter should again be stayed pending either a decision by the Louisiana supreme court on the merits of the certified question, or a decision by the Louisiana supreme court to not accept the certified question.^[14] The Louisiana supreme court ultimately denied certification,^[15] so the Court lifted the stay to determine the merits of the instant motion to compel arbitration.^[16]

II. PENDING MOTION

ISIC argues that the parties should be compelled to arbitrate the dispute because the arbitration clause is valid and enforceable under Louisiana law.^[17] ISIC then argues that the policy's “broad delegation clause” requires that the arbitration panel, not this Court, decide whether the present dispute falls within the scope of the arbitration clause.^[18] Regardless, says ISIC, Beachcorner's claims are arbitrable.^[19] Next, ISIC contends that no statute or other law prevents enforcement of the arbitration clause.^[20] In particular, ISIC argues that La. R.S. 22:868(A) does not prevent arbitration of this dispute because arbitration clauses in surplus lines policies are excepted under subsection (D) of the statute in that an arbitration clause is a type of forum-selection clause and does not oust a court of jurisdiction.^[21]

In opposition, Beachcorner urges the Court to deny the motion to compel for three reasons: (1) La. R.S. 22:868 prohibits enforcement of the arbitration clause in this case;^[22] (2) ISIC issued a subsequent service-of-suit endorsement to the policy that supplants the arbitration clause;^[23] and (3) compelling a small, local business like Beachcorner to arbitrate in Tennessee renders the clause unconscionable.^[24] In reply, ISIC cites to additional recent cases holding that arbitration clauses in surplus lines polices are permitted under the exception in La. R.S. 22:868(D).^[25] ISIC then contends that the service-of-suit endorsement does not supplant the arbitration clause but complements it,^[26] and that plaintiff's legislative intent argument is a red herring.^[27] Lastly, ISIC argues that the arbitration clause is not unconscionable since it is conspicuous and plaintiff fails to demonstrate inadequate bargaining strength or an incapacity to read and understand the policy.^[28]

III. LAW & ANALYSIS

“[A] court must hold a party to its arbitration contract just as the court would to any other kind [of contract].” Morgan v. Sundance, 596 U.S. 411, 418 (2022). In doing so, courts perform a two-step analysis to determine whether parties should be compelled to arbitrate a dispute. They must determine: (1) “whether the party has agreed to arbitrate the dispute”; and (2) “whether ‘any federal statute or policy renders the claims nonarbitrable.'” Jones v. Halliburton Co., 583 F.3d 228, 233-34 (5th Cir. 2009) (quoting Sherer v. Green Tree Servicing LLC, 548 F.3d 379, 381 (5th Cir. 2008)). The first step is further divided into two additional questions, requiring a court to ask: “(1) is there a valid agreement to arbitrate the claims and (2) does the dispute in question fall within the scope of that arbitration agreement”? Id. (quotation omitted). When there is a valid delegation clause, however, the first step of the analysis changes:

[I]f the party seeking arbitration points to a purported delegation clause, the court's analysis is limited. It performs the first step - an analysis of contract formation -as it always does. But the only question, after finding that there is in fact a valid agreement, is whether the purported delegation clause is in fact a delegation clause - that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated. If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.

Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 202 (5th Cir. 2016) (internal citations and footnote omitted). In other words, a valid delegation clause may delegate the scope determination (arbitrability) to the arbitrator. If the arbitration agreement “clearly and unmistakably delegated arbitrability, [a court] ‘must refer the claim to arbitration,'” but if not, it “‘must perform the ordinary arbitrability analysis.'” Brittania-U Nigeria, Ltd. v. Chevron USA, Inc., 866 F.3d 709, 714 (5th Cir. 2017) (quoting Kubala, 830 F.3d at 203).

A. The Parties Agreed to Arbitrate the Dispute

1. Validity of the arbitration agreement

The determination of whether the parties agreed to arbitrate the dispute “is generally made on the basis of ‘ordinary state-law principles that govern the formation of contracts.” Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir. 2002) (quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). Under Louisiana law, a valid contract requires: (1) capacity to contract; (2) consent; (3) lawful cause; and (4) a valid object. La. Civ. Code arts. 1918, 1927, 1966, 1971. Here, Beachcorner does not argue that the arbitration clause is invalid under Louisiana contract law. Indeed, Beachcorner alleges that “at all times relative to [the] complaint,” the policy was “in full force and effect.”^[29] Beachcorner nonetheless argues that compelling arbitration would be unconscionable due to the expense and inconvenience of arbitration in a distant state. To the extent this argument may be understood to raise the issue of invalidity, however obliquely, the Court will now address it out of an abundance of caution.

“Louisiana caselaw analyzing arbitration provision disputes demonstrates that ‘invalidity' includes, yet is not limited to, contracts that contain provisions that are (1) unconscionable or (2) possess features of both adhesionary formation and unduly harsh substance.” Baudoin v. Mid-La. Anesthesia Consultants, Inc., 306 Fed.Appx. 188, 195 (5th Cir. 2009); see also Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159, 166 (5th Cir. 2004) (“‘[G]enerally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements ....'”) (quoting Doctor's Assocs. v. Casarotto, 517 U.S. 681, 687 (1996)) (emphasis in original). This is because, under Louisiana law, “an unconscionable contract or term can be thought of as lacking the free consent that the [Louisiana Civil] Code requires of all contracts.” Iberia Credit Bureau, 379 F.3d at 167. Therefore, the Court will determine whether the arbitration agreement is unconscionable.^[30]

“In order to be invalidated, a provision must possess features of both adhesionary formation and unduly harsh substance.” Id. Louisiana courts consider four factors in making this determination: “(1) the physical characteristics of the clause, including font size; (2) the distinguishing features of the clause; (3) the mutuality of the clause, in terms of the relative burdens and...