Second Circuit Rules Lloyd’s Arbitration Clause Overrides Louisiana Insurance Law

In a recent decision, the U.S. Court of Appeals for the Second Circuit ruled that arbitration clauses in surplus lines insurance policies issued by foreign insurers, such as Lloyd’s of London, are enforceable under federal law—even when they conflict with Louisiana’s state laws.

Background of the Case

The ruling arose from a dispute between 3501 N. Causeway Associates, LLC and Certain Underwriters at Lloyd’s London. The plaintiff argued that the arbitration clause in their insurance policy was invalid under Louisiana Revised Statute § 22:868(A)(2), which generally prohibits mandatory arbitration in insurance contracts issued in the state.

However, the Second Circuit held that this state law could not override federal treaty obligations, specifically those under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention).

Federal Law Supersedes State Law

The Second Circuit determined that the New York Convention, an international treaty that the U.S. is a party to, requires courts to enforce arbitration clauses in qualifying international contracts. Since the treaty holds the same weight as federal law, it takes precedence over any conflicting state statute, including Louisiana’s prohibition against such clauses.

This reasoning echoes the Fifth Circuit’s earlier decision in Bufkin Enterprises, where the court found that the McCarran-Ferguson Act—which protects state insurance laws—does not reverse-preempt federal treaties.

Conflict with Louisiana Supreme Court

This federal interpretation differs from the stance of the Louisiana Supreme Court. In a previous case, the state court held that arbitration clauses in surplus lines policies were unenforceable because they undermined Louisiana’s public policy and denied policyholders access to local courts.

As a result, there is now a clear divide between how state and federal courts interpret and apply arbitration clauses in insurance contracts.

Implications for Insurers and Policyholders

The Second Circuit’s decision creates an avenue for insurers to enforce arbitration provisions in surplus lines policies through federal courts. However, policyholders may face uncertainty, as state courts may refuse to recognize these clauses.

Until further clarification—possibly from the U.S. Supreme Court—insurers and policyholders must navigate this legal gray area with caution, particularly in jurisdictions like Louisiana where state and federal interpretations conflict.