Washington State Supreme Court Voids Mandatory Arbitration Clause in Insurance Contract

Last week, the Washington State Supreme Court ruled that a mandatory arbitration clause in an insurance contract was unenforceable under state law, and the state law was not preempted by the Federal Arbitration Act because of the McCarran-Ferguson Act.  In State of Wash. v. James River Ins. Co., Civ. No. 87644-4 (WA Sup. Ct. Jan. 17, 2013), a dispute over insurance coverage for the state of Washington’s Department of Transportation (following a car accident near a highway project), the high court affirmed the trial court’s denial of the insurance company’s motion to compel arbitration pursuant to the arbitration clause in the insurance contract.

The high court first held that Washington’s RCW 48.18.200(1)(b), which prohibits insurance contracts from “depriving the courts of this state of the jurisdiction of action against the insurer,” banned mandatory arbitration and thus voided the arbitration clause.  The Court reasoned that “this phrase demonstrates the legislature’s intent to protect the right of policyholders to bring an original “action against the insurer” in the courts of this state.”

Second, the court held that the FAA did not preempt the state statute because the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), shields the statutes from preemption by the FAA. That section provides, in pertinent part: “No act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance…”  The Washington Supreme Court concluded that RCW 48.18.200(1)(b) regulates the “business of insurance,” and thus section 1012(b) of the McCarran-Ferguson Act displaced (or “reverse preempted,” as the Court termed it) the Federal Arbitration Act in this context.

This case poses another example of courts resolving a conflict between the Federal Arbitration Act and another federal statute.  While the Supreme Court has made it clear that the FAA preempts state anti-arbitration laws very broadly, it has not had occasion recently to rule on a conflict between the FAA and another federal statutory scheme.  If this case makes its way up to the Supreme Court, the Court will have occasion to address this very important issue, one with ramifications for many other federally-regulated industries, such as the securities industry.

[H/T to George Friedman for alerting me to this decision.]

2 thoughts on “Washington State Supreme Court Voids Mandatory Arbitration Clause in Insurance Contract”

  1. The 4th Circuit, in ESAB Group, Inc. v. Zurich Ins. PLC, 685 F.3d 376 (4th Cir. 2012), similarly held that under S.C. law, the reverse preemption of the McCarran-Ferguson Act means that the state law prohibiting arbitration clauses in insurance contracts prevails. The ESAB Group case is even more complex because it involves an international angle.

  2. I should note that the ESAB Group case came out the other way because of the intersection of international law – but it did cite the South Carolina law regarding the reverse preemption. I apologize if my earlier comment was vague as to the outcome of the 4th Circuit decision.

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