Binding Arbitration Clauses in Insurance Policies Found Unenforceable in Washington
In State of Wash. Dep't of Transp. v. James River Ins. Co., No. 87644-4 (Wash. Jan. 17, 2013), the Washington Supreme Court recently determined that a state statute prohibits binding arbitration clauses in insurance policies. The decision arose out of an insurance coverage dispute between James River Insurance and one of its insureds, the Washington State Department of Transportation (the "Department"). The Department had been named as an insured by the contractor on a state highway project under the contractor's liability policy with James River Insurance. Following an automobile accident at the project location, representatives of those killed and injured in the accident sued the contractor as well as the Department. The Department tendered the defense of the suit to James River and James River accepted while reserving rights.
James River subsequently attempted to initiate arbitration against the Department pursuant to the binding arbitration provision of the policy. The Department objected to arbitration, and sought a declaration that the policy's binding arbitration provision was unenforceable. The trial court ruled that RCW 48.18.200(1)(b), which voids any insurance contract provision "depriving the courts of this state of the jurisdiction of action against the insurer," rendered the policy's arbitration clause void. The court further held that the Federal Arbitration Act (FAA) did not preempt this state statute based on “reverse preemption” under the McCarran-Ferguson Act.
On appeal, the Washington Supreme Court affirmed the trial court decision, holding that, among other intentions, RCW 48.18.200 protects the right of policyholders to bring an original “action against the insurer” in the courts of Washington state. Thus, RCW 48.18.200 is properly interpreted as a prohibition on binding arbitration provisions, such as the provision at issue in this case. The court also affirmed the trial court's holding that the FAA did not preempt RCW 48.18.200. Although the FAA generally preempts state law, there is an exception when the state statute was enacted “for the purpose of regulating the business of insurance” within the meaning of the McCarran-Ferguson Act. In finding that RCW 48.18.200 regulates the “business of insurance,” the court determined that the McCarran-Ferguson Act “reverse preempts” the FAA, shielding the statute from invalidation.