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McDonnel Group, L.L.C. v. Great Lakes Ins., SE, No. 18-30817 (5th Cir. May 13, 2019)

In fall 2015, McDonnel Group, L.L.C. (“McDonnel”) purchased a builders risk insurance policy (the “policy”) from defendant insurers for a construction project on a property located in New Orleans, Louisiana. Two years later, the property suffered significant water damage. After Defendants denied the claim, McDonnel filed a declaratory and breach of contract action in federal district court.

Defendants moved to dismiss based on the policy’s arbitration provision, which provided that “any dispute, controversy or claim arising out of, relating to, or in connection with this
Policy, shall be finally settled by arbitration.” Defendants argued that this arbitration provision should be enforced, and the case dismissed in favor of arbitration pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention“).

McDonnel, however, argued that any obligation to arbitrate under the Convention did not apply because the policy’s arbitration agreement was invalid. More specifically, McDonnel claimed that the policy’s “conformity to statute” provision “amended” the arbitration provision out of the policy in order to conform with Louisiana state law—which prohibited arbitration agreements in insurance contracts covering property located in the state. The policy’s “conformity to statute” provision read: “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.”

The district court held that the Convention superseded Louisiana state law, and found that because the state statute was preempted by federal law, there was no conflict between the policy and state law so as to trigger the conformity provision of the policy. The district court dismissed the action in favor of arbitration. McDonnel appealed, and the Fifth Circuit considered the specific issue of whether the contractual agreement to conform to statute statutes applies when the conflicting state statute has been held as a matter of law to have been preempted by the Convention.

The Fifth Circuit began with a review of the state and federal laws at issue, and examined the following: (i) Louisiana’s insurance code (which prohibits arbitration agreements in insurance contracts covering property in the state); (ii) the Convention (which requires recognition of arbitration agreements); and (iii) the McCarran-Ferguson Act (which protects state laws regulating the insurance industry from the preemptive effect of federal law and permits states to reverse-preempt an otherwise applicable “Act of Congress” by enacting their own regulations of the insurance industry). The court relied on precedent that found that an “Act of Congress” does not include a treaty, such as the Convention, and thus, the McCarran-Ferguson Act does not reverse-preempt the Convention. On this basis, the court confirmed that the Convention supersedes Louisiana state law.

Against this backdrop, the court explained that although the policy’s conformity provision amended the terms of the contract to conform to state statutes, this
only applied “in the event any terms of [the] Policy are in conflict with the statutes of the jurisdiction where the Insured Property is located.” Under existing precedent, the Louisiana state statute is preempted by the Convention. Thus, the court concluded that the statute did not apply to the policy, and because it did not apply, there was no conflict between the policy and the state statute. On these grounds, the conformity provision was not triggered, and the arbitration provision survived.

The Fifth Circuit affirmed the district court judgment dismissing the case in favor of arbitration.

A version of this post originally appeared in the July 2019 edition of Baker McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.

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