Nobles v. Rural Community Ins. Services

• Decision Date: 21 November 2000
• Docket Number: No. CIV.A. 00-D-375-S.,CIV.A. 00-D-375-S.
• Parties: William N. NOBLES, et al., Plaintiffs, v. RURAL COMMUNITY INS. SERVS., Defendant.
• Court: U.S. District Court — Middle District of Alabama

122 F.Supp.2d 1290

William N. NOBLES, et al., Plaintiffs, v. RURAL COMMUNITY INS. SERVS., Defendant.

No. CIV.A. 00-D-375-S.

United States District Court, M.D. Alabama, Southern Division.

November 21, 2000.

COPYRIGHT MATERIAL OMITTED

Stanley J. Murphy, Murphy Law Office, Tuscaloosa, AL, for Plaintiffs.

Douglass Taylor Flowers, Daniel F. Johnson, Douglass Taylor Flowers, Dothan, AL, for Defendant.

MEMORANDUM OPINION AND ORDER

DE MENT, District Judge.

Before the court is Defendant's Motion To Compel Arbitration and Defendant's Motion to Stay, which were filed along with a supporting brief on April 19, 2000. (Docs. No. 4, 5.) Plaintiffs filed a Response on May 9, 2000, and Defendant issued a Reply on May 16, 2000. In addition, both parties have filed various supplemental materials on this issue, which is a matter of first impression. The court has carefully considered the arguments of counsel, the relevant law, and the record as a whole. Because a factual dispute between the parties is subject to mandatory arbitration, the court finds that Defendant's Motions are due to be granted.

I. JURISDICTION AND VENUE

The court has subject matter jurisdiction over this civil action pursuant to 28 U.S.C. § 1332 (diversity jurisdiction). The parties do not contest personal jurisdiction or venue.

II. FACTUAL BACKGROUND

The issue presented is whether a provision in a federally-authored insurance contract preempts all of Plaintiffs' state law claims, limits the remedies available to Plaintiffs, and subjects all of Plaintiffs' claims to binding arbitration. Plaintiffs are Alabama residents who farm approximately 7,700 acres of land in Florida. In February 1999, Plaintiffs purchased from Defendant's insurance agent two multiple peril crop insurance policies, which indemnified Plaintiffs for losses to their cotton crop. (Compl.¶¶ 5-6.) The parties do not dispute that the insurance policies issued by Defendant comport with the standard policy guidelines established by the Risk Management Agency ("RMA"), which is a federal agency formerly known as the Federal Crop Insurance Corporation ("FCIC.") (Mot. at 1.) Put another way, the parties agree that the policies at issue are uniform policies, the terms and conditions of which are mandated by RMA and are published in the Code of Federal Regulations. See 7 C.F.R. § 457.8. Essentially, RMA licenses Defendant to sell crop insurance policies that comport with federal guidelines, and RMA reinsures those contracts with the full faith and credit of the United States Government. See 7 U.S.C. § 1508(e)(4); 7 C.F.R. §§ 400.161 to—.176.

The face of the one-page agreement signed by Plaintiffs expressly states, "Subject to the provisions of the Federal Crop Insurance Act and the regulations issued under that Act, I hereby apply for insurance on my share of the crops as specified below for the crop year." (Pl.Ex. D, E.) The reverse side of the agreement also states the following:

... Unless rejected or the sales closing date has passed at the time you signed this application, insurance shall be in effect for the crops and crop years specified and shall continue for each succeeding crop year, unless otherwise specified in the policy, until canceled, terminated or voided. The insurance contract which includes the accepted application, is defined in the regulation published at 7 CFR Chapter IV....

(Id.) The terms and conditions of the policy (Def.Ex. B), which are published at 7 C.F.R. § 457.8, have provisions regarding arbitration and limitation of damages, reading as follows:

20. Arbitration

(a) If you and we fail to agree on any factual determination, the disagreement will be resolved in accordance with the rules of the American Arbitration Association. Failure to agree with any factual determination made by FCIC must be resolved through the FCIC appeal provisions published at 7 CFR part 11.

(b) No award determined by arbitration or appeal can exceed the amount of liability established or which should have been established under the policy.

. . . . .

25. Legal Action Against Us

(a) You may not bring legal action against us unless you have complied with all of the policy provisions.

(b) If you do take legal action against us, you must do so within 12 months of the date of denial of the claim. Suit must be brought in accordance with the provisions of 7 U.S.C. 1508(j).

(c) Your right to recover damages (compensatory, punitive, or other), attorney's fees, or other charges is limited or excluded by this contract or by Federal Regulations.

7 C.F.R. § 457.8.

The parties agree that Defendant's insurance agent provided Plaintiffs with the one-page insurance contract but not the standardized insurance policy containing the arbitration and damages limitation provisions. Plaintiffs and Defendant's insurance agent claim that they had no knowledge of the arbitration clause. (Carpenter Aff.; Nobles Aff.) Defendant maintains that "it is company policy to provide each insured with a copy of his/her policy along with confirmation of the same." (Reply at 4 n. 6.)

Plaintiffs' cotton crop was substantially destroyed. In full compliance with their insurance policy, they notified Defendant of their loss. Defendant refused to pay the loss incurred by Plaintiffs on approximately 5,000 acres of land, claiming that the land was not insured because it had not been planted to a crop and harvested during one or more of the three previous crop years. (Compl.¶¶ 7-9, 11.) Defendant bases its denial on the language of the policy. See 7 C.F.R. § 457.8 ¶¶ 8-9. As a result, Plaintiffs seek relief on six state law claims: breach of contract, misrepresentation, suppression, bad faith, negligent and wanton distribution of information via agency, and negligent and wanton supervision of agents. They ask for compensatory and punitive damages, as well as interest and costs for filing this action. (Id. ¶¶ 10-32.)

III. DISCUSSION

While Plaintiffs argue that they have the right to litigate each claim in court, Defendant contends that each claim is subject to arbitration or is pre-empted by federal law. As explained below, the answer lies somewhere in the middle. Plaintiffs must submit to binding arbitration the factual question of whether their 5,000 acres of land were covered by the policy. The arbitrator may award relief as permitted by federal statutes and regulations. After that dispute is resolved, and in keeping with the arbitrator's findings and awards that are entitled to preclusive effect, Plaintiffs may then elect to pursue their common law claims in this forum pursuant to the court's jurisdictional grant under 28 U.S.C. § 1332.

A. Legislative History and Statutory Purpose

The Federal Crop Insurance Act was enacted in 1938 as part of President Franklin D. Roosevelt's New Deal legislation. Its purpose was to rescue and preserve agriculture in order to restore farming to its previous position of strength in the national economy. Specifically, Congress sought "to promote the national welfare by improving the economic stability of agriculture through a 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. To further these purposes, Congress established the RMA as a wholly government-owned corporate body and agency within the Department of Agriculture. RMA was charged with implementing a nationwide crop insurance program. See id. § 1503. RMA and the Secretary of Agriculture have extensive rulemaking authority. See id. §§ 1506(l), (p). Indeed, RMA has all "such powers as may be necessary or appropriate" to implement the Act's remedial purposes. Id. § 1506(k).

Congress amended the Act in 1980 and 1994 with the goal of increasing participation in the insurance program by private-sector insurance companies. Pursuant to statute, RMA presently makes crop insurance available through two methods. First, licensed private insurance agents and brokers may sell policies issued directly by RMA. Second, RMA may reinsure private insurers that issue crop insurance policies, with RMA paying the private insurance companies' operating and administrative costs. See 7 U.S.C. § 1508(a)(1); see also Meyer v. Conlon, 162 F.3d 1264, 1266 (10th Cir.1998) (per curiam). The second method is obviously the preferred one, as Congress has directed RMA to provide reinsurance "to the maximum extent practicable." 15 U.S.C. § 1508(k)(1); see also Kansas ex rel. Todd v. United States, 995 F.2d 1505, 1507-08 (10th Cir. 1993) (discussing legislative history and congressional intent in expanding participation by private insurance corporations).

Using its rulemaking powers, RMA has dictated the terms of the insurance contracts issued by Defendant and other companies. See 7 C.F.R. § 457.7. The terms and conditions preempt any contrary state laws that would apply to other insurance contracts normally issued by private insurance companies. See 7 U.S.C. § 1506(l); 7 C.F.R. § 400.352; see also Roberts v. Federal Crop Ins. Corp., 158 F.Supp. 688 (E.D.Wash.1958) (regulations prescribing form of crop insurance policies issued by RMA have force and effect of federal statute). At the same time, however, RMA has never intended to extinguish state law causes of action that may arise from tortious conduct by private companies selling RMA-approved reinsurance contracts. See Williams Farms of Homestead, Inc. v. Rain & Hail Ins. Serv., Inc., 121 F.3d 630, 634 (11th Cir.1997); Horn v. Rural Community Ins. Servs., 903 F.Supp. 1502, 1505-06 (M.D.Ala.1995). Indeed, by their very terms, the relevant regulations expressly envision litigation. The regulations provide that:

No policy of insurance reinsured by the Corporation and no claim, settlement, or adjustment action with respect to any such policy shall provide a basis for a claim of damages against the Company issuing such policy ... unless the claimant establishes in a court of competent jurisdiction ... that such...