Home Page The Publication The Editor Contact Information Insurance Key issues Book Subscribe


Vol. 2, Iss. 23
December 18, 2013


Washington Supreme Court: Policy Arbitration Clauses Are Unenforceable
Insurers See Red – Insureds See Delicious
Washington Department of Transportation v. James River Ins. Co., No. 87644-4 (Wash. Jan. 17, 2013)


W.C. Fields once famously quipped: “All things considered, I’d rather be in arbitration.”

Insurance policies sometimes contain clauses requiring that any dispute under the policy be resolved by arbitration. Given the complexity and uniqueness of every case in litigation, it certainly cannot be said that insurers will fare better, in every case, if arbitration is the method of resolution. But, all things considered, insurers generally prefer arbitration over the traditional judicial system.

But some states have statutes that purport to prevent insurers from requiring that a dispute under a policy be resolved by arbitration. Washington is one such state. How many states have statutes to this effect is unclear, but apparently at least one-third. The Washington DOT’s brief in Washington Department of Transportation v. James River Ins. Co. (kindly sent to me by the Washington Attorney General involved), discussed herein, cited a 2005 Connecticut Insurance Law Journal article, stating that nearly one-third of states have provisions prohibiting binding arbitration of insurance disputes. However, a Law360 article reporting on Washington DOT cited an attorney who stated that around 26 states place a restriction of some type on the enforcement of arbitration clauses. It is possible that these two sources are using different definitions of what is a restriction on the enforcement of an arbitration clause. Thus, they may both be correct. But the point is that Washington is not an outlier by having the arbitration prohibition statute that it does.

In Washington Department of Transportation v. James River Ins. Co., the Washington Supreme Court held that a state statute made an arbitration provision in an insurance policy unenforceable. The case involved a dispute whether James River owed coverage to the Washington DOT, as an additional insured, under policies issued to a company performing work on a highway project. James River attempted to initiate an arbitration proceeding against the DOT pursuant to a binding arbitration provision in the policies. The DOT filed an action seeking a declaration that the arbitration clauses were void.

The issue that ultimately made its way to the Washington Supreme Court was whether a Washington statute rendered the arbitration requirement in the policies void. The statute provided, in relevant part, as follows: “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 (b) depriving the courts of this state of the jurisdiction of action against the insurer[.]”

In general, the parties’ competing arguments, centered around the meaning of the term “jurisdiction” contained in a nearly 100 year old statute. The DOT argued that “the legislature intended to prohibit mandatory binding arbitration clauses in insurance contracts because such agreements deprive Washington policyholders of the right to bring an original action against the insurer in the courts of this state.” Alternatively, James River argued that the statute “is a forum selection provision” and “the legislature intended to prohibit forum selection clauses in insurance contracts that designate a forum outside the state as the sole forum for actions against the insurer because such agreements deprive Washington policyholders of the right to bring an action against the insurer in the courts of this state.” Putting aside how it got there, the Washington high court held that the statute is “properly interpreted as a prohibition on binding arbitration agreements.”

Having concluded that the statute prohibits binding arbitration agreements in insurance policies, the court was required to examine a second issue: whether the McCarran–Ferguson Act shielded the statute from preemption by the Federal Arbitration Act. The court described the issue as follows: “Generally, when a state enacts a statute of general applicability prohibiting arbitration agreements, the statute may be inconsistent with the FAA, and if so, the FAA arguably preempts that state law. 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.” The court held that, because the Washington statute regulated the “business of insurance,” the McCarran–Ferguson Act shielded it from preemption by the FAA.

Incidentally, the 2005 Connecticut Insurance Law Journal article, that is cited in the DOT’s brief in James River, stated that the provisions prohibiting binding arbitration of insurance disputes come in two types: arbitration acts that provide that arbitration agreements are valid, enforceable and irrevocable, but specifically exempt insurance contracts from their scope; and insurance codes that provide that insurance policies issued or delivered in the state may not contain any provision that deprives the state’s courts of jurisdiction against the insurer (the type in James River).

I was on the fence about including James River as one of the year’s ten most significant coverage cases. Such statutes are not unique to Washington, lots of courts have addressed the same issues as James River and most reach the same conclusion. But James River was from a state supreme court and very few of the existing cases are. James River arose in the context of a commercial general liability policy and most of the existing cases do not. Lastly, I took an informal, and far from scientific, survey of folks that have significance experience in the general and professional liability arenas. Many were unaware of the issues addressed in James River, especially the impact of the McCarran–Ferguson aspect. Lastly, albeit this is anecdotal, I have started to see an increase in the inclusion of arbitration requirements for dispute resolution in liability policies. For all of these reasons, James River was selected as one of the year’s ten most significant coverage cases as it put a spotlight on what may be an unfamiliar issue that arose in the context of a common liability claim scenario. If the arbitration enforceability issue arises in a liability claim scenario, James River is more likely than the others to be the go-to case for guidance.

 
 
Website by Balderrama Design Copyright Randy Maniloff All Rights Reserved