A contract allocation endorsement just killed eight insurers' federal court strategy, ending a years-long hurricane claims dispute over surplus line policy structure.
After years of legal wrangling that zigzagged between state and federal courts, a hurricane damage dispute out of Louisiana has finally reached its conclusion – and it all came down to a few lines of fine print in the insurance policy.
The Fifth Circuit Court of Appeals ruled on January 27 that federal courts lack jurisdiction over the case, remanding it to the federal district court for further proceedings. The decision hinges on how surplus line policies are structured when multiple insurers share the risk.
The story begins in 2020, when Hurricanes Laura and Delta struck Calcasieu Parish in Louisiana. The Police Jury of Calcasieu Parish had purchased surplus line coverage from a mix of foreign and domestic insurers. When the Parish filed claims and the insurers allegedly failed to compensate the Parish, they sued in state court.
But here's where it gets interesting. The Parish quickly dismissed the foreign insurers from the lawsuit with prejudice, leaving only the domestic carriers in the fight. Those remaining insurers – a group that included Indian Harbor Insurance Company, Lexington Insurance Company, QBE Specialty Insurance Company, and five others – then removed the case to federal court.
Their strategy relied on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an international treaty that gives federal courts jurisdiction over certain arbitration disputes involving foreign parties. The insurers sought to compel the Parish to arbitrate, arguing that even though the foreign insurers had been dismissed, they were still parties to the underlying agreement.
The case pinballed through the courts for years. It went up to the Fifth Circuit twice before, and even required the Louisiana Supreme Court to weigh in on state law questions.
What ultimately decided the matter was a provision in the policy called the Contract Allocation Endorsement. The language stated that the agreement "shall be construed as a separate contract between the Insured and each of the Underwriters."
Circuit Judge Stephen A. Higginson, writing for the panel, noted that a nearly identical case had just been decided. In Town of Vinton v. Indian Harbor Insurance Co., another town in Calcasieu Parish had the same policy language, the same hurricane damage, and faced the same litigation moves from insurers. The parties in the Police Jury case had even asked the court to wait for the Vinton decision before proceeding, knowing it would likely settle their dispute too.
The court interpreted the Contract Allocation Endorsement to mean exactly what it said: the policy wasn't one big contract, but rather separate individual contracts between the Parish and each insurer. Since the Parish had dismissed all the foreign insurers, there were no foreign parties left in any of the contracts still at issue. No foreign parties meant the Convention didn't apply. And without the Convention, the federal court had no jurisdiction.
The insurers had already conceded they couldn't rely on diversity jurisdiction because of timing issues with the removal, so that avenue was closed too.
The court also addressed whether equitable estoppel could save the insurers' argument. The Louisiana Supreme Court had made clear in its earlier ruling in this very case that Louisiana law precludes the use of estoppel to compel arbitration in this context, effectively countermanding an earlier Fifth Circuit decision in Bufkin Enterprise v. Indian Harbor Insurance Co. that had gone the other way.
The Fifth Circuit remanded the case to the district court on January 27 for consideration of pending motions consistent with the Vinton decision. The court also denied as moot both the Parish's motion for summary reversal and remand and the insurers' motion to stay.
For insurers writing surplus line business, the takeaway is straightforward. Contract allocation endorsements that create separate contracts with each carrier will be enforced as written. That structure can have significant consequences for where and how coverage disputes get resolved, especially when policies involve both foreign and domestic participants.
The decision also highlights a litigation strategy that policyholders might employ: dismissing foreign insurers early to knock out federal jurisdiction based on the Convention. For carriers, it's a reminder that policy structure matters long before a claim ever gets filed.
