In Washington State Department of Transportation v. James River Insurance Company, Wash. No. 87644-4 (January 17, 2013), the Washington Supreme Court declared binding arbitration agreements in insurance contracts void and unenforceable. The court explained that binding arbitration frustrates legislative intent to protect Washington policyholders' rights to sue insurers in Washington courts for coverage disputes over subjects located, resident or to be performed in Washington.
Background Facts
James River Insurance Company issued two surplus lines insurance policies - one primary and one excess - that provided certain coverages related to a highway project. The Washington State Department of Transportation (WSDOT) was an insured on the policies.
The policies contained the following language:
Binding Arbitration Should we and the insured disagree as to the rights and obligations owed by us under this policy, including the effect of any applicable statutes or common law upon the contractual obligations otherwise owed, either party may make a written demand that the dispute be subjected to binding arbitration.
Following a traffic accident, WSDOT and others were sued. James River accepted WSDOT's tender under a reservation of rights and demanded arbitration. WSDOT objected and filed suit against James River, requesting the court declare the arbitration clauses void. James River moved to compel arbitration. The trial court agreed with WSDOT, and it declared the arbitration clauses void. The Washington Supreme Court granted direct review and affirmed.
Enforceability of the Arbitration Clauses
Although there were several arguments raised, including the reasons arbitration is preferable to litigation, the court addressed only two issues: (1) whether the arbitration clauses are unenforceable under a Washington statute, RCW 48.18.200; and (2) whether RCW 48.18.200 is preempted by federal law.
First, RCW 48.18.200 provides:
(1) No insurance contract delivered or issued for delivery in this state and covering subjects located, resident, or to be performed in this state, shall contain any condition, stipulation, or agreement
(a) requiring it to be construed according to the laws of any other state or country except as necessary to meet the requirements of the motor vehicle financial responsibility laws of such other state or country; or
(b) depriving the courts of this state of the jurisdiction of action against the insurer; or
(c) limiting right of action against the insurer to a period of less than one year from the time when the cause of action accrues in connection with all insurances other than property and marine and transportation insurances. In contracts of property insurance, or of marine and transportation insurance, such limitation shall not be to a period of less than one year from the date of the loss.
(2) Any such condition, stipulation, or agreement in violation of this section shall be void, but such voiding shall not affect the validity of the other provisions of the contract.
The court concluded that, unless the legislature specifically provides otherwise, RCW 48.18.200(1)(b) prohibits binding arbitration agreements in insurance contracts. In reaching its decision, the court cited the legislative intent to provide Washington policyholders with the protection of Washington law in Washington's courts.
Second, the court then considered whether RCW 48.18.200 is preempted by federal law. The court recognized the general rule that state statutes prohibiting arbitration agreements are inconsistent with and therefore preempted by the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-14. Even so, the court relied on an exception to this general rule for state statutes enacted "for the purpose of regulating the business of insurance" under the McCarran-Ferguson Act, 15 U.S.C. § 1012. The court stated that RCW 48.18.200 regulates the "business of insurance ... because it is aimed at protecting the performance of an insurance contract by ensuring the right of the policyholder to bring an action in state court to enforce the contract." Therefore, the court concluded that federal law did not preempt the state statute.
Conclusion
The Washington Supreme Court's holding in James River mandates that disputes regarding each "insurance contract delivered or issued for delivery in [Washington] state and covering subjects located, resident, or to be performed in [Washington] state" be resolved in Washington's state and federal courts. If an insurance contract was delivered in another state or if the insurance contract covers subjects located in other states, it is possible another state's law may apply. If so, insurers should consider consulting non-Washington laws that address the enforceability of binding arbitration clauses. In addition, as the James River analysis focused strictly on the interpretation of the underlying legislative intent of RCW 48.18.200(1)(b), the court did not limit the rights of policyholders and insurers to resolve their disputes in flexible, expeditious and less expensive arbitration proceedings as permitted by other statutes.
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