Summary of a Recent
Judicial Development in
Crop Insurance

State Law Claims Not Preempted By Federal Laws Governing Crop Insurance

Gaby R. Jabbour
National AgLaw Center Research Assistant

Summary of Decision

In Nobles v. Rural Community Ins. Services, 303 F.Supp.2d 1292 (M.D. Ala. 2004), the United States District Court for the Northern Division of Alabama held that an insured's state law claims against his crop insurer were not preempted by the Federal Crop Insurance Act (FCIA), 7 U.S.C. §§ 1501-1524, or by the regulations implementing the FCIA.

Background

In 1999, plaintiffs William M. Nobles and Ronnie Hales bought two types of coverage for their crops from Rural Community Insurance Services (RCIS) after its regional sales manager informed them that "because their land was not listed as uninsurable in the actuarials published by the Federal Crop Insurance Corporation (FCIC), there would be no reason for it to be uninsurable." Id. at 1295. RCIS adjusters subsequently inspected the plaintiffs' crop to verify they were using proper farming practices. See id. In the course of the inspections they determined that approximately 5000 acres of the plaintiffs' land was not insurable "because it had not been planted and harvested in one of the previous three crop years . . . ." Id. The plaintiffs later suffered significant crop losses due to drought conditions and sought indemnification for those losses. See id. Based on the previous determination that approximately 5000 acres of the plaintiffs' land were uninsurable, RCIS denied the plaintiffs' crop-loss claims. See id. at 1296. The plaintiffs brought an action against RCIS and the court ordered the matter to be submitted to arbitration pursuant to the arbitration agreement set forth in the crop insurance policies. See id. The arbitration panel determined that coverage existed under both of the plaintiffs' policies for acreage for which the plaintiffs sought coverage. See id. The panel awarded damages to the plaintiffs in the amount of all remaining unpaid indemnities under the policies. See id. Following the panel's decision, the plaintiffs sought to have the case reinstated into the court's active docket so that they could pursue their state law claims against RCIS. See id.

Arguments

RCIS argued that "because it was complying with established FCIC rules, regulations, and directives when it determined that . . . [the plaintiffs'] acreage was not insurable," the plaintiffs' state-law claims were inconsistent with the federal laws governing crop insurance and were therefore preempted by federal law. Id. at 1296-97. In making this argument, RCIS relied in part on 7 C.F.R. § 400.352, an FCIC regulation that provided that

State or local governmental entities or non-governmental entities are specifically prohibited from . . . (4) levying fines, judgments, punitive damages, compensatory damages, or judgments for attorney fees or other costs against companies . . . arising out of actions or inactions on the part of such . . . entities authorized or required under the . . . [FCIA], the regulations, any contract or agreement authorized by the . . . [FCIA regulations] or procedures issued by the Corporation (nothing herein is intended to preclude any action on the part of any authorized . . . entity concerning any actions or inactions on the part of the . . . company whose action or inaction is not authorized or required under the Federal Crop Insurance Act, the regulations, any contract or agreement authorized by the Federal Crop Insurance Act or by regulations or procedures issued by the Corporation).

Id. at 1297 (emphasis added) (citation omitted).

Analysis and Holding

The court stated that "RCIS's argument misunderstands the basis of a number of . . . [the plaintiffs'] state-law claims." Id. at 1297. It noted that the key act underlying the plaintiffs' fraud claim "is not RCIS's denial of their insurance coverage, but is instead RCIS's act of telling them that their land was insurable." Id. The court stated that while RCIS was required under the regulations to find that some of the plaintiffs' acreage was not insurable, "it certainly was not required to misrepresent to them that their land was insurable when in fact it was not." Id. It added that the plaintiffs' claims were based on RCIS's failure to inform them of certain insurability requirements and that the plaintiffs' claims therefore fall under the parenthetical language set forth in 7 C.F.R. § 400.352(b)(4).

The court explained that in Williams Farms of Homestead, Inc. v. Rain and Hail Ins. Servs., Inc., 121 F.3d 630 (11th Cir. 1997), it was determined that "'Congress intended to leave insureds with their traditional contract remedies against their insurance companies. Such remedies include[d] a state law breach of contract claim . . . The existence of a claim against a private reinsured company is therefore consistent with the scheme of the FCIA.'" Id. (citation omitted). See also id. (discussing Meyer v. Conlon, 162 F.3d 1264 (10th Cir. 1998) (same holding as in William Farms). The court concluded that

Similar to those state-law claims in William Farms and Meyer, . . . [the plaintiffs'] state-law claims are not preempted by the FCIA or FCIC regulations. . . . Under the plain language of § 400.352(b)(4), and as explained . . . in Williams Farms, these type [sic] of claims explicitly are not preempted by the FCIA or FCIC regulations. As such, . . . [the plaintiffs'] state-law claims cannot be dismissed as preempted by federal law, and RCIS's preemption argument must be rejected.

Id.

The case was decided on February 24, 2004; this summary was posted July 14, 2004.