Summary of a Recent
Judicial Development in
Crop Insurance

Crop Insurers Required To Exhaust
Administrative Remedies

Patricia Farnese
National AgLaw Center Graduate Assistant

In an action involving a crop insurance dispute between several sugar beet growers and their insurers in which the insurers filed a third-party complaint against the Federal Crop Insurance Corporation ("FCIC") and the FCIC filed a motion to dismiss the third-party complaint, the United States District Court for the District of Minnesota has ruled that it lacked jurisdiction to consider the FCIC's motion to dismiss. In re 2000 Sugar Beet Crop Ins. Litigation 2002, 228 F.Supp.2d 999, 1001 (2002). The district court ruled that it lacked jurisdiction because the insurers were required to exhaust their administrative remedies before the matter could be judicially reviewed. See id. at 1003-07.

The plaintiffs were sugar beet growers who purchased multi-peril crop insurance policies from several crop insurance companies to cover their crops for the 2000 growing season. See id. at 1001. The growers submitted claims to the insurers after their crops were damaged by frost. See id. The insurers denied the growers' claims and the growers brought a state court action against them seeking coverage under their policies. See id. The insurers removed the matter to federal court and filed a third-party complaint against the FCIC, asserting that they had no obligation to the growers and that "liability should be borne instead by the FCIC." Id. The FCIC responded by filing a motion to dismiss the third-party complaint. See id.

The insurers claimed that a bulletin issued by the Risk Management Agency ("RMA") on March 2, 2001, "altered the terms of the insurance and reinsurance agreements, thereby relieving the companies of any liability for the farmers' loss." Id. This bulletin addressed "'[w]hether 2000 crop year sugar beets affected by drought, freeze, or other insurable causes during the insurance period that later manifested damage after being delivered to the processor are insurable.'" Id. (citation omitted). The bulletin provided, in part, that

RMA believes that the type of losses experienced by the Minnesota producers in the above listed counties were contemplated under the Sugar Beet Crop Insurance Provisions when RMA elected to cover freeze as a cause of loss. Sugar beet experts assert that freeze damage did not manifest itself until after the end of the insurance period and following delivery of the affected sugar beets to the processor. In this case, RMA will reinsure any such 2000 crop year sugar beet losses that the reinsured companies elect to pay in those effected counties. RMA notes that it is solely the reinsured company's decision with respect to payment of these claims. RMA does not in any manner direct or obligate reinsured companies to pay these claims.

Id. at 1001-02.

The FCIC requested that the district court dismiss the third-party complaint for lack of jurisdiction because "the insurance companies failed to exhaust their administrative remedies, thereby barring federal jurisdiction, or alternatively limiting judicial consideration of the third-party claims." Id. at 1002. The district court ruled that it lacked jurisdiction to consider the FCIC's motion to dismiss because the insurance companies were required to exhaust their administrative remedies before the matter could be submitted for judicial review. See id.

The court stated that because federal courts are courts of limited jurisdiction, "the requirement that jurisdiction be established as a threshold matter is inflexible and without exception." Id. (citation omitted). It also stated that "[w]hen required by Congress, failure to exhaust administrative remedies bars federal jurisdiction." Id. (citation omitted). The court explained that the exhaustion requirement makes certain that courts "receive the fullest benefit of administrative review, avoiding 'premature interruption of the administrative process,' promoting deference to agency discretion, and allowing the agency to 'develop the necessary factual background.'" Id. at 1002-03 (citation omitted). It added that

Congressional intent is paramount when considering whether exhaustion is jurisdictional. "Where Congress specifically mandates, exhaustion is required. But where Congress has not clearly required exhaustion, sound judicial discretion governs." When Congress has adopted a statutory provision, the Court cannot waive exhaustion. Conversely, where Congress has not enacted an explicit requirement, a court may not create one.

Id. (internal citations omitted).

The court explained that 7 U.S.C. § 6912(e) explicitly requires that administrative remedies be exhausted before an action can be brought against the USDA or any of its agencies, such as the FCIC. See id. at 1003. Section 6912(e) provides that "a person shall exhaust all administrative appeal procedures established by the Secretary or required by law before the person may bring an action in a court of competent jurisdiction against . . . an agency . . . of the Department." Id. The district court noted that although the Eighth Circuit had not previously considered whether § 6912(e) is jurisdictional, several other courts had considered the issue. See id.

In Bastek v. Federal Crop Insurance Corp., 145 F.3d 90 (2d Cir. 1998), the Second Circuit ruled that the § 6912(e) exhaustion requirement was "unambiguous, and therefore jurisdictional." Id. (citing Bastek, 145 F.3d at 95) (additional citations omitted). The Second Circuit stated that it "harbored 'little doubt that Congress's intent, in enacting this statute, was to require plaintiffs to exhaust all administrative remedies before bringing suit in federal court.'" Id. at 1003-04 (quoting Bastek, 145 F.3d at 95). However, in McBride Cotton and Cattle Corp. v. Veneman, 290 F.3d 973 (9th Cir. 2002), the Ninth Circuit ruled that "'failure to exhaust does not deprive a federal court of jurisdiction when the exhaustion statute is merely codification of the exhaustion requirement,' and lacks 'sweeping and direct language' requiring exhaustion." Id. at 1004 (quoting McBride, 290 F.3d at 978).

In the present case, the district court adopted the reasoning in Bastek, stating that Bastek was "most consistent with the Eighth Circuit's approach to exhaustion, as seen in other administrative law cases, and more consonant with the Supreme Court's decision in Weinberger v. Salfi, 422 U.S. 749, 757 (1975)." Id. (citations omitted). In Chellete v. Harris, 229 F.3d 684 (8th Cir. 2000), the Eighth Circuit ruled that the exhaustion requirement contained in the Prison Litigation Reform Act was "not jurisdictional because its language is indirect and a general codification." Id. The exhaustion requirement at issue in Chellete stated that "'no action shall be brought . . . until such administrative remedies as are available are exhausted . . . ." Id. In Weinberger, the Supreme Court required that there be "clear language expressing jurisdictional nature of exhaustion requirement." Id.

In the present case the court concluded that

In enacting 7 U.S.C. § 6912(e) . . . Congress made exhaustion an affirmative requirement, providing that "a person shall exhaust" administrative remedies before initiating litigation against the FCIC. "[W]hen Congress enacted section 6912(e), it did so against the backdrop of principles of collateral estoppel, res judicata, and administrative estoppel." A waiver of exhaustion would divest the USDA of its prerogative to review determinations and pronouncements prior to judicial action. It would remove the FCIC's ability to create a factual record, and render the agency's crop insurance expertise moot. Under these conditions, this Court finds the requirement jurisdictional.

Id. (internal citations omitted).

The court next examined whether the insurers were required to exhaust the administrative appeal process outlined in 7 C.F.R. § 400.169. See id. The court explained that § 400.169 "require[s] that an insurance company appeal any dispute concerning whether an FCIC Bulletin explains, restricts or interprets the [Standard Reinsurance Agreement] to the Board of Contract Appeals." Id. at 1005. The district court stated that it "'must give substantial deference to an agency's interpretation of its own regulations'" unless that interpretation is "'plainly erroneous or inconsistent with the regulations.'" Id. (quoting Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)).

The court noted that "[i]n 1997, the USDA Board of Contract Appeals considered an appeal under an earlier version of 7 C.F.R. § 400.169, in a case involving application of the exhaustion regulation to an FCIC Manager's Bulletin." Id. (citing Rain & Hail Ins. Serv., Inc., AGCBA No. 97-143-F (1997)). In the present case, the insurers asserted that Rain and Hail involved an appeal "of any directive that might 'affect, interpret, explain or restrict" the terms of the reinsurance agreement. Id. (citation omitted) (emphasis supplied). After Rain and Hail was decided, however, § 400.169 was modified by removing the word "affect" from the regulation's language. See id. (citation omitted). The insurers argued that this modification removes the Board of Contract Appeals' jurisdiction over appeals involving Manager's Bulletins because the decision in Rain and Hail caused the regulation to be amended. See id.

The district court rejected this argument, stating that there was "no basis upon which to read more into the modification than the regulation's language requires. [Section 400.169] restricts the terms of the reinsurance agreement; as such, it is covered by the exhaustion requirement." Id.

The court noted that the Eighth Circuit has recognized three limited exceptions to the requirement that a party exhaust its administrative remedies before it can seek judicial review. See id. at 1006. The court stated that these exceptions occur "where the litigant '(1) raises a colorable constitutional claim collateral to his substantive claim of entitlement; (2) shows the irreparable harm would result from exhaustion; and (3) shows that the purposes of exhaustion would not be served by requiring further administrative procedures.'" Id. (quoting Anderson v. Sullivan, 959 F.2d 690, 693 (8th Cir. 1992)). In this case, the insurers did not assert a constitutional claim nor assert that the Board of Contract Appeals' consideration of the Manager's Bulletin "would be inimical to the purposes of exhaustion." Id. Rather, the insurers only argued that exhaustion would waste judicial resources. See id.

The court stated that "Congress imposed the exhaustion requirement 'to provide the Secretary of Agriculture with the necessary authority to streamline and reorganize the Department of Agriculture to achieve greater efficiency, effectiveness, and economics in the organization and management of the programs and activities carried out by the Department." Id. at 1006-07 (citing 7 U.S.C. § 6901). It also stated that "[e]xhaustion promotes judicial economy by 'avoiding needless repetition of administrative and judicial factfinding, and by perhaps avoiding the necessity of any judicial involvement at all, if the parties successfully vindicate their claims before the agency.'" Id. (citation omitted). The court ruled that the insurers' desire to save judicial resources provided "no basis on which to reject Congress's explicit exhaustion requirement." Id.

The district court concluded that the insurers' failure to comply with the exhaustion requirement deprived it of jurisdiction, and that it was therefore "without power to consider third-party defendants' motion to dismiss for failure to state a claim." Id. Thus, it granted the FCIC's motion to dismiss. See id.

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