To Arbitrate or Not: Fifth Circuit Looks to the Supreme Court
Insurance Law Update
In Todd v. Steamship Mut. Underwriting Ass'n, ___ F.3d ___, 2010 WL 969795 (5th Cir. (La.) March 18, 2010), the Fifth Circuit Court of Appeals held that a recent decision of the U.S. Supreme Court may permit an insurer to compel arbitration in a direct action by a claimant against an insured pursuant to a clause in the insurance policy requiring the insured to arbitrate claims against the insurer.
The district court denied insurer Steamship Mutual Underwriting Association's motion to stay an action filed by a claimant against an insolvent insured filed pursuant to Louisiana's "direct action" statute, which permits injured individuals to proceed directly against insurers when an insured tortfeasor is insolvent. Steamship sought to compel the claimant to arbitrate the claim pursuant to the terms of the applicable policy, which required arbitration of disputes pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The district court ruled that, under Fifth Circuit case precedent, federal arbitration law did not apply to nonsignatories to arbitration agreements and, thus, nonsignatories could not be compelled to arbitrate.
Turning to the U.S. Supreme Court's decision in Arthur Andersen LLP v. Carlisle, 129 S.Ct. 1896 (2009), which was decided after the district court's denial of Steamship's motion, the Fifth Circuit held that nonsignatories to arbitration agreements (such as direct action plaintiffs) may in some instances be compelled to arbitrate. The Fifth Circuit reasoned that Carlisle effectively overruled other Fifth Circuit decisions upon which the district court based its decision, and therefore remanded the matter to the district court for further consideration of whether the claimant seeking recovery against Steamship's insolvent insured could be compelled to enter arbitration as a third-party beneficiary to the insurance contract.