Oak Harbor Freight Lines, Inc. v. Xl Insurance America, Inc.

FILED
COURT OF APPEALS OW I
STATE OF V.`ASIII:iGTON

2017 JUL -3 Ail 8:39

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION ONE

OAK HARBOR FREIGHT LINES, ) No. 75147-6-1
INC., a Washington corporation, )
)
Respondent, )
)
v. )
)
XL INSURANCE AMERICA, INC., )
a foreign insurance company, ) UNPUBLISHED OPINION
)
Appellant. ) FILED: July 3, 2017
)

VERELLEN, C.J. — From 2006 until 2010, Oak Harbor Freight Lines, Inc.
purchased workers' compensation insurance from XL Insurance America, Inc.(the

policies). In consideration of the policies, XL Insurance required Oak Harbor to enter

into an "Insurance Program Agreement" and post a letter of credit in favor of XL

Insurance as collateral to secure Oak Harbor's payment and reimbursement

obligations under the policies. In 2010, due to changes in FDIC policy, the bank

could no longer guarantee the $3.2 million letter of credit Oak Harbor posted as

collateral, and XL Insurance drew down the entire balance of the letter of credit. XL

Insurance ceased providing coverage to Oak Harbor in 2011.

In 2015, after unsuccessfully negotiating the return of the excess collateral,

Oak Harbor filed a lawsuit against XL Insurance in King County Superior Court. XL

Insurance moved to dismiss the lawsuit and to compel binding arbitration in New
No. 75147-6-1-2

York pursuant to the Insurance Program Agreement's arbitration provisions. Oak

Harbor opposed arbitration, arguing the arbitration provisions were unenforceable

under RCW 48.18.200(1)(b), which prohibits insurance contracts from "depriving the

courts of this state of the jurisdiction of action against the insurer." The court found

that the Insurance Program Agreement was "part and parcel" of the contract of

insurance and therefore, the arbitration provisions were void and unenforceable

under RCW 48.18.200(1)(b).1

XL Insurance argues the Insurance Program Agreement is fully integrated and

unrelated to the policies, and therefore is not subject to RCW 48.18.200(1)(b). But

absent the Insurance Program Agreement and required collateral to secure Oak

Harbor's payment and reimbursement obligations under the policies, XL Insurance

would not have agreed to assume liability for payment of workers' compensation

claims made by Oak Harbor employees. Because both the Insurance Program

Agreement and the policies expressly depend upon provisions contained in the other,

the integration clauses are not operative. The Insurance Program Agreement is part

and parcel of the insurance contract and therefore, the arbitration clause is not

enforceable.

Therefore, we affirm.

FACTS

In 2006, Oak Harbor purchased a workers' compensation and employers'

liability policy from XL Insurance and renewed the policies each year through 2010.

Under the policies, XL Insurance assumed liability for payment of workers'

1 Report of Proceedings(RP)(Apr. 1,2016) at 32.

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No. 75147-6-1-3

compensation claims made by Oak Harbor employees, and Oak Harbor assumed a

contractual obligation to reimburse XL Insurance for any claims paid up to the

deductible amount of $350,000 per claim.

In consideration of the policies, XL Insurance required Oak Harbor to post

collateral in the form of a $3.2 million letter of credit to secure Oak Harbor's payment

and reimbursement obligations for the deductible.2 This collateralization requirement

was set forth in an "Insurance Program Agreement" and an attached "Schedule"(i.e.

"Plan Specifications"), both of which became effective on July 1, 2006, the same date

the policy issued. The Schedule attached to the Insurance Program Agreement

expressly states that the "iplolicies shall be included within the[Insurance]Program

[Agreement]for the Program Period."3 The Schedule further states, "This Schedule

2 The Insurance Program Agreement states in pertinent part:
WHEREAS,[Oak Harbor]has applied for insurance programs as
described in the Schedule "Plan Specifications" for each Program Period
subject to this Agreement("Plan Specification");
WHEREAS,[XL Insurance] has agreed to issue Policies during the
term of this Agreement as described in the Plan Specifications attached as
a Schedule to this Agreement;
WHEREAS,[Oak Harbor] and [XL Insurance] intend to outline the
scope, description and structure for each Program Period, and to set forth
[Oak Harbor]'s obligations to [XL Insurance] to make payments and
provide security for its obligations.
NOW THEREFORE, in consideration for the issuance of the
Policies by[XL Insurance],[Oak Harbor] and [XL Insurance] agree as
follows.
Clerk's Papers(CP)at 282(emphasis added).
3 CP at 298(emphasis added).

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No. 75147-6-1-4

. .. attached to and together with all prior Schedules, if any, shall form a part of the

Insurance Program Agreement."

The Insurance Program Agreement states that binding arbitration shall be "the

sole remedy for the resolution of disputes" between the parties under the Insurance

Program Agreement "or any other agreement between them."5 The Insurance

Program Agreement further states the "board of arbitration will have complete and

exclusive jurisdiction over the entire matter in dispute, including any question as to its

arbitrability."6 Finally, the Insurance Program Agreement states "the rights of the

parties to this agreement shall be governed by and construed in accordance with the

laws of the state of New York."7

In 2010, due to changes in FDIC policy, U.S. Bank could no longer guarantee

the Frontier Bank letter of credit Oak Harbor posted as collateral and XL Insurance

drew down the entire balance of the $3.2 million letter of credit. When XL Insurance

refused to return some of the collateral to reflect its actual claims exposure, Oak

Harbor stopped making monthly premium payments. XL Insurance ceased providing

insurance to Oak Harbor in 2011. XL Insurance still holds excess collateral as

security for payment obligations that may arise due to claims under the policies.5

4 CP at 301 (emphasis added).
5 CP at 292.
6 CP at 292(emphasis added).

7 CP at 295.
8 See CP at 7("As of November 11, 2014, XL Insurance stated that it was still
holding $752,648.84 in cash from the Frontier Bank letter of credit.").

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No. 75147-6-1-5

In 2015, Oak Harbor sued XL Insurance in King County Superior Court for

breach of the duty of good faith and fair dealing, conversion, insurance bad faith,

Washington Consumer Protection Act violations, and California Unfair Competition

Law violations.9 XL Insurance moved to dismiss the lawsuit and compel binding

arbitration in New York pursuant to the Insurance Program Agreement's arbitration

provisions. Oak Harbor opposed XL Insurance's motion, arguing that arbitration and

forum selection provisions were unenforceable under RCW 48.18.200(1)(b), which

prohibits arbitration provisions in insurance contracts.

The superior court agreed with Oak Harbor and denied XL Insurance's motion:

It's clear to this court, given all the references in the [Insurance
Program Agreement] to the insurance policy, that this is part and parcel
of the insurance policy. It facilitates the coverage provided in the
insurance policy. ... It's. . part of... Oak Harbor's insurance policy
with XL.1191

XL Insurance appeals.

ANALYSIS

XL Insurance argues the superior court erred in denying its motion to compel

arbitration. Relying heavily on the presence of integration clauses, XL Insurance

argues the Insurance Program Agreement is fully integrated and unrelated to the

policies and therefore is not subject to the RCW 48.18.200(1)(b) prohibition on

arbitration provisions in insurance contracts. We disagree.

Under RCW 48.18.200(1)(b),"No insurance contract delivered or issued for

delivery in this state and covering subjects located, resident, or to be performed in

9 OP at 1-11.
19 RP (Apr. 1, 2016) at 32.

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No. 75147-6-1-6

this state, shall contain any condition, stipulation, or agreement. .. depriving the

courts of this state of the jurisdiction of action against the insurer." In Department of

Transportation v. James River Insurance Co., our Supreme Court expressly analyzed

whether RCW 48.18.200 "render[ed] arbitration agreements in insurance contracts

void."11 The court determined the phrase "jurisdiction of action against the insurer"

demonstrated "the legislature's intent to protect the right of the policyholders to bring

an original 'action against the insurer' in the courts of this state."12 The court

explained that to compel arbitration under an insurance contract arbitration clause

would "frustrate the legislature's intent because... binding arbitration agreements

deprive our courts of the jurisdiction they would normally possess in an original action

by depriving them of the jurisdiction to review the substance of the dispute between

the parties."13 "[A]ssuring the right to review the substance of disputes between

insurers and insureds helps assure the protection of Washington law to Washington

insureds as provided in RCW 48.18.200(1)(a)."14

We review the decision on a motion to compel arbitration de novo.15 We may

affirm the trial court on any basis supported by the record.16

11 176 Wn.2d 390, 395, 292 P.3d 118(2013).
12 Id. at 399.
13 Id.
14 Id.; see RCW 48.18.200(1)(a)(prohibiting insurance contracts containing
any condition, stipulation, or agreement "requiring it to be construed according to the
laws of any other state or country except as necessary to meet the requirements of
the motor vehicle financial responsibility laws of such other state or country.).
15 Saleemi v. Doctor's Assocs., Inc., 176 Wn.2d 368, 375, 292 P.3d 108
(2013); Wiese v. CACH, LLC, 189 Wn. App. 466,473, 358 P.3d 1213(2015).
16 Hoflin v. City of Ocean Shores, 121 Wn.2d 113, 134, 847 P.2d 428(1993).

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No. 75147-6-1-7

Washington courts follow the "objective manifestation theory" of contract

interpretation.17 "Under this approach, we attempt'to determine the parties' intent by

focusing on the objective manifestations of the agreement."18

"A contract may consist of one or several writings."19

"[T]he terms of agreement may be expressed in two or more separate
documents, some of these containing promises and statements as to
consideration, and others, such as deeds... embodying performances
agreed upon rather than a statement of terms to be performed. In
every such case, these documents should be interpreted together, each
one assisting in determining the meaning intended to be expressed by
the others."201

"Instruments which are part of the same transaction, relate to the same subject

matter and are executed at the same time should be read and construed together as

one contract."21

"An integrated contract is one where the parties intend a written document to

be a final expression of their agreement."22 It is generally a question of fact whether

Hearst Commc'ns, Inc. v. Seattle Times Co., 154 Wn.2d 493, 503, 115 P.3d
17
262(2005).
18 Id.

19 Kelley v. Tonda, 198 Wn. App. 303, 311, 393 P.3d 824(2017)(citing Smith
v. Skone & Connors Produce, Inc., 107 Wn. App. 199, 206, 26 P.3d 981 (2001)).
20 Id.(emphasis added)(quoting 5 MARGARET N. KNIFFEN, CORBIN ON
CONTRACTS § 24.21, at 216 (1998)).
21 Turner v. Wexler, 14 Wn. App. 143, 146, 538 P.2d 877 (1975); see Kelley,
198 Wn. App. at 311 ("All writings that are part of the same transaction are
interpreted together."); see also Kenney v. Read, 100 Wn. App. 467, 474, 997 P.2d
455, amended on denial of reconsideration, 4 P.3d 862(2000)("When several
instruments are made as part of one transaction, they will be read together and
construed with reference to each other.").
22 King v. Rice, 146 Wn. App. 662, 670 n.17, 191 P.3d 946 (2008).

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No. 75147-6-1-8

the parties intended an integrated contract.23 While boilerplate integration clauses

can provide evidence that parties to a contract intended a fully integrated agreement,

such clauses are not operative if they are premised on incorrect statements of fact.24

A court may consider evidence of negotiations and circumstances surrounding the

formation of the contract and, if the agreement is not completely integrated, additional

terms may be proved to the extent they are consistent with the written terms.25

Contrary to XL Insurance's argument, neither the Insurance Program

Agreement nor the policies are truly fully integrated. The parties' objective

manifestation of intent in executing these documents on the same date was for XL

Insurance to assume liability for payment of workers' compensation claims made by

Oak Harbor employees. Oak Harbor expressly signed the Insurance Program

Agreement in consideration of XL Insurance issuing the policies. Thus, absent the

Insurance Program Agreement and required collateral to secure Oak Harbor's

payment and reimbursement obligations under the policies, XL Insurance would not

have agreed to assume liability. Moreover, provisions of the policies and the

Insurance Program Agreement are interrelated. It is inconsistent to argue that the

documents are truly integrated when they both depend upon provisions contained in

the other.

23 Emrich v. Connell, 1058 Wn.2d 551, 556, 716 P.2d 863(1986).
24 Denny's Rests., 71 Wn. App. at 203("Although the policy contains an
integration clause, the courts of this state have repeatedly recognized that boilerplate
integration clauses are inoperative if they are false; parties to a contract are not
bound by incorrect statements of fact.").
25 Id. at 202.

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No. 75147-6-1-9

Specifically, XL Insurance attached endorsements to the policies giving XL

Insurance the right to require Oak Harbor to provide security for its obligations under

the policies. For example, the policies'"Large Deductible Endorsement" for

California and Oregon includes a section listing remedies that extends to Oak

Harbor's failure to provide adequate security:

If you fail to reimburse us for any amounts as required by this
endorsement, or, if you fail to provide security in a form and amount
acceptable to us, we may cancel this policy for non-payment in
accordance with the cancellation conditions.[28]

But the policies alone do not impose an obligation to provide security; they only

specify a remedy for the failure to do so. The only provision actually requiring Oak

Harbor to provide security is set forth in the Insurance Program Agreement:

As security for the Insured's Obligations, and for performance of all of
its obligations and duties hereunder, the Insured shall deliver to
Company on or before the effective date of the Agreement, a letter of
Credit or other collateral in an amount and form acceptable to Company
("The Collateral").(27]

The Insurance Program Agreement goes on to specify the details of the collateral

required.28

Further, the Insurance Program Agreement expanded XL Insurance's rights

under the policies. For example, the policies contained a general cancellation

provision permitting either party to "cancel this policy" upon "advance written notice

stating when the cancelation is to take effect."29 Yet under the Insurance Program

26 CP at 146, 153, 248, 262(emphasis added).
27 CP at 287(emphasis added).

28 S CP at 287-89.
26 CP at 105.

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No. 75147-6-1-10

Agreement, in the event Oak Harbor defaulted on any of its obligations, XL Insurance

reserved the right to cancel any policy in force at the time of default, or unilaterally

"issue an endorsement deleting the deductible or retrospective premium

endorsement from the in force policy or policies, recalculate and re-bill in accordance

with Company's full premium guaranteed cost rating plan."3° XL Insurance's remedy

under the Insurance Program Agreement to unilaterally modify the policies is

inconsistent with fully integrated contracts.31

The Insurance Program Agreement also adopted definitions from the policies:

"Unless otherwise provided in this Agreement or unless the context requires

otherwise, terms used in this Agreement shall have the meanings attributed to them

in the Policies or Company's applicable statistical or rating plans."32 The documents'

shared definitions is also inconsistent with unrelated, fully integrated contracts.

Finally, the Insurance Program Agreement purports to regulate all agreements

between the parties, including the policies: "The parties agree that arbitration

pursuant to the terms of[the Insurance Program Agreement]is the sole remedy for

the resolution of disputes between them under this Agreement or any other

agreement between them."33

30 CP at 290.
31 Contrary to XL Insurance's explanation at oral argument, the provision in the
policies that "We may change our manuals and apply the changes to this policy if
authorized by law or a governmental agency regulating this insurance" is not
authority for XL Insurance to make unilateral changes to the premiums imposed by
the policies as a remedy for violations of the Insurance Program Agreement. CP at
104.
32 CP at 285(emphasis added).
33 CP at 292(emphasis added).

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No. 75147-6-1-11

"[T]o the extent possible, where parts of the same writing are inconsistent they

should be construed so as to harmonize with one another."34 In substance, the

Insurance Program Agreement, attached schedule, and the policies constitute the

overall contract of insurance between the parties. The policies provide a remedy for

Oak Harbor's failure to fulfill the security obligation imposed only in the Insurance

Program Agreement. And the Insurance Program Agreement provides a remedy in

the event Oak Harbor defaults on any of its obligations that includes unilaterally

issuing an endorsement changing the premium structure of the policies; a material

provision of the policies. Therefore, there is no true objective manifestation of intent

for two fully integrated contracts. Because both the Insurance Program Agreement

and the policies expressly depend on provisions contained in the other, the

integration clauses are not operative.

To give effect to the parties' objective manifestation of intent, we agree with

the superior court that the Insurance Program Agreement is "part and parcel" of the

policies, and therefore, subject to the RCW 48.18.200(1)(b) prohibition on arbitration

provisions in insurance contracts. Our conclusion harmonizes the contracts and is

consistent with the purpose of RCW 48.18.200(1)(b) to guarantee the courts' ability

to analyze and review the substance of disputes under the laws of Washington.35

Accordingly, we conclude the superior court did not err in denying XL

Insurance's motion to compel binding arbitration.

34 Turner v. Wexler, 14 Wn. App. 143, 146, 538 P.2d 877(1975).
35 James River, 176 Wn.2d at 399.

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No. 75147-6-1-12

Attorney Fees

Oak Harbor requests an award of attorney fees and costs on appea1.36

Attorney fees may be awarded to a litigant when authorized by contract, statute, or a

recognized ground of equity.37 Under the Insurance Program Agreement, XL

Insurance "unconditionally and completely" agrees to indemnify Oak Harbor against

any liabilities, obligations, costs or expenses, "including reasonable attorney's fees,

incurred directly or indirectly" by Oak Harbor arising out of, or attributable in part to

any act, error or omission of XL Insurance.38 Therefore, Oak Harbor is entitled to

attorney fees and costs on appeal.

Affirmed.

WE CONCUR:

vi