A May 8 decision from the US Court of Appeals for the Second Circuit has cleared a legal path for insurers to enforce arbitration clauses in surplus lines policies - even in states like Louisiana that prohibit them.
The case stemmed from disputes over insurance coverage for two commercial properties in Louisiana that were damaged during Hurricane Ida in August 2021. After the storm, the properties were sold to new owners - 3131 Veterans Blvd LLC and Mpire Properties LLC - who took over the rights under the existing insurance policies. The policies, issued by a group of surplus lines insurers including Lloyd’s of London, Indian Harbor Insurance, and QBE Specialty Insurance, contained arbitration clauses requiring that any disputes be resolved in New York.
When the new owners sought payouts for the hurricane damage, they alleged the insurers offered significantly less than needed for repairs. They took their claims to Louisiana state court. In turn, the insurers filed in federal court in New York, seeking to compel arbitration under the policies and invoking both the Federal Arbitration Act and the New York Convention - a treaty the US signed in 1958 that governs international arbitration agreements.
The key complication: Louisiana law prohibits arbitration clauses in insurance contracts. Two federal judges in New York sided with the policyholders, citing a 1995 Second Circuit precedent (Stephens v. American International Insurance) that held the New York Convention’s arbitration rules could be “reverse-preempted” by state insurance laws under the McCarran-Ferguson Act.
But the Second Circuit reversed course in its May 8 decision. Writing for the three-judge panel, Judge Gerard Lynch said that the court's earlier view had been undermined by a 2008 Supreme Court decision (Medellín v. Texas) which changed how courts evaluate whether treaty provisions are automatically enforceable.
According to the Second Circuit, Article II Section 3 of the New York Convention - which states that courts “shall refer” disputes to arbitration unless the agreement is invalid - is what lawyers call “self-executing.” That means it’s binding in US courts without needing any new legislation from Congress. And because of that, the court said, it cannot be overridden by state laws like Louisiana’s.
In doing so, the court officially tossed aside its prior precedent in Stephens, holding that it had applied the wrong legal standard. The judges emphasized that the language of the arbitration clause in these surplus lines policies—covering “all matters in difference... including [the policy’s] formation and validity,” with New York as the seat of arbitration and New York law governing - fell squarely within what the New York Convention was designed to protect.
The decision also acknowledged that Louisiana courts, including the Louisiana Supreme Court, have consistently maintained a hard stance against arbitration in insurance contracts. A 2024 decision from that court reaffirmed that such clauses are unenforceable under state law - even in surplus lines policies. But the Second Circuit said that’s beside the point when it comes to international treaty obligations.
The court remanded the cases to the district courts for further proceedings, but with a clear directive: the arbitration clauses are valid and enforceable, and the disputes can be sent to arbitration in New York.
For insurers operating in high-risk markets like Louisiana, where surplus lines policies are often used to cover hurricane-related losses, the ruling delivers certainty. It confirms that well-drafted arbitration provisions in cross-border contracts can stand up - even in jurisdictions that try to prohibit them.
While the underlying coverage disputes remain unresolved, the court’s May 8 decision offers a critical legal win for insurers. It signals that in surplus lines disputes with international elements, arbitration clauses carry real legal weight - even in the face of state laws that say otherwise.