Summary of a Recent
Judicial Development in
Crop Insurance

State Law Claims Not Completely Preempted
By Federal Crop Insurance Act

Sean Brister
National AgLaw Center Graduate Assistant

In an action brought by two insureds in state court against their crop insurance company in which the insurance company removed the matter to federal district court and filed a motion for summary judgment, the United States District Court for the District of North Dakota has denied the motion for summary judgment and ruled that the case was improperly removed to federal court. Bullinger v. Trebas, No. A4-02-13, 2003 WL 244989 (D.N.D. Jan. 30, 2003). The court ruled that the Federal Crop Insurance Act (FCIA), 7 U.S.C. §§ 1501-1515, did not create a federal cause of action against the insurance company and that the doctrine of complete preemption did not apply to the state law claims brought against it. See id. at *2-6.

Daniel and David Bullinger were farmers who lived in Bottineau County, North Dakota. See id. at *1. On or before March 15, 1999, they completed applications for multi-peril crop insurance with the help of Brad Trebas, a local agent for Rain and Hail, L.L.C. (Rain and Hail), defendant. See id. Rain and Hail is an insurance company licensed to do business in North Dakota. See id.

The policies were issued by Rain and Hail and reinsured by the Federal Crop Insurance Corporation. See id. In mid-1999, the Bullingers filed claims for prevented planting due to excessive moisture. See id. Rain and Hail denied portions of the claims in September, 1999, "because the Bullingers' acreage reports did not comply with the rotational requirements set forth in the policies." Id. The Bullingers alleged that they suffered a crop loss in 1999 that should have been covered by their policies "but [the indemnity] was not paid because of errors in their acreage reports." Id.

On February 4, 2002, the Bullingers filed suit against Trebas and Rain and Hail in North Dakota state court. See id. On February 15, 2002, Rain and Hail removed the action to federal court, asserting that the existence of a federal question justified the removal. See id. Rain and Hail argued that the federal question existed because the Bullingers' complaint implicated the FCIA and its implementing regulations. See id. The Bullingers did not challenge the motion for removal. See id.

On September 13, 2002, Rain and Hail filed a motion for summary judgment based on the expiration of a twelve-month statute of limitations. See id. (citing U.S.C. §1508(j)(2)(B)). On November 13, 2002, the Bullingers filed a response to the summary judgment motion. See id. On November 22, 2002, Rain and Hail filed a reply in support of the motion. See id.

The Bullingers argued that their acreage reports were filled out incorrectly due to the negligence of Trebas and Rain and Hail, and, therefore, they should pay the loss. See id. The Bullingers also argued that the defendants had a duty to provide information and assist them in complying with the requirements in the insurance policies and that the defendants breached that duty. See id. In addition, they argued that the applicable statute of limitations under North Dakota law was six years. See id.

The court began its analysis with a discussion of the history of the FCIA. See id. The court explained that insurance companies refused to write multi-peril crop insurance policies in the early 1900s due to the high level of risk and that Congress attempted to remedy this situation by enacting the FCIA. See id. The FCIA was enacted in 1938 to "‘promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance . . . .'" Id. (quoting 7 U.S.C. § 1502). The Federal Crop Insurance Corporation (FCIC) was created to carry out the FCIA. See id. The FCIC accomplished this by "1) selling insurance through private insurance agents; 2) reinsuring private insurance companies that provide crop insurance; and 3) providing crop insurance directly to the farmer." Id. (citing Owen v. Crop Hail Management, 841 F.Supp. 297, 300 (W.D.Mo. 1994)(also citing 7 U.S.C. §§ 1507 - 1508)).

Originally, only the FCIC was allowed to issue crop insurance policies and handle claims. See id. at *2. However, in 1980, the FCIA was amended to allow private companies to provide crop insurance directly to farmers. See id. These private companies were reinsured by the FCIC. See id. The policies at issue in this case were issued by Rain and Hail and reinsured by FCIC. See id.

Rain and Hail argued that the Bullingers' action was barred by the twelve-month statute of limitations contained in 7 U.S.C. § 1508(j) because more than eighteen months had elapsed since the denial of their claims and the filing of their lawsuit. See id. Section 1508(j) provides that "[i]f you do take legal action against us, you must do so within 12 months of the date of denial of the claim. Suit must be brought in accordance with the provisions of 7 U.S.C. § 1508(j)." Id. 7 U.S.C. § 1508(j)(2) provides as follows:

(A) In general Subject to subparagraph (B), if a claim for indemnity is denied by the Corporation or an approved provider, an action on the claim may be brought against the Corporation or Secretary only in the United States district court for the district in which the insured farm is located.

(B) Statute of limitations A suit on the claim may be brought not later than 1 year after the date on which final notice of denial of the claim is provided to the claimant.

Id.

The Bullingers argued that Rain and Hail "misinterpreted their claims." Id. They did not contest the policy provisions; instead, they alleged that the defendants were in breach of contract and of duty. See id. The Bullingers contended that "they relied upon the knowledge, skill, and expertise of Trebas and representatives of Rain and Hail to ensure that their insurance applications were properly completed and that the necessary forms were filled out to provide coverage for their crop losses." Id. Rain and Hail responded that the policies and the FCIA made no distinction between contract claims and tort claims, and consequently the one-year statute of limitations applied. See id. at *3. The court disagreed. See id.

Even though the plaintiffs did not challenge the action's removal to federal court, the court stated that it had a duty to examine whether federal jurisdiction was appropriate in federal court. See id. (citing Magee v. Exxon Corp., 135 F.3d 599, 601 (8th Cir. 1998) (explaining that subject matter jurisdiction cannot be waived)). "A defendant may remove a state court case to federal court only if the case could have been originally filed in federal court." Id. (citing Caterpillar, Inc. v. Williams, 482 U.W. 386, 392 (1997); Gore v. Trans World Airlines, 210 F.3d 944, 948 (8th Cir. 2000)).

Without diversity of citizenship, the defendant must establish federal question jurisdiction or some other basis for jurisdiction. See id. The court explained that the "well-pleaded complaint rule" is the guiding principle for determining the presence of federal question jurisdiction. See id. The rule provides that the face of the complaint must demonstrate a federal question to invoke the jurisdiction of the federal courts. See id. This prevents defendants from using federal law defenses to move an otherwise state law claim into federal court. See id.

The court also explained that one exception to the "well-pleaded complaint rule" is the doctrine of complete preemption. See id. (citing Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 65 (1987)). Under this doctrine, preemption occurs when federal law so extensively regulates an area that there is no room for state law supplementation. See id. (citation omitted). If a complaint is based on state law claims that have been preempted, then the complaint is "converted to one stating a federal claim for purposes of the ‘well-pleaded complaint rule.'" Id. (citation omitted). This allows federal jurisdiction even when a defendant "raises the federal question as a defense which does not appear on the face of the complaint." Id. Once a court finds "that federal law completely preempts state law in a certain area, then the federal court has jurisdiction." Id. However, if a plaintiff's claims are not entirely preempted by federal law, and there is no other means of establishing jurisdiction, then the court lacks jurisdiction and is required to remand the case to state court. See id. (citation omitted).

Courts are reluctant to find preemption without clear direction from Congress. See id. at *4. In this case, the court found that the complete preemption doctrine was the only basis for federal jurisdiction. See id. The issue addressed by the court was "whether the Federal Crop Insurance Act so completely preempts state law that the plaintiffs' claims against the defendants are considered to arise from federal law." Id. The court stated that if complete preemption was not found, then the case must be remanded back to state court. See id.

The district court stated that the Eighth Circuit had not specifically addressed this question but that many other district and circuit courts had. See id. The majority of these courts held that the FCIA "does not completely preempt state law causes of action." Id. (citing Holman v. Laulo-Rowe Agency, 994 F.2d 666, 669 (9th Cir.1993); Halfmann v. USAG Ins. Servs., Inc., 118 F.Supp.2d 714 (N.D.Tex.2000); Bullard v. Southwest Crop Ins. Agency, Inc., 984 F.Supp. 531 (E.D.Tex.1997); Horn v. Rural Cmty. Ins. Servs., 903 F.Supp. 1502 (M.D.Ala.1995); Hyzer v. Cigna Prop. Cas. Ins. Co., 884 F.Supp. 1146 (E.D.Mich.1995); O'Neal v. Cigna Prop. Cas. Ins. Co., 878 F.Supp. 848 (D.S.C.1995)).

The court noted that only two district courts have determined that the FCIA completely preempted state law causes of action. See id. (citing Brown v. Crop Hail Mgmt., Inc., 813 F.Supp. 519 (S.D.Tex 1993); and Owen v. CropHail Mgmt., Inc., 841 F.Supp 297 (W.D.Mo. 1994)). It explained that Brown and Owen had been criticized and were not persuasive. See id.

The court stated that it found persuasive the courts that specifically found that the FCIA "and its regulations do not preempt state law causes of action under the defense of federal preemption." Id. (citing Meyer v. Conlon, 162 F3d.1264, 1268 (10th Cir. 1998); Williams Farms of Homestead v. Rain and Hail Ins., 121 F.3d 630 (11th Cir. 1997); Nobles v. Rural Cmty. Ins. Servs., 122 F. Supp. 2d 1290, 1294 (M.D.Ala. 2000)). The court was also persuaded by Reimers v. Farm Credit Services Ag. Country, No. A3-00-168, 2001 WL 1820379 (D.N.D.2001). In Reimers, the court concluded that "the FCIA does not have the extraordinary preemptive force necessary for the application of the doctrine of complete preemption." Id.

The court agreed with the courts that held that no federal cause of action against private reinsured companies and no complete preemption of state law was created by 7 U.S.C. § 1508(j)(2) or any other FCIA provision. See id. at *5. The court also based its decision on the permissive language of 7 U.S.C. § 1508(j)(2)(A) and (B). See id. The court explained that these sections use "may" and do not mention FCIC-reinsured entities. See id.

The court stated that its decision was supported by the FCIA's legislative history. See id. The court concluded that "as a matter of law, . . . 7 U.S.C. § 1508(j)(2) does not create a federal cause of action against private reinsured companies nor does the Act grant exclusive jurisdiction to the federal courts over claims against private entities reinsured by the Federal Crop Insurance Corporation." Id.

The court added that a clear reading of 7 U.S.C. § 1508(j)(2)(B) leads to the conclusion that the twelve-month limitation period was not mandatory and that the FCIA did not preempt state law causes of action. See id. The court explained that the twelve-month period was permissive and did not bar the Bullingers' claims. See id. The court also stated that no federal cause of action was created against a private insurance company reinsured by the FCIC. See id.

The court concluded that it lacked federal question jurisdiction, stating that it was "clear that Congress intended to leave insureds with their traditional breach of contract or tort remedies against their insurance companies." Id. The matter was therefore remanded back to state court. See id. at *6.

The case was decided on January 30, 2003; this summary was posted April, 2003