Summary of a Recent
Judicial Development in
Federal Crop Insurance

Private Crop Insurer Ordered to Indemnify
General Farming Partnership

Harrison M. Pittman
Research Assistant Professor of Law

Summary of Decision

In Kroeplin Farms General Partnership v. Heartland Crop Insurance, Inc., 430 F.3d 906 (8th Cir. 2005), the United States Court of Appeals for the Eighth Circuit affirmed a federal district court decision that ordered a private insurer to indemnify a general farming partnership that had been assigned a right to indemnity by a former partnership member who was disqualified from receiving any form of indemnity payments for the 2002 crop year.

Background

In September of 2001, Bryan Koeplin obtained a Multi-Peril Crop Insurance (MPCI) Policy from defendant Heartland Crop Insurance, Inc. (Heartland) that covered his 2002 winter-wheat crop. Kroeplin, 430 F.3d 906, 908. In December of 2001, Bryan and two other individuals formed a general partnership known as Kroeplin Farms General Partnership (Kroeplin Farms). See id. at 909. In February of 2002, Bryan withdrew from Kroeplin Farms. See id. At the time of his withdrawing, Bryan assigned his right to indemnity under the policy to Kroeplin Farms. See id. In March of 2005, Bryan executed a bill of sale that transferred his interests in the 2002 wheat-crop and any indemnity payments to the farming partnership. See id.

In June of 2002, the United States brought an action against Bryan and his wife that alleged that they submitted a false claim with respect to their 1999 sunflower crop. See id. In July of 2002, the parties entered into a settlement agreement where, among other items, Bryan and his wife consented to voluntary disqualification from the MPCI policies on all crops that they had an interest in for the 2002 crop year. See id. at 609, 610. The agreement was to be effective from September 30, 2001 through September 30, 2002. See id. at 610. During the time the settlement agreement was negotiated and entered into, Kroeplin Farms filed a loss claim with Heartland. See id. at 609. Heartland initially agreed to indemnify Kroeplin Farms, but later denied the claim on the grounds that the settlement agreement voided the MPCI policy. See id.

The United States District Court for the District of South Dakota held that although the MPCI policy “was void and ‘never existed,’ . . . Heartland could not raise this defense because it had been notified of, and accepted, the assignment before the settlement agreement.” Id In so doing, the district court granted summary judgement in favor of Kroeplin Farms and ordered Heartland to indemnify the farming partnership for the loss. See id. Heartland appealed to the Eighth Circuit. See id.

Analysis and Holdings

The Eighth Circuit first considered whether the MPCI was void for fraud in accordance with the MPCI policy terms. The MPCI policy defined “void” as “[w]hen the policy is considered not to have existed for a crop year as a result of concealment, fraud, or misrepresentation . . . .” Id at 909-10. Section 27 of the policy provided that “[i]f you have falsely or fraudulently concealed the fact that you are ineligible to receive benefits . . . or if you or anyone assisting you has intentionally concealed or misrepresented any material fact relating to this policy . . . [t]his policy will be voided.” Id at 910. The court thus noted that Section 27 that the MPCI policy could be voided due to two types of fraud. See id. It added the following:

As for the first “if” clause, when Bryan applied for and received his winter-wheat policy in September 2001, he did not conceal any facts about his eligibility . . . . As to the second clause, the government’s concealment and misrepresentation charges do not relate in any way to Bryan’s winter-wheat-crop policy– the charges involve only his 1999 sunflower crop. Therefore, his policy is not void under section 27, the linchpin of the definition of “void” in the policy.

Id

The court next considered the argument that Bryan’s ineligibility for crop insurance began in July of 2002, rather than September 30, 2001, the date established in the settlement agreement. See id. Here, the court stated that “[a]lthough Bryan argues that his ineligibility did not begin until July 8, 2002, . . . he agreed to debarment and disqualification starting September 30, 2001” and, therefore, “is subject to the settlement agreement he voluntarily consented to, even if it is broader than the regulations authorize.” Id It added that by consenting to the September 30, 2001 disqualification date, Bryan waived any right to a different debarment date authorized by federal regulations. See id.

The court then turned to Heartland’s argument that Bryan’s MPCI policy was void from the date that it was entered into and, therefore, he did not have a right to assign a right of indemnification to Kroeplin Farms. See id. The court explained that South Dakota law governed the issue and that under South Dakota law, “‘a void contract is invalid or unlawful from its inception . . .’” and “‘is a ‘mere nullity, and incapable of confirmation or ratification.’’” Id (citations omitted). It also explained, however, that under state law, a voidable contract “is valid unless ‘legally voided at the option of one of the parties.’” Id (citations omitted).

The court explained that the MPCI policy at issue was voidable “to the extent that the government had the option to void it by disqualifying Bryan in accordance with the law.” Id at 911. It further explained that under federal regulations, a MPCI policy is void “‘once the person has been determined to be ineligible.’” Id (citing 7 C.F.R. § 400.681(b)). The court held that the MPCI policy is not void since it was not unlawful from the beginning, but rather the policy is void once the person becomes ineligible. See id.

The court then turned to the issue of whether the policy was properly assigned by Bryan to Kroeplin Farms. The court explained that while an “assignee stands in the same shoes as the assignor’” and “can obtain no greater rights than the assignor had at the time of assignment,” “an assignee is not subject to any defense by the obligor against the assignor that arises after notice of the assignment.” Id The court stated that

Bryan executed a transfer of right to indemnity effective February 11, 2002. The transfer was made on a form provided by Heartland, which was mailed back to, and approved by, Heartland. This assigned to Kroeplin Farms Bryan’s right to indemnity. The transfer of indemnity was an unconditional assignment, giving Kroeplin Farms the right to recover against Heartland. Any defense Heartland had against Bryan did not arise until July 8, 2002– the date Bryan agreed to disqualification and debarment– because the original policy was entered into validly. Heartland’s defense against Bryan arose after it had notice of the assignment, and, therefore, it cannot now assert that defense against Kroeplin Farms.

Id

The Eighth Circuit affirmed the district court, which had ordered Heartland to indemnify Kroeplin Farms.

The case was decided on December 6, 2005; this summary was posted Mar. 6, 2006.