Summary of a Recent
Judicial Development in
Crop Insurance

Arbitration Act Preempts State
Arbitration Statute

Harrison M. Pittman
Staff Attorney

The Iowa Supreme Court has held that Iowa Code § 679A.1 (1999), which would have required adhesion contracts to be exempted from arbitration, was preempted by the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 1-307. Heaberlin Farms, Inc. v. IGF Ins. Co., 641 N.W.2d 816 (Iowa 2002). The court held that the FAA preempted the Iowa statute because the sale of federal crop insurance had a sufficient economic nexus with interstate commerce to make the FAA applicable. Id. The court also ruled that the FAA was a permissible exercise of Congress' authority to regulate interstate commerce. Id.

Heaberlin Farms, Inc., ("Heaberlin") purchased a multi peril crop insurance ("MPCI") policy from IGF Insurance Company ("IGF"). Id. at 817. The policy covered approximately 1000 acres of Heaberlin's corn crop. Id. Heaberlin subsequently filed a "prevented planting" loss claim with IGF because the ground was too wet for Heaberlin to plant crops. Id. IGF denied the claim, contending that the loss was not covered by the MPCI policy. Id.

Heaberlin filed suit alleging that IGF breached the parties' contract when it refused to pay on the "prevented planting" claim. Id. IGF responded by filing a motion to compel arbitration and a motion to stay. Id. The trial court dismissed IGF's motions. Id. IGF appealed the trial court's decision to the Iowa Supreme Court. Id. (citing Iowa Code § 679A.17(1)(a)) (stating that the denial of a motion to compel arbitration is a final judgment for purposes of appeal).

Section 679A.1 states in relevant part, "‘A provision in a written contract to submit to arbitration a future controversy arising between the parties is valid, enforceable, and irrevocable unless grounds exist at law or in equity for the revocation of the contract. This subsection shall not apply [to adhesion contracts].'" Id. at 818. The FAA, 9 U.S.C. § 2, states in relevant part,

[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. Id.

Heaberlin argued that because the MPCI policy was an adhesion contract, its arbitration clause was unenforceable pursuant to § 679A.1. Id. Heaberlin also argued that the FAA was inapplicable "because [IGF] has not satisfied the jurisdictional requirement that the relationship was one "involving commerce." Id. at 817.

IGF argued on appeal that Iowa Code § 679A.1 was preempted by the Federal Crop Insurance Act ("FCIA") and by the FAA. Id. at 818. IGF also argued that the MPCI policy was not an adhesion contract required to be exempted from arbitration under § 679A.1. Id. The court did not address whether the FCIA preempted § 679A.1 because IGF failed to raise the issue before the trial court. Id. Because the court ruled that the FAA preempted the § 679A.1, it did not address whether the MPCI policy was an adhesion contract. Id. The court mentioned in dictum, however, that "[t]he Iowa statute, by excluding adhesion contracts, is in conflict with the FAA." Id. at 819.

The Iowa Supreme Court stated that if the MPCI policy was a "transaction involving commerce" then the FAA would apply and therefore preempt the Iowa statute. Id. (citing Allied-Bruce Teminix Cos. v. Dobson 513 U.S. 265, 271-72) (observing that the FAA is applicable in state and federal courts if the interstate nexus requirement is met). The court stated that "[c]ontrary to the plaintiff's argument, a substantial weight of authority holds that insurance transactions do involve interstate commerce." Id.

The Iowa Supreme Court noted that prior to 1944, a "long line of cases had held that insurance policies do not involve interstate commerce." Id. However, in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 553, 546-47 (1944) the Court stated that,

We may grant that a contract of insurance, considered as a thing apart from negotiation and execution, does not itself constitute interstate commerce. But it does not follow from this that the Court is powerless to examine the entire transaction, of which that contract is but a part, in order to determine whether there may be a chain of events which becomes interstate commerce.

Id.

The Court added that the insurance business "‘is not separated into 48 distinct territorial compartments which function in isolation from each other. Interrelationship, interdependence, and integration of activities in all the states in which they operate are practical aspects of the insurance companies' methods of doing business.'" Id. at 820-21 (quoting South-Eastern Underwriters, 322 U.S. at 541-42). Finally, the Iowa Supreme Court noted that the Court had stated that "[t]he result is a continuous and indivisible stream of intercourse among the states composed of collections of premiums, payments of policy obligations, and the countless documents and communications which are essential to the negotiation and execution of policy contracts . . . . The decisions which that company makes at its home office . . . concern not just the people of the state where the home office happens to be located. They concern people living far beyond the boundaries of that state." Id. at 821 (quoting South-Eastern Underwriters, 322 U.S. at 541-42).

The Iowa Supreme Court found that the activities of the Federal Crop Insurance Corporation (the government owned corporation which reinsures the federal crop insurance policies administered by private insurance companies) and its affiliates, "clearly constitute ‘the continuous and indivisible stream of intercourse among the states'" discussed in South-Eastern Underwriters. Id. at 821 (quoting South-Eastern Underwriters, 322 U.S. at 541-42). It concluded that the FAA preempted § 679A.1 because it "clearly has a sufficient economic nexus with interstate commerce . . . to invoke the arbitration provisions of 9 U.S.C. § 2 . . . . " Id. at 823.