A few years ago, I asked Merlin Law Group attorney Doug Grose, “How did we end up in arbitration in London, England with policy delivered in Texas, a loss in Houston, Texas and our client from Houston, Texas?” He told me there was an arbitration provision and the federal court ordered us to go to arbitration in London because that is where the policy required the arbitration take place. I asked Doug: ”Geez, forgetting the extraordinary increased cost to our client do this, what chance do you think we have in arbitration in London against Certain Underwriters at Lloyd’s of London?”

I remembered this scenario with Doug Grose while reading a Texas case last week where the policy required arbitration in New York applying New York law, and a separate Texas case with a choice of law provision applying California law. As a warning to policyholders, public adjusters, and contractors involved with insurance policies with these provisions, please get legal advice. You may find yourself thinking these provisions cannot be enforceable and find out they are enforceable, and you lost your rights to collect otherwise available coverage benefits.

The recent Texas case1 involving the arbitration clause has the same analysis and finding that I previously blogged about in, Surplus Lines Carriers Select Arbitration and Choice of Law in New York to Pay Less Coverage and Less on Claims. My blog post indicated that these arbitration agreements in far-away places and applying foreign law were being upheld by the courts, and were bad for policyholders:

There is nothing favorable for a non-New York policyholder to have an arbitration clause requiring arbitration in New York. It is even worse for coverage when New York is the designated law to be applied. This is the type of “cheap” insurance professional insurance agents should refuse to sell and strongly advise against purchasing if they are looking out for their customer.

Did the Texas federal court find the following argument persuasive?

Plaintiff argues that the Policy’s arbitration agreement is unconscionable and therefore null and void because its provision that ‘the Arbitration Tribunal shall consist of persons employed or engaged in a senior position in Insurance underwriting or claims’ guarantees a biased decisionmaker, and because it applies New York Law and precludes the award of exemplary, punitive, and other damages permitted under Texas law.

No. The court sent the matter to arbitration. Similar to other courts, the Texas federal judge found that federal law supersedes state law and a treaty was signed compelling the arbitration.

It seems bizarre that insurance agents sell their customers these policies. If professional insurance agents have any backbone at all for their customers interests, they should collectively be speaking out against such policy provisions, boycotting those wholesale brokers that sell the policies and seeking federal laws preventing this practice. I have had a number of agents privately tell me they did not even know the polices they sold had these provisions, but insurance agent associations should take a more proactive stance for their customers against these clauses.

A choice of law provision simply says another state law will apply. Every state “choice of law” analysis is a little different and these often require the most complex legal analysis any lawyer will ever face because some tests are so vague. For example, an excellent article2 about a Texas choice of law provisions found in insurance contracts, states the following:

If the suit involves an insurance contract payable to a Texan by an insurer doing business in Texas, you must consider article 21.42 of the Texas Insurance Code. That statute provides:

Art. 21.42. Texas Laws Govern Policies

Any contract of insurance payable to any citizen or inhabitant of this state by any insurance company or corporation doing business within this state shall be held to be a contract made and entered into under and by virtue of the laws of this state relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed and the premiums and policy (in case it becomes a demand) should be payable without this State, or at the home office of the company or corporation issuing the same. Tex. Ins. Code Ann. art. 21.42. As the heading and text make clear, if the statute applies, Texas law governs the policy.

For the statute to apply, courts have identified three requirements:

(1) the insurance proceeds are payable to a citizen or inhabitant of Texas;
(2) the policy is issued by an insurer doing business in Texas; and
(3) the policy must be issued in the course of the insurance company’s Texas business….

Courts construe article 21.42 narrowly to avoid giving it extraterritorial effect….So, for example, Kansas law applied to a policy issued and paid for in Kansas and insuring property there, even though the insured was a Texan. Austin Bldg. Co. v. Natl. Union Fire Ins. Co., 432 S.W.2d 697, 700-01 (Tex. 1968).

Also, the statute applies only when the Texas citizen is the insured that is subject to the suit. The fact that other insureds might be Texas residents does not suffice…..For example, in Scottsdale Ins. Co. v. Nat’l Emerg. Svc’s, Inc., 175 S.W.3d 284, 292-93 (Tex. App.–Houston [1st Dist.] 2004, pet. denied), the statute did not apply where the insured entity was foreign, even though it had Texas affiliates, some of whom might receive part of the proceeds.

To the extent the statute does not apply, a court will consider which state has the most significant relationship.

So, what are the lessons from this post?

First, read the policy to see if it requires another state law other than the one where the loss occurred to apply.

Second, read the policy to see if it requires arbitration. If either of these apply, I would strongly encourage those to get a legal opinion about how to treat the adjustment of the claim and educate the policyholder about the legal rights and implications from these draconian clauses.

Regarding insurance agents, the photo above is of my client David Khalaj taken at Last week’s Win The Storm Conference. I wanted him to see my new book, Pay Up! Chapter 10 of the book has suggestions about finding a great insurance agent a policyholder can trust.

I represented David on two different losses. He switched agents between the two and his second loss with Chubb was a pleasure to work with his agent and adjuster. There was no need for litigation. David was a satisfied customer who tells everybody about the great job Chubb did with his claim. He cannot say anything about the first claim because of confidentiality settlement requirements.

Thought For The Day

We have to do a better job of putting some rules on the insurance companies.
—Amy Klobuchar
1 Bhandara Family Trust v. Underwriters at Lloyd’s, London, No. 19-968 (S.D. Tex. Feb. 20, 2020).
2 Choice of Law: How It Impacts Coverage and Surrounding Litigation, Mark L. Kincaid, Univ. of Texas School of Law 17th Annual Insurance Law Institute, October 18-19, 2012.