Eastern District Declines to Invalidate Arbitration Provision in Harvey Coverage Litigation

April 13th, 2019 By Catherine Hanna

In recent litigation arising out of Hurricane Harvey damage, Eastern District Magistrate Judge Zack Hawthorn has recommended that the District Court enforce an arbitration provision in a commercial property insurance policy issued to Southwest LTC-Management Services, LLC.  Doc. #16, Report and Recommendation, Southwest LTC-Management Service, LLC v. Lexington Ins. Co. et al., No.1:18-CV-00491-MAC (E.D. Tex., March 29, 2019). Plaintiff filed suit in state court requesting $8,400,000 in damages to its Port Arthur property. After removing the case to federal court, the defendants moved to compel arbitration and stay litigation.

Plaintiffs argued that they shouldn’t be forced to arbitration, since an endorsement to the policy regarding the proper procedure for service of suit contradicted the arbitration agreement within the body of the policy. Because the arbitration clause already contained language explaining the proper method of enforcement, Plaintiffs argued, the enforcement provision in the service of suit endorsement effectively superseded the provision in the arbitration clause. In light of this conflict between the arbitration enforcement mechanism and the enforcement mechanism in the service of suit endorsement, the clauses could not be reconciled and the arbitration provision should not be enforced.

The court declined to adopt this logic. The court noted that arbitration provisions are generally favored, and that the only relevant questions were: (1) whether there was an enforceable arbitration provision, and (2) whether that provision was, as a matter of law, null, void, or otherwise inoperative or incapable of being performed. Waiver of contractual arbitration agreements must be clear and unequivocal. The court agreed with Defendants that the service of suit provision in the endorsement did not conflict with the arbitration provision; both enforcement mechanisms could be invoked if, for example, the parties opted out of arbitration or if one of the parties sought to enforce the arbitration provision through the courts.

We are seeing more and more of our carrier clients including appraisal provisions in their policies. Courts generally enforce such provisions and we understand that the binding and final nature of arbitration awards is the appeal, but carriers should also keep in mind that putting their fate in the hands of a single arbitrator with very little possibility of judicial review can be risky.