Heaberlin Farms, Inc. v. IGF Ins. Co.

• Citation: 641 N.W.2d 816
• Decision Date: 03 April 2002
• Docket Number: No. 00-0754.,00-0754.
• Parties: HEABERLIN FARMS, INC., Appellee, v. IGF INSURANCE COMPANY, Appellant.
• Court: United States State Supreme Court of Iowa

641 N.W.2d 816

HEABERLIN FARMS, INC., Appellee, v. IGF INSURANCE COMPANY, Appellant.

No. 00-0754.

Supreme Court of Iowa.

April 3, 2002.

R. Jefferson Allen and Elizabeth T. Bufkin of Henke-Bufkin, P.C., Clarksdale, Mississippi, Edward N. McConnell of Dickinson, Mackaman, Tyler & Hagen, P.C., Des Moines, for appellant.

Steven P. Wandro and Sandra K. Lyons of Wandro, Lyons, Wagner & Baer, P.C., Des Moines, for appellee.

LARSON, Justice.

This case raises novel issues involving the right of an insurer to enforce an arbitration clause in an insurance policy in the face of claims by the insured that (1) the Iowa arbitration statute, Iowa Code § 679A.1 (1999), makes the arbitration clause invalid because the insurance policy is a "contract of adhesion," and (2) the Federal Arbitration Act, 9 U.S.C. §§ 1-307, which would otherwise trump the Iowa statute and require enforcement of the clause, is inapplicable because the defendant insurance company has not satisfied the jurisdictional requirement that the relationship was one "involving commerce." The district court denied the insurer's motion to compel arbitration. We reverse and remand for further proceedings.

I. Facts and Prior Proceedings.

The plaintiff, Heaberlin Farms, Inc., bought a multiple-peril crop insurance policy from IGF Insurance Company for the 1999 crop year, covering over 1000 acres of corn in Marion County, Iowa. In June 1999 Heaberlin submitted a notice of claim for "prevented planting," as covered by the insurance policy, on the basis it was too wet for Heaberlin to plant its crops. IGF inspected the fields and determined that the cause of loss was not one covered by the policy. The cause of loss, it said, was flooding from the nearby Red Rock Reservoir, a condition excluded from coverage under the policy. In January 2000 Heaberlin commenced this breach-of-contract action against IGF for failing to pay its claim. IGF filed a motion to compel arbitration and a motion to stay. The district court denied the motions, and IGF appealed. The denial of a motion to compel arbitration is a final judgment for purposes of appeal. See Iowa Code § 679A.17(1)(a); Des Moines Asphalt & Paving Co. v. Colcon Indus. Corp., 500 N.W.2d 70, 72 (Iowa 1993),overruled on other grounds by Wesley Retirement Servs., Inc. v. Hansen Lind Meyer, Inc., 594 N.W.2d 22, 29 (Iowa 1999)

.

II. The Issues.

IGF raises three issues: (1) the Iowa law denying arbitration of adhesion contracts is preempted by the Federal Crop Insurance Act (FCIA), 7 U.S.C. §§ 1501-21; (2) the Iowa arbitration statute is also preempted by the Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-307; and (3) the policy was not an adhesion contract so as to be excluded from mandatory arbitration under the Iowa statute.

We reject IGF's first preemption argument (that the Iowa arbitration statute is preempted by the FCIA) because this issue was not raised below. We find it unnecessary to address IGF's third claim (that this policy is not an adhesion contract within the meaning of Iowa Code section 679A.1) because of our view that the FAA preempts the Iowa act.

III. The Iowa and Federal Arbitration Statutes.

The Iowa arbitration statute, Iowa Code § 679A.1, provides in relevant part:

2. A provision in a written contract to submit to arbitration a future controversy arising between the parties is valid, enforceable, and irrevocable unless grounds exist at law or in equity for the revocation of the contract. This subsection shall not apply to any of the following:

a. A contract of adhesion.

(Emphasis added.)

Under the FAA, 9 U.S.C. § 2,

[a] written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

(Emphasis added.)

The FAA has been interpreted to be very broad in its scope. The Supreme Court has stated that "[s]ection 2 is a congressional declaration of a liberal federal policy favoring arbitration agreements," Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765, 785 (1983), and questions as to whether an issue is arbitrable are to be resolved in favor of arbitration. Id. at 24-25, 103 S.Ct. at 941, 74 L.Ed.2d at 785.

The FAA is applicable in state, as well as federal, courts if the interstate nexus requirement is met. Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 271-72, 115 S.Ct. 834, 838, 130 L.Ed.2d 753, 763 (1995); Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1, 12 (1984) ("In enacting § 2 of the federal Act, Congress declared a national policy favoring arbitration and withdrew the power of the states to require a judicial forum for the resolution of claims which the contracting parties agreed to resolve by arbitration."). The reason the federal act is enforceable in state court is because Congress intended to place arbitration agreements "`upon the same footing as other contracts, where [they] belong[].'" Southland, 465 U.S. at 16, 104 S.Ct. at 861, 79 L.Ed.2d at 15 (quoting H.R.Rep. No. 96, 68th Cong., 1st Sess., 1 (1924)); see also William G. Phelps, Annotation, Preemption by Federal Arbitration Act (9 USCS §§ 1 et seq.) of State Laws Prohibiting or Restricting Formation or Enforcement of Arbitration Agreements, 108 A.L.R. Fed. 179, §§ 2-5, at 187-201 (1992).

The issue remains whether the federal act preempts the Iowa act. It is clear that it does if the policy is a "contract evidencing a transaction involving commerce." Allied-Bruce Terminix, 513 U.S. at 272-75, 115 S.Ct. at 839-40, 130 L.Ed.2d at 763-65. In Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 683, 116 S.Ct. 1652, 1654, 134 L.Ed.2d 902, 906 (1996), the Supreme Court said:

The Federal Arbitration Act ... declares written provisions for arbitration "valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Montana law, however, declares an arbitration clause unenforceable unless "[n]otice that [the] contract is subject to arbitration" is "typed in underlined capital letters on the first page of the contract." The question here presented is whether Montana's law is compatible with the federal Act. We hold that Montana's first-page notice requirement, which governs not "any contract," but specifically and solely contracts "subject to arbitration" conflicts with the FAA and is therefore displaced by the federal measure.

(Alterations in original.) (Citations omitted.) The FAA does not exclude adhesion contracts. The Iowa statute, by excluding adhesion contracts, is in conflict with the FAA. Thus, if the federal act is applicable, it preempts the Iowa statute by operation of the Supremacy Clause. Heaberlin argues that the federal act is not applicable here because this contract is not a "transaction involving commerce." That is the key issue in this case.

IV. Is This Transaction One Involving Interstate Commerce?

Heaberlin claims IGF has not established an interstate-commerce connection. However, the case the plaintiff relies on to support that argument is not persuasive. The district court in that case, Booth v. Seaboard Fire & Marine Insurance Co., 285 F.Supp. 920, 925 (D.Neb.1968), rev'd on other grounds, 431 F.2d 212 (8th Cir. 1970), ruled that an insurance policy did not implicate interstate commerce. However, on appeal the court of appeals did not address the issue of whether the insurance transactions were a part of interstate commerce because neither party had demanded arbitration. Booth, 431 F.2d at 215. Contrary to the plaintiff's argument, a substantial weight of authority holds that insurance transactions do involve interstate commerce.

Prior to 1944, a long line of cases had held that insurance policies do not involve interstate commerce. In 1944 the Supreme Court traced the history of the relationship between interstate commerce and the insurance industry beginning with a rejection of any interrelationship in Paul v. Virginia, 75 U.S. (8 Wall.) 168, 183, 19 L.Ed. 357, 361 (1868) (holding that "issuing a policy of insurance is not a part of commerce"), and concluding with a recognition, based on the economic realities of the insurance industry, that the insurance industry inextricably involves interstate commerce. See United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 543-47, 64 S.Ct. 1162, 1168-70, 88 L.Ed. 1440, 1451-54 (1944). There, the Court stated:

One reason advanced for the rule in the Paul case has been that insurance policies "are not quantities to be shipped or forwarded from one State to another." But both before and since Paul v. Virginia, this Court has held that Congress can regulate traffic though it consist of intangibles. Another reason much stressed has been that insurance policies are mere personal contracts subject to the laws of the state where executed. But this reason rests upon a distinction between what has been called "local" and what "interstate," a type of mechanical criterion which this Court has not deemed controlling in the measurement of federal power. We may grant that a contract of insurance, considered as a thing apart from negotiation and execution, does not itself constitute interstate commerce. But it does not follow from this that the Court is powerless to examine the entire transaction, of which that contract is but a part, in order to determine whether there may be a chain of events which becomes interstate commerce. Only by treating the Congressional power over commerce among the states as a "technical legal conception" rather than as a "practical one, drawn

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