Hear Ye! Hear Ye! Binding Arbitration and Binding Appraisal Provisions Are Prohibited in Louisiana

The Louisiana Department of Insurance (LDI) has reissued Directive 173 (Revised and Reissued)¹ to remind insurers of La. R.S. 22:868(A) and to advise of recent amendments, effective August 1, 2020, made in Louisiana’s Regular Session 2020, which adds “venue” to subsection (A)(2):

Please take note that, pursuant to La. R.S. 22:868(A)(2), arbitration and appraisal provisions that attempt to deprive Louisiana courts of jurisdiction or venue are not permitted in insurance policies or insurance contracts delivered or issued for delivery in Louisiana.

Though Louisiana courts have interpreted binding arbitration and binding appraisal provisions in Louisiana contracts of insurance enforceable, since at least January 15, 2003, the LDI has determined those binding provisions are prohibited and invalid, and has directed:

The parties shall proceed as if the non-compliant condition or provision did not exist and/or was worded to be in full compliance with the law as set forth in the Louisiana Insurance Code.²

The LDI further warns insurers of residents of Louisiana that non-compliance with the Louisiana Insurance Code will subject the insurer to sanctions:

Further, if an authorized insurer certifies compliance in accordance with Regulation 78 and it is later discovered that the form contains a prohibited binding arbitration or a binding appraisal provision, the authorized insurer will be subject to sanctions including, but not limited to, the imposition of such fines as are authorized by law.³

Though the LDI does not prohibit appraisal or arbitration provisions in the policy of insurance issued to a Louisiana resident, the non-binding nature of the provisions must be clear:

The Commissioner will consider for approval provisions that clearly convey to the policyholder that the arbitration process is not binding, does not deprive the Louisiana courts of jurisdiction or venue, and is invoked at the request of the insured. The language used should clearly convey that the insured does not forfeit any right to seek judicial resolution of the dispute.

An appraisal provision that states that the appraisal process is “binding” or “final” or uses similar language is not lawful in Louisiana. As with arbitration provisions, such terminology in an appraisal provision has the effect of removing the matter from the judicial branch contrary to La. R.S. 22:868. Further, such language is misleading. Pursuant to La. R.S. 22:862, policies with misleading language shall not be approved by the Commissioner.⁴

Interestingly, we are just now beginning to see the “non-binding” language in the appraisal provisions of policies. However, as recent as May 13, 2019, the Fifth Circuit Court of Appeals ruled in McDonnel Group v. Great Lakes Insurance,⁵ that a binding arbitration provision in a Louisiana insurance policy was enforceable despite La. R.S. 868(A) prohibiting provisions that attempt to deprive Louisiana courts of jurisdiction. The court held that the Louisiana statute was pre-empted by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“Convention”) as implemented in Chapter 2 of the Federal Arbitration Act.

The court found that the Convention’s trigger consisted of four elements:

This court has succinctly described the Convention’s trigger as consisting of four elements; a district court must dismiss a case in favor of arbitration “if (1) there is an agreement in writing to arbitrate the dispute, (2) the agreement provides for arbitration in the territory of a Convention signatory, (3) the agreement arises out of a commercial legal relationship, and (4) a party to the agreement is not an American citizen.” Francisco v. STOLT ACHIEVEMENT MT, 293 F.3d 270, 273 (5th Cir. 2002). Like all treaties, the Convention ordinarily preempts conflicting state laws. See, e.g., Lim, 404 F.3d at 904.

Id. (emphasis added).

It is important to note that the first element is “an agreement in writing to arbitrate the dispute” and the second element speaks to the provisions of the agreement. Perhaps the better argument against a binding arbitration in New York would have been to void the invalid and prohibited language improperly included in the policy issued to a Louisiana resident. As noted above, Louisiana does not prohibit arbitration. In Directive 173 (Revised and Reissued), the Commissioner advises he will consider provisions which “clearly convey to the policyholder that the arbitration process is not binding, does not deprive the Louisiana courts of jurisdiction or venue, and is invoked at the request of the insured.”

We always encourage policyholders to review their policies. Today, we encourage Louisiana insurers to review their policies per the LDI Directive 173 (Revised and Reissued):

Authorized insurers should review their policy forms that are on file with the Louisiana Department of Insurance (the “LDI”) to determine if any forms contain arbitration provisions or appraisal conditions which may be construed as binding. Such forms should be revised and re-filed with the LDI in accordance with Regulation 78 §§10107.H, 10109.H and 10113.H.

Please be governed accordingly.⁶

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¹ Directive 173 (Revised and Reissued), James J. Donelon, Commissioner, Louisiana Dept. of Ins., October 5, 2020.
² Id.
³ Id.
⁴ Id.
⁵ McDonnel Group, LLC v. Great Lakes Insurance SE, UK Branch, No.18-30817 (5th Cir. May 13, 2019).
⁶ Directive 173 (Revised and Reissued), James J. Donelon, Commissioner, Louisiana Dept. of Ins., October 5, 2020.