Arbitration clauses primarily found in surplus lines policies with a choice of law provision generally selecting New York law and a shortened statute of limitations are a trap for unwary public adjusters and attorneys. A recent federal appellate court case upheld such a clause despite a state law making it illegal. The holding of the case suggests just how complicated of a legal issue this is:

This appeal presents an issue of first impression in this circuit that lies at the intersection of international, federal, and state law: whether the McCarran-Ferguson Act, 15 U.S.C. §§ 1011–15, allows a Washington statute to reverse-preempt the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a multilateral treaty. We conclude that the relevant provision of the Convention is self-executing, and therefore not an “Act of Congress” subject to reverse-preemption by the McCarran-Ferguson Act. Accordingly, we affirm the district court’s order compelling arbitration.1

Treaties and international law are not what most public adjusters are thinking about while waiting forever for payment and adjustment from Lloyds or another foreign surplus lines carrier for payment. The very crucial bottom-line lesson from this blog is to check the policy carefully to see if there is a provision requiring arbitration. If so, does the policy have a provision changing the state law to another state? If the answer is “yes” to those issues, arbitration will apply, and the other state law will apply.

Knowing that this blog is read by many who are intellectually curious—also called by the ignorant as “nerdy”—Merlin Law Group’s Knowledge Manager Ruck DeMinico tracked down the treaty that causes this bizarre legal result. President Richard “Tricky Dick” Nixon is the person to blame for this outcome. While Lloyd’s claims managers in London may raise a pint to his memory, American policyholders are now feeling the brunt of this treaty long after he has left.

The opinion cited above means that if you are in this situation, your case can be forced into arbitration far away from the wherever the loss happened. The policyholder consumer protections of a particular state will not apply. In many cases, you have to be concerned with a shortened statute of limitations. The analysis of the loss and valuation will be determined by another state law. Arbitration rather than appraisal or court litigation will be the method of dispute resolution.

I expect that this trend of arbitration will be an increasing movement with surplus lines carriers. This means that with every surplus lines property insurance policy, carefully ask the question if it has an arbitration and a choice of law provision because your entire analysis of how to handle the claim will change from the very first notice of loss issue.

I warned about this trend in Surplus Lines Carriers Select Arbitration and Choice of Law in New York to Pay Less Coverage and Less on Claims. I provided examples about why insurance agents are doing their clients such a disservice by selling policies with these provisions:

Off the top of my head, I noted some pretty obvious examples of how these clauses give a lot of practical leverage to the insurer:

1. Arbitration in New York is a lot more expensive for the policyholder. It is not an appraisal.

2. Arbitration is a formal process requirement that includes attorneys. In this case, attorneys that will have to be licensed in New York rather than Florida.

3. Since the policyholder has to prove the damage, all the witnesses will have to attend the arbitration trial in New York or have their depositions taken in Florida. This is a cost and strategic advantage for the insurer.

4. The ability to show the Umpire the damaged property is not available since the arbitration is in New York.

5. New York law is generally a lot more conservative and less policyholder-friendly. I cannot think of one area of property insurance law which is more favorable in New York than Florida law as I write this.

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.”

I became a New York lawyer and opened our Red Bank office in 2012 following Superstorm Sandy. It looks like I will be visiting a lot more often because these clauses are increasingly being found in surplus lines policies.

I also would like to give a shout-out to United Policyholders and lawyers at Covington & Burling for their excellent amicus brief and fighting the good fight for policyholders against this result.

Thought For The Day

A man is not finished when he is defeated. He is finished when he quits.
—Richard M. Nixon
1 CLMS Management Services v. Amwins Brokerage of Georgia, 21 Cal. daily Op. Serv. 8158, — F.4th — (9th Cir. Aug. 12, 2021).