Washington Cities Insurance Authority v. Ironshore Indemnity Inc., No. 19-54 (W.D. Wash. March 6, 2020).

Issue Discussed: The Federal Arbitration Act, the McCarran-Ferguson Act and Preemption

Submitted by Michael Kuehn

Date Promulgated: March 6, 2020

Case: Washington Cities Insurance Authority v. Ironshore Indemnity Inc., No. 19-54 (W.D. Wash. March 6, 2020).

Issues Discussed:  The Federal Arbitration Act, the McCarran-Ferguson Act and Preemption

Court:   United States District Court for the Western District of Washington

Date Decided:    March 6, 2020

Issues Decided: Whether an arbitration and choice of law provision in a reinsurance agreement violate Washington State’s statutory prohibition on enforcement of arbitration clauses in insurance contracts.

Submitted by:  Michael R. Kuehn, Reinsurance Counsel, The Riverstone Group

Washington Cities Insurance Authority (“WCIA”), an association of Washington public entities, is an entity authorized by statute to self-insure risks and purchase reinsurance.  Ironshore Indemnity reinsured WCIA up to $10 million per occurrence for losses that exceeded WCIA’s $4 million self-insured layer (the “Reinsurance Agreement”).

The Reinsurance Agreement provided for arbitration of “[a]ny and all disputes or differences arising out of this Agreement ….”  The agreement also included a New York choice of law provision.

WCIA filed suit after Ironshore denied a reinsurance claim in 2018.  Ironshore moved to compel arbitration under the Federal Arbitration Act (“FAA”).  WCIA moved to strike the arbitration clause and choice of law provisions as void under Washington law.

The District Court granted WCIA’s motion.  Washington law provides that choice of law and arbitration provisions in an insurance contract are void.   The Court acknowledged that the Washington’s law would normally be pre-empted by the FAA, which requires courts to “direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed ….”  However, the Court found that Washington law was not pre-empted by virtue of the McCarran Ferguson Act.  The court explained that McCarron-Ferguson effectively reverse preempts the FAA with regard to state laws that regulate the business of insurance.

With this background, the Court addressed the following two questions.  First, does reinsurance qualify as insurance? Second, does Washington’s prohibition apply to a reinsurance agreement purchased by a joint self-insurance program?  The court answered yes to both.

In answering the first question, the Court found that the statutory definition of insurance – “a contract whereby one undertakes to indemnify another or pay a specified amount upon determinable contingencies” – unquestionably encompassed the Reinsurance Agreement.  The Court also relied on the fact that the text of the statute did not expressly exclude reinsurance, but did specifically exempt other types of insurance such as ocean marine and foreign trade.

In answering the second question, the Court addressed Ironshore’ s argument that a separate section of the Washington code authorizing joint self-insurance programs to purchase reinsurance permitted the use of arbitration and choice of law provisions.  Specifically, Ironshore relied on a section of the law that allowed a joint self-insurance program to “purchase … reinsurance coverage in such form … as the program’s participants agree by contract.”  The Court declined Ironshore’ s invitation to read this section of the statute as carving out an exception to the statutory prohibition on arbitration and choice of law provisions.  The Court reasoned that had the legislature intended to exclude specific types of insurance (including reinsurance) from the statute it would have done so in clear and unmistakable terms.