Summary of a Recent
Judicial Development in
Crop Insurance

Grower Required to Submit Crop Insurance
Dispute to Arbitration

Patricia Farnese
National AgLaw Center Graduate Assistant

In an action brought by several insured sugar beet growers against their insurers when the growers were denied coverage under their federal crop insurance policies, the United States District Court for the District of Minnesota has ruled that the parties were required to submit their dispute to arbitration. In re 2000 Sugar Beet Crop Ins. Litigation, 228 F.Supp.2d 992 (D. Minn. 2002).

The plaintiffs were sugar beet growers who purchased multi-peril crop insurance contracts for the 2000 crop year from various crop insurance companies, defendants. See id. at 994. In October, 2000, the growers' crops were damaged or destroyed by a hard frost, causing the growers to suffer significant financial losses. See id. The growers attempted to mitigate the frost damage, but they determined by mid-December that a loss had occurred. See id. After harvesting their crops, the growers submitted their crop insurance claims to the defendants. See id. The defendants denied the growers' claims, "apparently expecting the FCIC's Risk Management Agency ("RMA") to provide full coverage." Id. The growers subsequently brought suit against the defendants. See id. After removing the matter to federal court and bringing a third-party complaint against the Federal Crop Insurance Corporation ("FCIC"), the defendants moved to have the matter dismissed, or in the alternative, to compel arbitration. See id.

The district court explained that its first task was to "determine if an agreement to arbitrate exists and, if so, to ascertain the scope of that agreement." Id. (citation omitted). Arbitration is a contract matter "and a party cannot be required to submit to arbitration any dispute which he has not agreed to so submit." Id.

The court began by examining paragraphs twenty and twenty-five of the parties' crop insurance policy. See id. Paragraph twenty stated that the parties agreed to arbitrate any dispute that arose if they "'fail[ed] to agree on any factual determination.'" Id. at 995 (citation omitted). Paragraph twenty-five provided that the growers "may not bring legal action against [the insurer] unless [the insured] has complied with all policy provisions." Id. (citation omitted).

The defendants contended that these provisions required the parties to submit their dispute to arbitration. See id. The growers argued that they were not required to submit the dispute to arbitration because there were no factual issues in dispute between the parties. See id. They asserted that because the insurers failed to adjust the growers' claims, no factual determinations were made that could be in dispute. See id.

The court disagreed and ruled that decisions to deny payment are factual, not legal, determinations and were exactly the types of disputes the parties agreed to arbitrate in the crop insurance policy. See id. at 996. The court concluded that "[s]uch determinations of coverage questions are precisely those left to arbitration under the insurance contract. The parties have agreed to arbitrate their factual disputes; absent waiver, that agreement is binding." Id.

The court stated that to determine whether the defendants had waived their right to arbitration, it had to first decide whether federal law or Minnesota state law would govern. See id. The court explained that the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, "a so-called reverse preemption statute, provides 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 . . . unless such Act specifically relates to the business of insurance.'" Id. (quoting 15 U.S.C. § 1012(b)). The court explained that the McCarran-Ferguson Act was enacted to protect the states' ability to regulate insurance and that the Act "prevents otherwise neutral laws from preempting state insurance statutes." Id. (citation omitted).

The court noted that the issue of whether the McCarran-Ferguson Act applies to a federal crop insurance scheme was "a question of first impression in this Circuit," but that a recent Arkansas Supreme Court case, IGF Ins. Co. v. Hat Creek P'ship, 76 S.W.3d 859 (Ark. 2002), and the Tenth Circuit's decision in State of Kansas ex rel. Todd v. United States, 995 F.2d 1505 (10th Cir. 1993), held that the federal crop insurance regulations at issue in those cases "fell beyond the scope of McCarran-Ferguson." Id. The court also noted that when Congress created the crop insurance program in 1938, it stated that "'[i]t is the purpose of this chapter to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance.'" Id. (quoting 7 U.S.C. § 1502).

The court concluded that the McCarran-Ferguson Act did not apply because the law establishing the federal crop insurance program "specifically relates to the business of insurance.'" Id. (citation omitted). It added that

[t]he Court finds it most unlikely that when Congress created federal crop insurance, specifically intending to provide a uniform and accessible system of farmer protection, it also intended to allow fifty states to administer that program according to fifty different state insurance regulatory schemes. Because Congressional statutes specifically relating to the business of insurance supercede state law, the FAA and other federal laws are applicable.

Id. at 997.

Thus, the court ruled that the McCarran-Ferguson Act and the FAA applied, not Minnesota insurance and arbitration law. See id.

Having found that federal law would govern, the court examined whether the defendants had waived their right to arbitrate. See id. at 997. The growers argued that the defendants waived their right to arbitrate when they "remov[ed] this case to federal court, [brought] a third-party complaint, and disput[ed] subject matter jurisdiction." Id. In Ritzel Communications, Inc. v. Mid-American Cellular Tel. Co., 989 F.2d 966, 969 (8th Cir. 1993), the Eighth Circuit stated that a right to arbitrate is waived "'when the party claiming a right to arbitrate: (1) knew of a right to arbitrate; (2) acted inconsistently with that right; and (3) prejudiced the party by these inconsistent acts.'" Id. (quoting Ritzel, 989 F.2d at 969) (additional citations omitted). The growers agreed that the defendants were aware of their right to arbitrate but argued that the defendants' actions during the litigation was inconsistent with that right and thereby prejudiced the growers. See id.

The court disagreed, ruling that the insurers did not act inconsistently with their intent to arbitrate when they removed the case to federal court and disputed subject matter jurisdiction. See id. The court stated that these actions constituted mere participation in litigation which was not sufficient to overcome the presumption against arbitration. See id. (citing Stifel Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991)).

The court also rejected the growers' assertion that the defendants waived their right to arbitrate when they filed a third-party complaint. See id. The court stated that the mere filing of a third-party complaint did not constitute a waiver unless the growers faced procedural or other burdens as a result of the addition. See id.

Finally, the court considered whether to dismiss the case or to compel arbitration. See id. at 999. The court chose the latter because it refused to adopt the expansive reading of the contract advocated by the insurers. See id. The insurers argued that the provision of the contract that states that the growers "may not bring legal action against [the insurer] unless [the insured] have complied with all of the policy provisions" precludes any court action. Id. The court rejected this reading because it would prevent any case from ever reaching the court. See id.

The case was decided on September 26, 2002; this summary was posted Mar. 2003.