Summary of a Recent
Judicial Development in
Crop Insurance

Arkansas Supreme Court Rules
that Federal Crop Insurance Act
Preempts Arkansas Statute

Harrison M. Pittman
Staff Attorney

The Arkansas Supreme Court has ruled that the Federal Crop Insurance Act ("FCIA"), 7 U.S.C. Secs. 1501-1515, preempts Ark. Code. Ann. Sec. 16-108-201 (Supp. 2001), a statute which would have rendered the arbitration clause in the parties' multiple peril crop insurance policy ("MPCI") unenforceable. IGF Ins. Co. v. Hat Creek Partnership, No. 01-1267, 2002 WL 1227253 (Ark. June 6, 2002). The court also ruled that the McCarran-Ferguson Act, 15 U.S.C. Secs. 1011-1015, was inapplicable. Id. A concurring opinion agreed that the FCIA preempted Sec. 16-108-201, but reasoned that "neither the contract nor the applicable federal regulations require the parties to arbitrate anything other than disputes over 'any factual determination.'" Id. at *4-5. According to the concurring opinion, Hat Creek, the insured party, could pursue its state law tort claims against IGF, the insurance company, and its agent, once arbitration of any factual determinations was completed. Id.

Hat Creek Partnership ("Hat Creek") purchased a multiple peril crop insurance policy from IGF Insurance Company ("IGF") on February 10, 1999. Id. at *1. The insurance policy covered Hat Creek's crops planted during the 1999 crop year. Id. Approximately one month after this policy was purchased, Hat Creek's wheat crop was destroyed by wild geese. Id. Soon thereafter Robert Burns, an IGF insurance adjuster, met with Paul McCain, a representative of Hat Creek Farms, to discuss the crop damage. Id. At this meeting, McCain mentioned to Burns that some of the wheat crop might be saved if it were fertilized in time. Id. Burns represented to McCain that he thought the wheat crop was a total loss. Id. Burns told McCain that he would return in a few days to finalize the claim and pay the loss. Id.

McCain subsequently called Burns to inform him that some of the wheat crop "was trying to come back" and could possibly be salvaged. Id. Burns advised Hat Creek not to be concerned with salvaging the crop because the crop had failed. Id. Based on Burns's advice, Hat Creek did not attempt to save any of the wheat crop. Id. Burns returned to the farm on April 7, 1999, to finish plant counts in connection with the lost wheat crop. Id. The next day, Burns told McCain for the first time that over 1100 acres of the crop was not covered by the MPCI policy. Id.

Hat Creek brought an action against IGF, claiming that IGF had breached its insurance contract and that IGF and its agent (Burns) were both liable for negligent misrepresentation. Id. IGF filed a motion with the trial court to compel arbitration, arguing that the MPCI policy's arbitration clause was enforceable under the Federal Arbitration Act ("FAA"), 9 U.S.C. Secs. 1-14 (West 1999 & Supp. 2002). Id. The trial court denied this motion and IGF appealed to the Arkansas Supreme Court. Id. Ark. R. App. P. Civ. 2(a)(12) states that a denial of a motion to compel arbitration can be immediately appealed. Id. (also citing Walton v. Lewis, 987 S.W.2d 262 (Ark. 1999); Terminix Int'l Co. v. Stabbs, 930 S.W.2d 345 (Ark. 1996); American Ins. Co. v. Cazort, 871 S.W.2d 575 (Ark.1994)).

The MPCI policy's arbitration clause read, "If you and we fail to agree on any factual determination, the disagreement will be resolved in accordance with the rules of the American Arbitration Association. Failure to agree with any factual determination made by FCIC must be resolved through the FCIC appeal provisions published at 7 C.F.R. Part 11." Id.

Hat Creek argued on appeal that the dispute should not be subject to arbitration because the insurance contract's arbitration clause was rendered unenforceable by Ark. Code. Ann. Sec. 16-108-201. Id. Section 16-108-201 provides that,

A written provision to submit to arbitration any controversy thereafter arising between the parties bound by the terms of the writing is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract; provided, that this subsection shall have no application to personal injury or tort matters, employer-employee disputes, nor to any insured or beneficiary under any policy or annuity contract.

Id.

Hat Creek also argued that the arbitration clause was unenforceable because the Arkansas Uniform Arbitration Act preempted the FAA by virtue of the McCarran-Ferguson Act ("MFA"), 15 U.S.C. Secs. 1011-1015. Id. More specifically, Hat Creek contended that the FAA was preempted by the Arkansas statute because the MFA mandates that state statutes regulating insurance are superior to federal statutes regulating insurance. Id. Finally, Hat Creek argued that arbitration should not be compelled because the dispute did not derive from the terms of the insurance contract, but from representations made by an employee of IGF (Burns). Id.

IGF responded that the FAA required the parties to arbitrate their dispute, and that it preempted Sec. 16-108-201. Id. IGF argued that because the MPCI was a "'contract evidencing a transaction involving commerce,'" the trial court should have granted its motion pursuant to the FAA. Id. at *2. IGF pointed out that the United States Supreme Court stated, in Allied Bruce Terminex Companies, Inc. v. Dobson, 513 U.S. 265 (1995), that "'the basic purpose of the Federal Arbitration Act is to overcome courts' refusals to enforce agreements to arbitrate.'" IGF also noted that 9 U.S.C. Sec. 2 of the FAA states that a written arbitration clause contained in a contract "evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." Id. Finally, IGF noted that in United States Dep't of the Treasury v. Fabe, 508 U.S. 491 (1993), the Court held that insurance policies are subject to the FAA because they are contracts "'involving commerce.'" Id.

The Arkansas Supreme Court ruled in favor of IGF but based its ruling on grounds not specifically raised by either party. The court stated that although Hat Creek and IGF disputed the applicability of the FAA, "the federal act which forms the crux of this case is the [FCIA], the act under which IGF reinsured its crop insurance policy with the Federal Crop Insurance Corporation." Id. In fact, the MPCI policy issued to Hat Creek stated that, "This insurance policy is reinsured by the Federal Crop Insurance Corporation (FCIC) under the provisions of the [FCIA], as amended, 7 U.S.C. Secs. 1501-1515. All provisions of the policy and rights and responsibilities of the parties are specifically subject to [the FCIA]." Id.

The court rejected the claim that the MFA applied. The first section of the MFA provides that "'[c]ongress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.'" Id. (quoting 15 U.S.C. Sec. 1011). The Act also states that "[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically related to the business of insurance." Id. (quoting 15 U.S.C. Sec. 1101(b). The Arkansas Supreme Court ruled that the MFA was inapplicable because "the FCIA specifically relates to the business of insurance." Id.

The court also ruled that the FCIA preempted Ark. Stat. Sec. 16-108-201. The court cited State of Kansas ex rel. Todd v. United States, 995 F.2d 1505 (10th Cir. 1993), for the proposition that "the FCIA explicitly preempts state law regarding federal crop insurance contracts . . . . " Id. (citing 7 U.S.C. Sec. 1506(k), now codified as Sec. 1506(1)). Moreover, the court acknowledged that the FCIA's implementing regulations state that "'[n]o state or local governmental body . . . shall have the authority to promulgate rules or regulations, pass laws, or issue policies or decisions that directly or indirectly affect or govern agreements, contracts, or actions . . . unless . . . specifically authorized by this part or by the Corporation.'" Id. (quoting 7 C.F.R. Sec. 400.352). The court concluded that Sec. 16-108-201 was inconsistent with, and therefore preempted by, the FCIA because it "'directly or indirectly affect[ed] or govern[ed]'" the insurance contract authorized by the FCIC." Id. at *3.

The concurring opinion suggested that the arbitration clause, on its face, did not require all disputes to be arbitrated, only those disputes regarding factual determinations. Id. at *4. The concurrence reasoned that the question of whether 1100 to 1200 acres was covered by the MPCI policy was a factual determination that was subject to arbitration. Id. at *5. The concurrence concluded that "although arbitration must take place first, Hat Creek may pursue its tort claims against IGF once arbitration is completed and it has complied with all of the policy provisions. Both the federal case law and the plain language of the contract support this conclusion." Id.

This case summary was prepared July, 2002.