Summary of a Recent
Judicial Development in
Crop Insurance

Court Rules Against Insureds' In Crop
Insurance Action

Jennifer Williams
National AgLaw Center Graduate Assistant

Summary of Decision

In Holliday v. Rain and Hail, L.L.C., 690 N.W.2d 59 (Iowa 2004), the Supreme Court of Iowa denied insureds' appeal that a lower court erred in not allowing them to amend their complaint against their crop insurance company and that the lower court erred in the burden of proof instruction it provided to the jury.

Background

Doug, Janet, and Wendel Holliday raised corn and soybeans on several farms in southern Iowa. See id. at 60. Rain and Hail, L.L.C. (Rain and Hail) issued and serviced several federal crop insurance policies to the Hollidays, issued under the standard Federal Crop Insurance Corporation (FCIC) reinsurance agreement. See id. Under the standard agreement, Rain and Hail is paid by the FCIC for servicing the policy and the FCIC also subsidizes part of the premium the farmer pays and pays a portion of the farmer's loss. See id. at 61.

These insurance policies ensure that farmers will receive a certain amount of revenue "by guaranteeing farmers will obtain certain yields . . . on their insured farms." Id. Farmers in the program must provide production reports from past years in order to determine what yields will be guaranteed, as well as to certify dates crops were planted. See id. The Hollidays submitted reports to Rain and Hail that certified their 1998 planting dates and 1997 yields on several different farms. See id. However, some of the farms on which yields were certified had not been harvested at all in 1997, and crops had not been planted in 1998 on some of the farms submitted by the Hollidays. See id. Rain and Hail began to investigate the Hollidays at the request of the FCIC, while at the same time the government audited the insurance policies and concluded that "(1) the Holliday's actions were fraudulent, (2) they had received indemnities to which they were not entitled in prior years, and (3) their approved yields were overstated." Id. Rain and Hail communicated these discrepancies to the Hollidays. See id. The Hollidays subsequently submitted new documentation, which were also inconsistent with both employee timecard records and eyewitness accounts. See id.

As a result, Rain and Hail voided the Hollidays 1998 policies for crop insurance, which they were allowed to do under the contract if the insured "intentionally conceal[s] or misrepresent[s] any material fact relating to [the policies]." Id. at 62. In the process of investigating the Hollidays, Rain and Hail incurred over $80,000 in expenses. See id. The Hollidays sued Rain and Hail in 2000 for breach of contract and bad faith because of their voiding of the 1998 policies and also asked the court to declare that the 1998 policies "were in full force and effect." Id. Rain and Hail raised several affirmative defenses in their answer, including "that the policies were void because of the Hollidays' alleged 'intentional concealment and/or misrepresentation of one or more material facts as prohibited by the terms of [the Hollidays'] policies'," and they also counterclaimed for twenty percent of the 1998 premium to offset their costs, as allowed by the terms of the policy. Id.

Soon thereafter, the Hollidays amended the petition, adding claims regarding the 1999 policies and for duress. See id. The day before the trial was to start, the Hollidays moved to amend the petition again regarding with whom the 1999 policies were issued. See id. The district court denied this motion and the case went to trial. See id. The district court also granted Rain and Hail's motion for a directed verdict on the conversion issue. See id. Objections were raised by the Hollidays during the trial as to the standard of proof on the misrepresentation defense, but the court did not agree and the breach of contract claim and bad-faith claims were presented to the jury. See id. The jury found that there was misrepresentation on the part of the Hollidays and the "district court entered judgment in favor of Rain and Hail on the breach of contract, bad faith, and declaratory judgment claims." Id. at 63. The court then dismissed Rain and Hail's counterclaim. See id. Both sides appealed. See id.

Arguments

On appeal, the Hollidays took issue again with the jury instructions regarding the burden of proof on the affirmative defense, arguing that the correct standard should be "by a preponderance of clean, satisfactory, and convincing evidence rather than by a preponderance of the evidence." Id. at 62-63. They claim the jury instruction was "a material misstatement of the law and for that reason was prejudicial, warranting reversal." Id. at 64. The Hollidays also appealed the court's denial of their motion to amend the petition that they filed the day before the trial began. See id. at 63. On their cross-appeal, Rain and Hail argued that the "court erred by dismissing its counterclaim" in that no election and demand was required under the contract. Id.

Analysis and Holdings

The first issue the court examined was the jury instruction argument regarding the burden of proof. See id. The court looked at the instruction being appealed in conjunction with another instruction that defined "preponderance of the evidence as evidence 'that is more convincing than opposing evidence' and states that '[t]o prove something by the preponderance of the evidence is to prove that is it more likely true than not true.'" Id. at 63-64. The court stated that elements of common-law fraud need to be proven by "a preponderance of the evidence that is clean, satisfactory, and convincing," but that was not what needed to be proven here by Rain and Hail. Id. at 64. Instead, they only needed to "prove a contractual defense" and "one of two elements: intentional concealment or misrepresentation; there was no language [in the contract] indicating that Rain and Hail had to prove all the elements of common-law fraud." Id. As such, the court held burden of proof was correctly stated to the jury by the district court. See id.

Next, the court turned to the Hollidays motion to amend the petition. See id. at 65. The court held that this motion had been properly denied by the district court for two reasons. See id. The first was that the amendment would have "inject[ed] a new issue into the case-whether Rain and Hail had a right of setoff against funds due under another insurer's policy." Id. The court stated that this would have required that another party be added to the case as well as cause undue prejudice to Rain and Hail because it was not an issue raised in the original pleadings. See id. Secondly, the court agreed with the district court's ruling that the motion itself was not timely. See id. Because the Hollidays had the information needed to make the correction at least a month before the pleadings time was closed and yet chose not to move to amend the petition until the day before trial, the court upheld the denial of the motion to amend.

The court did not agree with the district court's dismissal of Rain and Hail's counterclaim for twenty percent of the 1998 premium. See id. The district court had ruled against Rain and Hail because it found that the provision in question "was discretionary, and for that reason Rain and Hail had to make an election and demand for payment before it had any right of action for the liquidated damages." Id. The court here held that while it is discretionary, there was nothing in the policy or that provision that required Rain and Hail to "first make an election and demand before filing suit." Id. at 66. As such, the court held that the general rule that applied in this case was that no such "election and demand" was necessary. Id. On this issue only, the court reversed the judgment of the district court and remanded to allow the court to decide this issue on the record. See id.

The case was decided on December 17, 2004; this summary was posted Mar. 21, 2005.