Texas, Insurance Contracts, and Foreign Forum Selection Clauses
January 23, 2024
A pair of recent Fifth Circuit cases — both involving damage to yachts — suggest that that court will enforce foreign forum selection clauses even when they appear in insurance contracts. This post first describes these cases. It then queries whether enforcing foreign forum selection clauses against Texas policyholders is, in fact, consistent with the policy preferences of the Texas state legislature.
Noble House, L.L.C. v. Certain Underwriters at Lloyd’s, London
In Noble House, L.L.C. v. Certain Underwriters at Lloyd’s, London, Noble House, LLC (Noble), an LLC organized under the laws of the Marshall Islands, purchased a maritime insurance policy on a yacht from Lloyd’s of London (Lloyd’s), an insurance company based in the United Kingdom, through a Texas-based broker. The policy contained an exclusive forum selection clause choosing the courts of England. A cover note attached to the policy contained a different forum selection clause whereby Lloyd’s consented to jurisdiction in any U.S. court of competent jurisdiction.
After the yacht was damaged in the Bahamas, and Noble informed Lloyd’s of the accident, Lloyd’s sent a letter to Noble informing that “coverage may not exist.” Noble then sued Lloyd’s in federal court in Florida. That suit was dismissed without prejudice for lack of personal jurisdiction. Noble then refiled in federal court in Texas. The judge invoked the exclusive English forum selection clause and dismissed the case on the basis of forum non conveniens. Noble appealed to the Fifth Circuit.
On appeal, Noble advanced two arguments. First, it argued that if it were required to litigate in England, it would be “deprived of its day in court due to a shortened statute of limitation in England that would be invalid under Texas law.” Second, it argued that enforcing the clause would violate Texas public policy under Section 982.305 of the Texas Insurance Code, which provides that “[a]n action involving a contract entered into in this state between a foreign or alien insurance company and a resident of this state may not be brought in or transferred to a court in another state without the consent of the resident of this state.” The Fifth Circuit rejected both arguments.
With respect to the statute-of-limitations argument, the court cited prior precedent in support of the rule that the mere fact that an “action may be time-barred in the chosen forum does not make a forum-selection clause unreasonable.” The court noted that Noble House had offered “no compelling reason justifying its filing in Texas or why its action could not be filed timely in the foreign fora. Its violation of the clause should not be rewarded. It occasioned its own predicament by failing to timely file its claim in the contractually specified forum.” In theory, Noble might have argued that its failure to timely file its claim in England was attributable to confusion arising from the conflicting forum selection clauses in the policy and its cover note. In fact, Noble apparently waived this argument by failing to raise it on appeal.
With respect to the public policy argument, the Fifth Circuit’s analysis was less persuasive. On its face, Section 982.305 suggests that the Texas legislature wanted to protect Texas residents from being forced to litigate insurance disputes against foreign insurers outside of Texas. There is an argument, however, that the English forum selection clause provides the necessary “consent” to permit the transfer of the case to England under the plain language of the statute. And the Fifth Circuit might have pointed out that the statute was inapplicable because neither Noble nor its sole managing member was a resident of Texas. The court did neither of these things.
Instead, it cited the strong presumption in favor of enforcing forum selection clauses. It invoked The Bremen for the proposition that it would be “parochial” not to enforce the clause. And it faulted Noble for failing to “cite a case where enforcement of a forum-selection clause contravened state public policy.” In the final analysis, one is left with the distinct impression that although the court probably reached the correct result in this case, it ignored the possibility that public policy might bar enforcement in other cases. Indeed, the Fifth Circuit’s broad reasoning calls into question whether there is any set of facts where a foreign forum selection clause would not be enforced.
Eads v. Spheric Assurance Company
In Eads v. Spheric Assurance Company, Ralph Eads (Eads), a resident of Texas, purchased a maritime insurance policy on his yacht from Spheric Assurance Company (Spheric), a company incorporated in the British Virgin Islands (BVI). The policy stipulated that it would be “governed by and construed in accordance with the laws of the British Virgin Islands and each party agrees to submit to the exclusive jurisdiction of the Courts of the British Virgin Islands.” After the yacht was destroyed by fire, Eads filed a claim with Spheric. The claim was denied. Eads then filed a lawsuit against Spheric in Texas state court. The insurer first removed the case to federal court. It then moved to dismiss for forum non conveniens based on the BVI forum selection clause. The district court granted the motion. Eads appealed to the Fifth Circuit.
On appeal, Eads argued that Texas public policy forbade the enforcement of a forum selection clause choosing a jurisdiction with less favorable insurance laws. The Texas legislature had enacted a number of laws intended to regulate foreign insurers in their dealings with policyholders in Texas, so the argument went, and these laws would be rendered toothless if foreign insurers could evade them by writing foreign forum selection clauses and choice-of-law clauses into their policies. Eads argued that the state and federal courts in Texas should refuse to enforce forum selection clauses whenever the courts chosen in these clauses were likely to apply insurance laws that were less protective of policyholders than those enacted by Texas.
To advance this argument, Eads submitted an expert declaration from a BVI lawyer stating that the lawsuit would face a “grim legal future” if it had to be brought in the BVI. If the Fifth Circuit had accepted Eads’s argument, this declaration probably would have been enough to invalidate the clause. It did not accept this argument. Instead, it cited Noble House for the proposition that foreign forum selection clauses should be enforced even when they “relegate the plaintiff to a dead-end forum.”
It is useful to pause for a moment to consider this statement. The Fifth Circuit was saying, in effect, that foreign insurers may deprive Texas residents of every protection conferred by the Texas Insurance Code by writing a foreign forum selection clause and a foreign choice-of-law clause into their contracts. Even when a policy selects a body of law under which the policyholder has absolutely no recourse against the insurer, the forum selection clause selecting the courts of that jurisdiction should be given effect. Although the Eads court suggested that this conclusion was compelled by the prior panel decision in Noble House, this is not so. In Noble House, the plaintiff was responsible for its own predicament because it had failed “to timely file its claim in the contractually specified forum.” That was not true in Eads, where there was no issue with the statute of limitations. The issue in Eads was that the policyholder was guaranteed to lose if it was litigated in the BVI under BVI law. The Fifth Circuit held that this was a distinction without a difference.
In many states, the legislatures have enacted statutes expressly stating that forum selection clauses choosing courts in other states are void when written into insurance contracts. The Texas legislature has yet to enact a similar statute. It has, however, enacted a constellation of other laws – including but not limited to Sections 21.42, 982.303, and 982.305 of the Texas Insurance Code – that suggest that it favors this policy outcome. But there is no law expressly voiding outbound forum selection clauses in insurance contracts. Until a statute declaring these provisions to be void (not voidable!) is enacted, the Fifth Circuit seems likely to continue to enforce forum selection clauses selecting the courts of foreign countries in insurance contracts even when enforcement deprives Texas policyholders of any recourse against their insurer.