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Washington Supreme Court Holds That Binding Arbitration Clauses in Insurance Contracts Are Unenforceable

02.15.13

Pamela L. Signorello

Brandon D. Almond

Leslie S. Ahari

Terrence R. McInnis

In an en banc decision issued on January 17, 2013, the Washington Supreme Court held that binding arbitration clauses in insurance contracts are unenforceable under a state statute, RCW 48.18.200(1)(b). The Court further held that the McCarran-Ferguson Act, 15 U.S.C. § 1012, shields the relevant state statute from preemption by the Federal Arbitration Act (FAA), a law that liberally allows the arbitration of legal disputes. See State of Washington, Department of Transportation v. James River Insurance Company, Case No. 87644-44 (Wash. Jan. 17, 2013).

 

James River Insurance Company issued two surplus line insurance policies that provided coverage for certain liability related to a highway project and included Washington State Department of Transportation (WSDOT) as an insured. The policies contained mandatory arbitration provisions, which permitted either party to demand that a coverage dispute be submitted to binding arbitration. During the policy period, a traffic accident occurred near the highway project, and representatives of the accident’s victims brought suit against WSDOT. WSDOT tendered its defense to the insurer, which accepted the tender under a reservation of rights. The insurer subsequently attempted to initiate arbitration of a coverage dispute with WSDOT pursuant to the binding arbitration clauses, but WSDOT objected and instituted litigation seeking to have the arbitration provisions declared void. 

 

The trial court held that the arbitration clauses were barred by RCW 48.18.200. The trial court further held that the relevant statute was not preempted by the FAA on account of “reverse preemption” under the McCarran-Ferguson Act. On appeal, the Washington Supreme Court affirmed.

 

RCW 48.18.200(1)(b) prohibits insurance contracts from “depriving the courts of this state of the jurisdiction of action against the insurer.” James River argued that because, under the “modern view of arbitration,” courts still have jurisdiction to adopt, modify, and enforce an arbitration award, arbitration agreements do not deprive courts of jurisdiction. According to James River, RCW 48.18.200 simply manifests the legislature’s intent to prohibit forum selection clauses in insurance contracts that designate a forum outside the state as the sole forum for actions against the insurer. WSDOT disagreed, arguing that the binding arbitration clauses violated RCW 48.18.200 because they deprived the court of full jurisdiction to determine the merits of the parties’ claims. 

 

The Washington Supreme Court agreed with WSDOT, reasoning that the phrase “jurisdiction of action against the insurer” demonstrates the legislature’s intent to protect the rights of policyholders to bring an original action against the insurer in court. The Court cited Price v. Farmers Ins. Co. of Wash., 133 Wn.2d 490 (1997), for the proposition that, in special proceedings to confirm arbitration awards, the court’s jurisdiction is limited, and “that is not the same as bringing an original action to obtain a monetary judgment.” According to the Court, “assuring the right to review the substance of disputes between insurers and insureds helps assure the protection of Washington law to Washington insureds as provided in RCW 48.18.200(1)(a).”

 

As a final matter, the Court held that the McCarran-Feguson Act shields RCW 48.18.200 from preemption by the FAA. Generally, when a state enacts a statute of general applicability prohibiting arbitration agreements, the statute may be inconsistent with, and thus preempted by, the FAA. However, there is an exception to this general rule when the state statute was enacted “for the purpose of regulating the business of insurance” within the meaning of the McCarran-Ferguson Act. On this point, the insurer argued that RCW 48.18.200 does not regulate the “business of insurance” because it is merely a choice of forum provision that does not concern the relationship between the insurer and the insured. However, the Court already had determined that RCW 48.18.200 was not a forum selection provision, and therefore concluded that the statute was aimed at protecting the performance of insurance contracts by ensuring the rights of policyholders to bring actions in state court to enforce such contracts. Thus, RCW 48.18.200 regulates “the business of insurance” and is shielded from preemption by the FAA under the McCarran-Ferguson Act.

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