Summary of a Recent
Judicial Development in
Federal Crop Insurance

Wisconsin Insurance Company Sued in Arkansas

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In Ferrell v. West Bend Mutual Insurance Company, 393 F.3d 786 (8th Cir. 2005), the United States Court of Appeals for the Eighth Circuit held (1) that a Wisconsin crop insurer was subject to personal jurisdiction in Arkansas, (2) that the insurance policy's "right-to-sue-insurer" clause was enforceable in Arkansas, (3) that the action was not precluded by a previous declaratory judgment in Wisconsin, (4) that damage to a tomato crop was "property damage" under the policy, (5) that damage to the tomato crop constituted an "occurrence" under the policy, (6) that a contractual liability exclusion did not apply, and (7) that Arkansas' penalty statute applied. See id.

Background

Arkansas tomato growers Phillip and Tommy Ferrell and Clay and Donny Lowry (growers) purchased a plastic film from Hi-Tech Film, Inc. (Hi-Tech) designed to prevent soil from splashing onto tomatoes and causing blight. See id. After placing the film on their fields, the film began to deteriorate causing holes in parts of the film. See id. Because of these holes, the growers' tomatoes were splashed with soil when it rained, causing blight. See id. As a result, the tomatoes were smaller than normal and suffered from sunburn, rain damage, and cracking. See id. Therefore, in August of 2000 the growers sued Hi-Tech in Arkansas federal district court and were awarded damages and attorney's fees due to the breach of warranties of merchantability and fitness. See id. The growers then sought indemnification from West Bend Mutual Insurance Company, the insurance company that insured Hi-Tech. See id. The court "awarded the tomato growers the underlying judgment, plus attorney's fees and costs, a penalty, prejudgment interest, and postjudgment interest." Id. at 790. West Bend appealed the decision to the Eighth Circuit. See id.

Arguments, Analysis, and Holdings

West Bend argued that the district court did not have personal jurisdiction over it because it lacked sufficient minimum contacts with Arkansas. See id. West Bend asserted that it was a Wisconsin company with its principle place of business in Wisconsin, that it conducted no business and had no offices or agents in Arkansas, that it had no bank accounts or property in Arkansas, that it solicited no business in Arkansas, and that it was not licensed to operate in Arkansas. See id. The court explained that the policy covering Hi-Tech contained a territory-of-coverage clause providing that the policy covered Hi-Tech "against injury or property damage from occurrences in '[t] he United States of America . . . Puerto Rico, and Canada.'" Id. at 790. The court determined that West Bend chose to extend its coverage into Arkansas and was therefore subject to personal jurisdiction in Arkansas. See id. It also determined that the "territory-of-coverage clause" in the policy satisfied the minimum contacts requirement of the Due Process Clause. See id.

West Bend also argued that the growers' only cause of action arose out of § 23-89-101 of the Arkansas Code, which provides for direct actions against an insurer based on an insurance policy issued or delivered in Arkansas. See id. Although the growers abandoned their reliance upon this section because the insurance policy at issue was neither issued nor delivered in Arkansas, the court explained that the express language of the policy provided for a cause of action. See id. The court explained that the language of the policy providing that "[a] person or organization may sue us to recover . . . on a final judgment against an insured obtained after an actual trial." Id. at 792. The court explained that § 23-89-101 of the Arkansas Code did not preclude a claim based upon the express language of a policy and the common law. See id.

West Bend further argued that the growers' claim was foreclosed by a previously issued declaratory judgment in Wisconsin that West Bend "had no duty to defend or indemnify Hi-Tech." Id. at 792. West Bend argued that such judgment should be given full faith and credit in Arkansas. See id. The court explained that the district court had concluded that "the Wisconsin judgment did not bar the tomato growers' action in Arkansas, because the growers were not a party to the Wisconsin action, and Hi-Tech had little or no incentive to obtain a full and fair adjudication in that case." Id. at 792-93. The court agreed with the district court that the Wisconsin judgment did not bar this action. See id. It stated that the growers would not have been precluded in Wisconsin and that the growers' interests cannot be deemed to have been litigated in the Wisconsin action. See id.

West Bend next argued that the breach-of-warranty damages were for economic losses not covered by the policy and that the policy's contractual liability exclusion applied. See id. The court explained that the growers did sustain property damage as a result of the defective film purchased from Hi-Tech. See id. It noted that the tomato plants were "stunted, undersized, sunburned, or waterlogged, and they were cracked in parts." Id. at 795. The court stated that measuring the damage in terms of lost profits or diminished gross receipts did not alter the fact that property (tomatoes) was damaged. See id. The court also stated that there was an "occurrence" within the meaning of the policy. See id. It noted that the plants were accidentally and unintentionally damaged due to the faulty film. See id. The court further explained that the plants were exposed to blight, overwatering, and underwatering. See id. The court further determined that because there was no agreement or contract between the growers and Hi-Tech assuming liability for damages, West Bend's contention that the policy's exclusion of coverage for contractual liability applied was erroneous. See id.

West Bend also argued that the growers were not entitled to a penalty and attorney's fees under § 23-79-208(a)(1) of the Arkansas Code. See id. That section provides that if an insurance company fails to pay in accordance with the policy after demand is made, they are liable to pay 12% penalty on the amount of the loss and reasonable attorney's fees. See id. The court explained that even where the law of another state governs the substantive issues, the award of the 12% penalty and attorney's fees is procedural and therefore governed by Arkansas law. See id. The court cited to USAA Life Ins. Co. v. Boyce, 745 S.W.2d 136 (Ark. 1988), and Arkansas Supreme Court decision, for that proposition. See id. The court explained that under § 23-79-208 of the Arkansas Code, there must be a connection with Arkansas for the court to award the penalty and attorney's fees on a policy. See id. The court further explained that the "insurance policy matured in Arkansas, the injury occurred in Arkansas, the damaged property was owned by Arkansas residents, and the Arkansas residents brought suit and obtained a judgment in Arkansas." Id. at 797. The court concluded that because of these factors there was a sufficient connection to apply § 23-79-208.

The case was decided on January 4, 2005; this summary was posted Mar. 24, 2005.