Most reinsurance contracts have binding arbitration provisions. The Federal Arbitration Act (FAA) sets out a national policy in favor of arbitration. Yet, there are states that expressly preclude arbitration provisions in insurance contracts. Does that apply to reinsurance contracts?
In Washington Cities Insurance Authority v. Ironshore Indemnity, Inc., No. 2:19-cv-0054-RAJ, 2020 U.S. Dist. LEXIS 39633 (W.D. Wash. Mar. 6, 2020), a public entities association organized for the purse of self-insuring risks and jointly purchasing insurance and reinsurance, purchased a reinsurance agreement that included an arbitration provision. A dispute arose concerning the settlement of a police misconduct lawsuit, which the cedent presented to the reinsurer for payment. The cedent commenced an action because of the reinsurer’s denial. The reinsurer moved to compel arbitration and the cedent moved to establish that the arbitration clause was void.
Washington, it turns out, is one of several minority states that have express provisions in their insurance laws that prohibit arbitration provisions in insurance agreements. RCW § 48.18.200 expressly provides that insurance contracts delivered or issued for delivery in Washington cannot contain a provision depriving the courts “of the jurisdiction of action against the insurer.” As the court noted, although the FAA would normally preempt a conflicting state law under the Supremacy Clause of the US Constitution, the McCarran-Ferguson Act creates a system of reverse preemption for state insurance law. The court cited examples of cases that hold, and noted that the parties did not appear to dispute, that under the McCarran-Ferguson Act, RCW § 48.18.200 preempts Chapter I of the FAA.
The court then articulated the dispute before it: (1) does reinsurance qualify as insurance and (2) does the anti-arbitration provision apply to reinsurance agreements where the reinsurance was purchased by a joint self-insurance program. The court concluded that the answer to both questions was yes.
The court examined the definition of insurance under Washington law, RCW § 48.01.040, and concluded that “reinsurance” comes within the definition of “insurance.” The court noted that both are contracts where one undertakes to indemnify the other or pay a specified amount upon determinable contingencies. The court found no basis to find that the reinsurance agreement did not fall within the definition of insurance. Moreover, the court noted that nothing in the statute’s text expressly excluded reinsurance and that a review of other sections showed that the legislature knew how to specifically exempt certain types of insurance from the section and to carve reinsurance out of other sections.
The court also concluded that the statute governing the joint self-insurance program that created the cedent did not contain any language saving arbitration provisions in reinsurance contracts purchased by the cedent. Although the statute suggested that the legislature authorized the cedent to purchase their own reinsurance, the statute did not reference arbitration provisions or authorize the inclusion of arbitration provisions in those contracts. The court refused to read into the statute that which the legislature omitted.
The court concluded that there was nothing in the statutory language or the relevant case law to support the reinsurer’s arguments and the motion to compel arbitration was denied.