Ace Prop. Ins. v. Crop Ins. and Risk Management

• Decision Date: 10 February 2005
• Docket Number: No. 1:04-cv-40036.,1:04-cv-40036.
• Citation: 357 F.Supp.2d 1140
• Parties: ACE PROPERTY & CASUALTY INSURANCE COMPANY, et al., Plaintiffs, v. FEDERAL CROP INSURANCE CORPORATION and RISK MANAGEMENT AGENCY, Defendants.
• Court: U.S. District Court — Southern District of Iowa

357 F.Supp.2d 1140

ACE PROPERTY & CASUALTY INSURANCE COMPANY, et al., Plaintiffs, v. FEDERAL CROP INSURANCE CORPORATION and RISK MANAGEMENT AGENCY, Defendants.

No. 1:04-cv-40036.

United States District Court, S.D. Iowa, Western Division.

February 10, 2005.

Wade R. Hauser, III, Ahlers & Cooney PC, Des Moines, IA, Michael J. Davenport, Rain & Hail LLC General Counsel, Johnston, IA, for Plaintiffs.

ORDER

GRITZNER, District Judge.

This matter is before the Court on Plaintiffs' Motion for Partial Summary Judgment and Defendants' Motion to Dismiss. Hearing was held on the motions on December 20, 2004. Attorneys Michael Tucci, Wade Houser, P. John Owen, and Michael Davenport appeared for Plaintiffs. Attorneys Jane Vanneman and Gary Hayward appeared for Defendants. The matter is now fully submitted for review. For the reasons discussed below, Plaintiffs' Motion for Partial Summary Judgment is denied. Defendants' Motion to Dismiss is granted.

SUMMARY OF MATERIAL FACTS

Plaintiffs are various insurers who sell and service crop insurance under the federal crop insurance program.¹ Plaintiffs claim damages arising from an alleged breach of contract by the Federal Crop Insurance Corporation ("FCIC") of the Standard Reinsurance Agreement ("SRA"), a contract between the FCIC and each Plaintiff insurer which Plaintiffs assert is a written, binding contract in continuous effect since July 1, 1997. Plaintiffs argue that the SRA was breached following the passage of two congressional acts that mandated changes to the terms of the SRA, thereby causing substantial fiscal damage to the insurers.

The Federal Crop Insurance Act, 7 U.S.C. § 1501 ("FCIA"), was passed by Congress in 1938 "to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance." 7 U.S.C. § 1502(a). The FCIC was created to carry out the purposes of the FCIA. 7 U.S.C. § 1503. The FCIC is an agency of and within the United States Department of Agriculture.

In order to protect agricultural producers from the full extent of their losses arising from drought, flood, or other natural disasters causing losses in yield from insured crops, the FCIC is required to offer catastrophic risk protection insurance ("CAT"). 7 U.S.C. § 1508(b)(1). Instead of writing CAT coverage as a direct insurer for the 1998 through 2000 reinsurance years, the FCIC reinsured approved insurance providers, who wrote CAT coverage and serviced all CAT policies. Each Plaintiff is an approved insurance provider as defined by the FCIA that writes CAT and other federal crop insurance coverages approved by the FCIC.

Under the SRA, the FCIC offers federal crop insurance through private insurance companies. Each Plaintiff entered into a reinsurance contract with Defendants via the 1998 SRA, which was effective as of July 1, 1997.² When the 1998 SRA was executed by the FCIC and each Plaintiff, the FCIA required insured policy holders to pay an administrative fee for CAT coverage.

Producers shall pay an administrative fee for catastrophic risk protection. The administrative fee for each producer shall be $50 per crop per county, but not to exceed $200 per producer per county up to a maximum of $600 per producer for all counties in which a producer has insured crops. The administrative fee shall be paid by the producer at the time the producer applies for catastrophic risk protection.

7 U.S.C. § 1508(b)(5)(A) (1997).

In 1998, the Agricultural Research, Extension and Education Reform Act of 1998 ("AREERA") was signed into law by President Clinton. Section 532 of AREERA amended 7 U.S.C. § 1508(b) by striking paragraph (5), which had granted the insurers and other approved insurance providers the right to retain CAT administrative fees as compensation for selling and servicing CAT policies, and substituted a new paragraph (5) in 7 U.S.C. § 1508(b), which deprived the insurers of this compensation and instead directed deposit of all CAT administrative fees in FCIC's crop insurance fund. The AREERA amendments to the FCIA reduced the level of CAT loss adjustment expenses payable to approved insurance providers from approximately fourteen percent to eleven percent of an imputed CAT premium. On June 30, 1998, Defendants sent Plaintiffs an FCIC Bulletin which addressed the changes brought about by AREERA and labeled the changes as Amendment No. 1 to the 1998 SRA. The Bulletin provided a description of the amendments, and stated the amendments were effective for the next (1999) reinsurance year and that the failure of an insurer to execute the amendment would terminate the SRA as of June 30, 1998, the end of the 1998 reinsurance year. Plaintiffs state that they each executed the unilaterally imposed Amendment 1 with a reservation of rights to seek compensation under the SRA.

Similarly, the Agricultural Risk Protection Act of 2000 ("ARPA") was passed by Congress and signed into law by President Clinton on June 20, 2000. The ARPA amended the recently added 7 U.S.C § 1508(b)(11) to reduce further the level of loss adjustment expenses payable to approved insurance providers under the FCIA from eleven percent to eight percent. The changes were embodied in Amendment 3 to the 1998 SRA, and on June 29, 2000, Defendants sent a Bulletin to Plaintiffs describing the amendments, stating that the amendment must be executed and returned by June 30, 2000, in order for the FCIC to provide reinsurance and subsidy in the 2001 and subsequent reinsurance years. Plaintiffs state that they executed the unilaterally imposed Amendment 3 with a reservation of rights to seek compensation under the SRA.

On February 27, 2003, Plaintiffs filed a Complaint in the Court of Federal Claims, asserting claims for breach of contract (count one) and unjust enrichment (count two). Ace Property & Cas. Ins. Co. v. United States, 60 Fed.Cl. 175 (Fed.Cl.2004). The Court of Federal Claims found that it lacked subject matter jurisdiction over plaintiffs' complaint due to plaintiffs' failure to exhaust their administrative remedies. Id. at 185.³ "[T]he statutory provision mandating exhaustion contained in 7 U.S.C. § 6912(e) is explicit. Congress' intent in enacting the FCIA was to require Plaintiffs to exhaust all administrative remedies before bringing suit." Id. at 184. "[T]he various exceptions to exhaustion urged by the plaintiffs do not apply where, as here, a clear statutory exhaustion requirement exists". Id. Due to its conclusion that it lacked subject matter jurisdiction, the court dismissed plaintiffs' complaint. Id. at 187.

On June 14, 2004, Plaintiffs filed suit in United States District Court for the Southern District of Iowa. Plaintiffs asserted the same two causes of action asserted in the Court of Federal Claims: breach of contract (count one), and unjust enrichment (count two). Plaintiffs contend that the manner of Defendants' implementation of Amendments 1 and 3, by a "take it or leave it" proposition, was a non-negotiable demand and unlawful threat to refuse to reinsure any crop insurance policies. Plaintiffs maintain that as a result of Defendants' unlawful acts, they have not received the CAT fees to which they are contractually entitled under the SRA, claiming that damages resulting from the deprivation of CAT administrative fees exceeds $61,600,000.

On August 23, 2004, Plaintiffs filed a Motion for Partial Summary Judgment, seeking summary judgment only as to Defendants' liability for the alleged breaches of contract. Plaintiffs assert that the undisputed facts in this matter demonstrate that Defendants have breached the SRA, the contract underlying this dispute. Plaintiffs claim that the breaches resulted from ARPA and AREERA, enactments that changed material provisions in the SRA regarding the compensation to be paid to or retained by the insurers. Plaintiffs assert that Defendants did not give written notice to any insurer that it was terminating the 1998 SRA in any of the discreet reinsurance years from July 1, 1998, through June 30, 2003. Plaintiffs claim that as a result, under the SRA's explicit terms, the contract between the Defendants and each insurer automatically renewed and was in effect during each of these years.

Plaintiffs argue that the "take it or leave it" manner of implementing the amendments breached the SRA in two respects. First, Plaintiffs assert that 7 U.S.C. § 1508(b) "old" paragraph (5), which granted the insurers the right to retain certain CAT administrative fees, was replaced with "new" paragraph (5), which removed the compensation from insurers; Plaintiffs also contend that a new paragraph (11) was added to 7 U.S.C. § 1508(b), which Plaintiffs argue had the effect of reducing the level of certain CAT loss adjustment expenses payable to the insurers from approximately fourteen percent to eleven percent. Second, Plaintiffs argue that Defendants' implementation of ARPA further breached the SRA by reducing the CAT loss adjustment expenses from eleven percent to eight percent. Plaintiffs assert that Congress, in enacting AREERA and ARPA, caused the FCIC to alter the terms of the SRA, thereby breaching its contract with the insurers. Plaintiffs contend that the undisputed facts and law also demonstrate that Defendants have no valid defense to their claims. Plaintiffs request that the Court enter judgment in their favor and against Defendants on the issue of liability and hold further proceedings to determine the extent of damages caused by Defendants' alleged breach.

On September 16, 2004, Defendants filed a Motion to Dismiss, or Alternatively, Motion for Summary Judgment. Defendants argue that this Court lacks jurisdiction to entertain Plaintiffs' Complaint because Plaintiffs failed to exhaust statutory mandatory administrative remedies. Alternatively, Defendants argue that the Government is entitled to summary judgment in...