The Washington Supreme Court has ruled that the Federal Arbitration Act (FAA) does not preempt a state statute that prohibits binding arbitration agreements in insurance contracts.
In response to an insurance company’s motion to compel arbitration of a coverage dispute based on arbitration agreements in two insurance policies, the insured party sought to have the agreements voided. In its decision in State of Washington Department of Transportation v. James River Insurance Company, the court held that the arbitration agreements were rendered unenforceable by a provision in Washington law that prohibits insurance contracts from “depriving the courts of [Washington] of the jurisdiction of action against the insurer.”
Rejecting the insurer’s argument that the FAA preempted the Washington prohibition, the court held that the state law was shielded from preemption by the McCarran-Ferguson Act. This law provides that federal law may not invalidate a state law enacted “for the purpose of regulating the business of insurance” unless the federal law in question “specifically relates to the business of insurance.” The court held that the Washington prohibition 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.”
Central to the Washington court’s ruling was its analysis of whether the state statute in question was enacted “for the purpose of regulating the business of insurance" within the meaning of the McCarran-Ferguson Act. Although the U.S. Supreme Court has identified certain criteria that help determine whether a state statute regulates the "business of insurance," the application of those standards necessarily differs from state to state, and from statute to statute.