In State, Dep't of Transp. v. James River Ins. Co., 292 P.3d 118 (Wash. 2013), the Washington State Department of Transportation (WSDOT) filed suit in state court, claiming coverage under two "surplus line" insurance policies issued by the James River Insurance Company (James River). James River sought to compel arbitration of the insurance coverage dispute under the insurance policies' arbitration clauses. WSDOT opposed arbitration and filed a motion for declaratory judgment, arguing that the arbitration clauses were unenforceable because Washington state law prohibited binding arbitration agreements in insurance contracts. Further, WSDOT argued that the McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015-) shielded the state statute from pre-emption by the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1-16; 201-208; 301-307-).

When the state trial court agreed and denied James River's motion to compel arbitration, James River appealed, challenging the decision. On appeal, the Supreme Court of the State of Washington affirmed that the arbitration clause in the insurance contract was barred by state law. The state law was not pre-empted by the FAA because the state law was shielded by the "reverse pre-emption" from the McCarran-Ferguson Act.

The Supreme Court reviewed case law and legislative history to discern that the Washington state statute was enacted specifically to protect the right of insurance policyholders to bring an original action against insurers in the state courts. The Supreme Court emphasised that binding arbitration agreements in insurance contracts deprived the state courts of jurisdiction to review the substance of the dispute between the parties. Therefore, the Supreme Court concluded that the state law was properly interpreted as a prohibition on binding arbitration in insurance contracts.

The Supreme Court then noted that, while normally state statutes barring arbitration agreements are pre-empted by the FAA, there is an exception to the general rule when the state statute regulates the insurance business within the meaning of the federal McCarran-Ferguson Act. That Act states that federal law "shall not be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance." The Supreme Court concluded that since the Washington state law prohibiting arbitration agreements in insurance contracts regulates the insurance business, the McCarran–Ferguson Act "reverse pre-empts" the FAA, shielding the statute from invalidation.

This case provides a rare example of an exception to the expansive federal policy in favour of arbitration. The case demonstrates that the FAA does not pre-empt state laws regulating "the business of insurance" because the McCarran–Ferguson Act protects these state laws from federal preemption.