Federal Crop Insurance Law Preempts State Law

Failure to Fulfill Material Condition Defeats Crop Insurance Claim

Aug 20, 2021

FACTUAL HISTORY

NAU filed a petition to compel arbitration, which was granted by the superior court. Following arbitration, the arbitrator rendered an award against Sunset, finding that NAU did not breach the contract and properly denied indemnity. NAU filed a motion for summary judgment or summary adjudication on the remaining state law claims for negligence and unfair insurance practices. The court granted the motion for summary adjudication as to the causes of action for negligence and unfair insurance practices on the basis of federal preemption. With respect to the cause of action for breach of contract, the court treated NAU's motion as a request for entry of judgment on confirmation of an arbitration award and granted it.

The multiple peril crop insurance policy incorporated-among other things-an earlier version of the Common Crop Insurance Policy Basic Provisions (Basic Provisions), which are set forth in 7 Code of Federal Regulations part 457.8 and “used by insurers, standard throughout the industry, when the [Federal Crop Insurance Corporation] provides reinsurance.” The Basic Provisions read in part:

This insurance policy is reinsured by the Federal Crop Insurance Corporation (FCIC) under the provisions of the Federal Crop Insurance Act (Act) (7 U.S.C. 1501 et seq.). All provisions of the policy and rights and responsibilities of the parties are specifically subject to the Act. The provisions of the policy may not be waived or varied in any way by us, our insurance agent or any other contractor or employee of ours or any employee of [the United States Department of Agriculture] unless the policy specifically authorizes a waiver or modification by written agreement....

TIMELY NOTICE OF LOSS

A notice of loss was not filed timely within the Basic Provisions and Cherry Crop Provisions. The required time frame to submit a notice of loss or damage for a cherry claim is within 3 days after the date harvest should have started if the crop will not be harvested, or 15 days prior to the beginning of harvest if you do harvest. The insurer received a notice of loss for the cherry policy on June 18, 2014, well after the normal harvest period for early season Brook/Tulare variety cherries, which are generally harvested in late April into early May.

DESTROYED WITHOUT CONSENT

The insurer noted that based on its claim inspection on 6/30/14, and its conversations with the insured, it confirmed that the cherry crop was dropped on the ground and disked in. By not seeing the crop the insurer was unable to determine if a loss is evident and to establish the production to count, which inhibits our ability to accurately adjust the loss. Considering the crop was put to another use without the insurers consent no loss was payable.

SUNSET'S COMPLAINT

Sunset sued Joseph M. Guerriero, an insurance agent; Central Valley Crop Insurance; United Valley Insurance Agency; United Valley Insurance Services, Inc.; and NAU. NAU moved to compel arbitration and following a hearing on the matter, the superior court issued an order compelling Sunset and NAU to arbitrate pursuant to the arbitration agreement and staying the civil action.

ARBITRATION

The arbitration took place on October 18, 2016. In a “FINAL AWARD OF ARBITRATOR” dated December 19, 2016, the arbitrator found, among other things, that the Code of Federal Regulations required Sunset to leave the crop intact and not destroy or abandon it prior to inspection and appraisal by NAU. To do otherwise, required the consent of NAU. The Arbitrator found it was “undisputed that no consent was requested or obtained, verbal or written, and that [Sunset] removed, destroyed or abandoned the damaged crop prior to an inspection and appraisal by NAU.”

NAU'S MOTION FOR SUMMARY JUDGMENT OR SUMMARY ADJUDICATION

NAU filed a motion for summary judgment or, in the alternative, summary adjudication to resolve any remaining state law claims against NAU. Under normal circumstances, the only step left for the court would be to enter judgment pursuant to the terms of the arbitration award.

The breach of contract claim was clearly disposed of by the arbitrator in his final award, as he ruled that plaintiff had not submitted a timely written notice of loss within 72 hours as required by the crop insurance policy, and had destroyed his crop without first obtaining NAU's consent. The trial court granted its order confirming the award. Thus, defendant is entitled to a judgment disposing of the second cause of action for breach of contract.

Regarding the causes of action for negligence and unfair insurance practices, the court concluded that allowing plaintiff to pursue its state law claims for extra-contractual damages would conflict with the Federal Crop Insurance Act, its regulations, and the language of the Basic Provisions, which expressly limit the scope of damages and claims.

DISCUSSION

Both the Federal Arbitration Act and the California Arbitration Act recognize arbitration as a speedy and relatively inexpensive means of dispute resolution and are intended to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing.

It is clear that Sunset did not “only” seek to impose vicarious liability on NAU for Guerriero's purported negligence. Sunset directly challenged NAU's denial of indemnity via its claims for breach of contract and unfair insurance practices. Although an action for bad faith breach of the covenant of good faith and fair dealing sounds in tort, the duty of good faith and fair dealing derives from and exists solely because of the contractual relationship between the parties.

Sunset contended that its claims for negligence and unfair insurance practices were not preempted by federal law. The Supremacy Clause provides that the Laws of the United States (as well as treaties and the Constitution itself) shall be the supreme Law of the Land any Thing in the Constitution or Laws of any state to the Contrary notwithstanding.

Congress can define explicitly the extent to which its enactments pre-empt state law. Pre-emption fundamentally is a question of congressional intent, and when Congress has made its intent known through explicit statutory language, the courts' task is an easy one. Second, in the absence of explicit statutory language, state law is pre-empted where it regulates conduct in a field that Congress intended the Federal Government to occupy exclusively. Finally, state law is pre-empted to the extent that it actually conflicts with federal law.

THE FEDERAL CROP INSURANCE ACT EXPRESSLY PREEMPTS INCONSISTENT STATE LAW

The record establishes that Sunset purchased a multiple peril crop insurance policy that was subject to the Federal Crop Insurance Act and its implementing regulations. The causes of action for negligence and unfair insurance practices were preempted. Accordingly, we affirm the court's order granting summary adjudication as to these claims.

The trial court properly granted NAU's petition to compel arbitration; Sunset's failure to initiate arbitration in accordance with the terms of the policy precluded judicial review of the arbitration award; and Sunset's claims for negligence and unfair insurance practices were preempted by federal law.

ZALMA OPINION

So-called insurance backed by the U.S. Government must be strictly construed as it was by the California Court of Appeal. The insured breached two material conditions of the policy: giving notice late and destroying the crop before it could be inspected by the insurer. The arbitrator found no coverage and the trial court agreed there could be no contract claim and since there is no contract claim there can be no claim for the tort of bad faith.

2021 – Barry Zalma Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at

http://www.zalma.com

and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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