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January 2013

State of Washington Department of Transportation v. James River Insurance Company ? Binding Arbitration Provisions in Insurance Policies are Unenforceable in Washington

(January 17, 2013) __ Wn.2d __

The Washington Supreme Court affirmed a trial court’s ruling against an insurer holding that binding arbitration agreements are unenforceable in insurance contracts in Washington.  The insured argued that RCW 48.18.200(1)(b) precludes enforcement of such clauses, as the statute prohibits insurance contracts from “depriving [Washington] courts … of the jurisdiction of action against the insurer.”  Further, RCW 48.15.150(1) provides that an “unauthorized insurer must be sued in the superior court of the county in which the cause of action arose.”  The insured also argued that these sections are not preempted by the Federal Arbitration Act, 9 U.S.C. §§ 1-14 (“FAA”).  The trial court agreed and denied the insurer’s motion to compel arbitration, and the Washington Supreme Court affirmed.

James River Insurance Company (“James River”) issued two “surplus lines” policies to a contractor relating to its work on a highway project for the Washington State Department of Transportation (“WSDOT”).  WSDOT was added as an insured on the policies.

This insurance litigation arose from a serious traffic accident near the project in 2009.  The accident resulted in claims against WSDOT and the contractor.  WSDOT tendered the claim to James River, which agreed to defend under a reservation of rights.  James River informed WSDOT that the policies included mandatory arbitration provisions and later attempted to initiate arbitration relating to a coverage dispute.  WSDOT objected and filed an action seeking a determination that the arbitration provisions in the policies were void.  James River and WSDOT filed motions for an order compelling or barring the arbitration, respectively.

The trial court granted WSDOT's motion and denied James River’s motion.  The court held that RCW 48.18.200 and RCW 48.15.150 bar application of the arbitration clause in the policies.  The court further held these statutes are not preempted by the FAA.  James River appealed, and the Washington Supreme Court granted direct review.

RCW 48.18.200 provides that no insurance policy delivered in Washington and “covering subjects located, resident, or to be performed” in Washington shall contain a provision “depriving the courts of this state of the jurisdiction of action against the insurer….”  WSDOT argued this is an anti-arbitration statute prohibiting mandatory binding arbitration provisions which would deprive Washington policyholders the right to bring an action against an insurer in state court.  However, in James River’s view, the reference to “jurisdiction” in the statute only addresses forum selection and is intended to prohibit insurers from designating a state other than Washington as the sole forum for an action against the insurer.

The Supreme Court agreed with WSDOT.  The court reasoned that the phrase “jurisdiction of action against the insurer” refers to a policyholder’s right to bring an “original action” in Washington.  The phrase indicates the legislature’s intent to protect the right of policyholders to bring an action in state court for a determination of the substance of an insurance dispute under Washington law.  A special proceeding to confirm an arbitration award, for example, is not an “original action” on the merits in state court.  The court concluded that, unless the legislature provides otherwise, RCW 48.18.200(1)(b) is a prohibition on binding arbitration agreements in Washington.  Under the circumstances, it was unnecessary for the Court to determine whether RCW 48.15.150 prohibits arbitration agreements. 

The Court then considered possible preemption.  The FAA arguably preempts inconsistent state laws prohibiting arbitration agreements.  Nevertheless, the McCarran-Ferguson Act, 15 U.S.C. § 1012, provides that “[n]o act of Congress shall be construed to invalidate, impair, or supersede” any state law enacted “for the purpose of regulating the business of insurance” (unless the federal law at issue expressly relates to insurance).  This is an exception to the general rule of preemption.  The Court concluded that the intent of RCW 48.18.200(1)(b) is to ensure the right to sue one’s insurer in state court and thus to “protect the performance of an insurance contract” in Washington.  The statute regulates the “business of insurance,” and thus the McCarran-Ferguson Act shields RCW 48.18.200(1)(b) from preemption by the FAA.

Accordingly, the Supreme Court affirmed the trial court’s order denying James River’s motion to compel arbitration. 

Please click here for the opinion.

This opinion is not final.  It may be withdrawn from publication or modified on rehearing.  These events would render the opinion unavailable for use as legal authority in Washington state courts.

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