Summary of a Recent
Judicial Development in
Crop Insurance

State Law Claims Not Preempted by Federal
Crop Insurance Laws

Gaby R. Jabbour
National AgLaw Center Research Assistant

Summary of Decision

In Hobbs v. IGF Ins. Co., 834 So.2d 1069 (La. Ct. App. 2002), the Louisiana Court of Appeal held that the Federal Crop Insurance Act (FCIA), 7 U.S.C. §§ 1501-1524, and the Federal Arbitration Act (FAA), 9 U.S.C. § 1-307, did not preempt the statutory prohibition against arbitration clauses in insurance contracts found in La. Rev. Stat. Ann. § 22:629.

Background

In 1997, plaintiffs Loyal and Jannifer Hobbs d/b/a/ Taylor Nursery, purchased a multiple peril crop insurance (MPCI) policy from defendants IGF Insurance Company and its agent Betty Hawthorne. See id. at 1070. The MPCI policy was federally reinsured through the Federal Crop Insurance Corporation (FCIC) and contained an arbitration clause. See id. In 1998 the plaintiffs suffered significant losses to their nursery crops as a result of severe drought conditions. The plaintiffs filed a loss claim with IGF through Hawthorne but IGF denied the claim. See id. The plaintiffs subsequently brought an action against the defendants alleging that the defendants breached their duty of good faith and fair dealings, failed to adjust claims fairly and promptly, and failed to make a reasonable effort to settle their claim. See id. IGF filed a motion to compel arbitration, arguing that "the arbitration clause in the federally reinsured MPCI policy preempted Louisiana law. See id. at 1071. The trial court denied IGF's motion to compel arbitration. See id. The defendants appealed the trial court judgment to the Louisiana Court of Appeal. See id.

Arguments

The defendants argued that the plaintiffs were precluded from bringing their state law action because state laws are preempted by the federal laws that govern crop insurance policies. See id. at 1071-72. The defendants also argued that the plaintiffs' claim must be submitted to arbitration in accordance with the FAA. See id.

Analysis and Holding

The court first considered whether La. Rev. Stat. Ann. § 22:629, a statute that prohibited mandatory arbitration clauses in insurance contracts, "applies to a federally reinsured crop insurance policy issued and managed in Louisiana and sold to a Louisiana farmer when the . . . claim against the insurer and its agent are based solely on state law." Id. at 1071. The court stated that such compulsory arbitration clauses were unenforceable under § 22:629 "because they operate to deprive Louisiana courts of jurisdiction of the action against the insurer." Id. (citations omitted). It also stated that arbitration clauses in contract of insurance were prohibited "as a matter of public policy because if enforced [they] would deny Louisiana citizens free access to its courts-a right guaranteed by the state's constitution." Id. The court further stated that neither the provisions of the FCIA nor federal jurisprudence mandated that a Louisiana farmer forced to purchase crop insurance as a condition to securing a crop loan would be deprived of his right to litigate state claims in state courts. See id. at 1072. It explained that "the FCIA does not specifically preclude a cause of action in state court against an insurer and its agent for its own errors and omissions." Id. The court added that "federal courts have consistently held they possess no federal subject matter jurisdiction to entertain state law claims against an insurer and its agent even though the policy sued on [was] one reinsured by the FCIC." Id. It further stated that "a review of the provisions of the FCIA and jurisprudence does not support a finding that Congress intended to completely preempt this field leaving an insured farmer with no remedy in state court." Id. See also id. at 1073-75 (citing and discussing Meyer v. Conlon, 162 F.3d 1264 (10th Cir. 1998) (holding that state law action not preempted); Williams Farms of Homestead, Inc. v. Rain and Hail Insurance Services, Inc., 121 F.3d 630 (11th Cir. 1997) (same); and Holman v. Laulo-Rowe Agency, 994 F.2d 666 (9th Cir. 1993) (same)).

Next, the court considered the defendants' argument that the plaintiffs were required to subject their claim to arbitration under the terms of the FAA. See id. at 1075. It explained that "federal courts have held the provisions of the FAA only apply if the court would have had subject matter jurisdiction over the underlying civil action. The FAA is not an independent source of jurisdiction." Id. at 1075 (citation omitted). The court concluded that

[h]aving determined the FCIA does not preclude a state cause of action by an insured against the reinsurer and the FCIC policy confers no federal question jurisdiction, we conclude the . . . [plaintiffs'] state claim is properly in state court and is governed by state law. We wholly reject . . . [the defendants'] contention that Congress intended to completely preempt this field thereby making Louisiana laws inapplicable.

Id.

The case was decided on October 23, 2002; this summary was posted July 14, 2004.