Summary of a Recent
Judicial Development in
Crop Insurance

FCIA Does Not Completely
Preempt State Regulations

Randal Busby
National AgLaw Center Research Assistant

In an action brought by two insurance companies against the Commissioner of the Minnesota Department of Commerce alleging that the Commissioner's authority under Minnesota state law to conduct examinations of insurance companies was preempted by the Federal Crop Insurance Act ("FCIA"), 7 U.S.C. §§ 1501-1515, the United States District Court for the District of Minnesota has held that the FCIA and its implementing regulations did not completely preempt insurance regulatory standards contained in Minnesota law or the Commissioner's jurisdiction under such law to conduct examinations of insurance companies. Alliance Ins. Co. and Farmers Alliance Mut. Ins. Co. v. Wilson, No. 02-2929, 2003 WL 1906160, at *3 (8th Cir. Apr. 16, 2003).

Alliance Insurance Company and Farmers Alliance Mutual Insurance Company (collectively, "Alliance"), plaintiffs, issued crop insurance policies to several sugar beet farmers in southern Minnesota. See id. at *1. The policies were reinsured by the federal government through the Federal Crop Insurance Corporation ("FCIC"), which is a wholly owned government corporation that is governed by the FCIA. See id. After the sugar beet farmers suffered crop losses caused by damaging freezes in 2000, they submitted loss claims to Alliance. See id. Alliance refused to compensate the farmers for their losses. See id. The Minnesota Department of Commerce Commissioner ("the Commissioner") subsequently initiated an examination of Alliance pursuant to his authority under Minnesota law. See id.

Alliance filed a complaint against the Commissioner arguing that he "did not have legal authority to undertake the examination because the FCIA alone regulates FCIC crop insurance policies and the FCIA preempts all other applicable state law regulating such insurance." Id. Alliance claimed that the Commissioner lacked jurisdiction "to carry out the examination because the FCIA comprehensively regulates FCIC crop insurance and directly conflicts with state regulatory procedures." Id. at *2. The Commissioner argued that there was proper jurisdiction because "the FCIA does not completely preempt state regulatory procedures." Id. He also contended that "Congress intended only to preempt those state laws which are inconsistent with the FCIA." Id.

The court explained that "preemption occurs when 'there is outright or actual conflict between federal and state law,' or 'where Congress has legislated comprehensively, thus occupying an entire field of regulation and leaving no room for the states to supplement federal law." Id. (quoting Louisiana Public Serv. Comm'n v. FCC, 476 U.S. 355, 368 (1986)). It also explained that the extent to which Congress intended to preempt state law was stated clearly in § 1506(1) of the FCIA. Section 1506(1) provides that

[s]tate and local laws or rules shall not apply to contracts, agreements, or regulations of the Corporation or the parties thereto to the extent that such contracts, agreements, or regulations provide that such laws or rules shall not apply, or to the extent that such laws or rules are inconsistent with such contracts, agreements, or regulations.

Id. (quoting 7 U.S.C. § 1506(1)).

"More specifically," the court added, "Congress expressed its intent that while state and local government authorities are precluded from levying fines or judgments against insurance companies for acts consistent with the FCIA, 'nothing herein is intended to preclude any action on the part of any authorized State regulatory body'" with respect to activity that is not required or prohibited by the FCIA or its implementing regulations." Id. (quoting 7 C.F.R. § 400.352(b)(4)).

The court rejected Alliance's claim that the Minnesota law at issue was in conflict with the FCIA regulations because there was no real conflict between state and federal law. See id. at *3. It agreed with the Commissioner's assertion that although the "FCIA curtails certain aspects of his regulatory authority," it did not completely preempt his regulatory authority. Id. The court stated that under § 1506(1), "Congress indicated that only those state statutes that are inconsistent with the FCIA are preempted." Id. It also stated that

[C]ongress clearly contemplated that some state statutes would remain applicable to FCIC crop insurance. Thus, contrary to Alliance's assertion that Congress, by enacting the FCIA, intended to preempt state regulatory law, Congress intended to allow for state regulation of federally reinsured crop insurance policies to the extent that state law is not inconsistent with the FCIA. The [c]ourt's conclusion is consistent with the findings of other federal courts deciding the issue. The four circuits deciding the question agree that the FCIA does not completely preempt state law.

Id. (citations omitted).

The court concluded that the insurance regulatory standards contained in Minnesota state law, as well as the Commissioner's jurisdiction to make certain examinations of Alliance's "insurance affairs, practices, and conditions," were not preempted by the FCIA and its regulations. Id. Although the court held in favor of the Commissioner, it stated that the Commissioner should not conduct a "sweeping investigation" of Alliance and should limit his investigation to "avoid running afoul of the FCIA." Id. at *4.

The case was decided on April 16, 2003; this summary was posted May, 2003