Please read various Insurance Companies Answer to Sugar Beet Lawsuit. On April 3, 2001, the Board of Directors of NCIS voted unanimously to sue over issuance of MGR-01-010 on March 2, 2001, by USDA’s Risk Management Agency (“RMA”) on behalf of the Federal Crop Insurance Corporation (“FCIC”). NCIS along with two of its members then sued FCIC, Secretary Veneman, and Acting Administrator/Manager Honor on April 10, 2001. This action was taken because the bulletin violated several key principles underlying the federal crop insurance program. I. What
Are the Key Principles? The NCIS litigation over MGR-01-010 implicates three principles of importance to the crop insurance industry. A. Certainty and Predictability in Contractual Relationships. Members of NCIS participate in the federal crop insurance program through their execution of a Standard Reinsurance Agreement (“SRA”) with the FCIC. That contract requires SRA holders to comply with its terms as well as to comply with the Federal Crop Insurance Act (“FCIA”), regulations issued thereunder, and bulletins issued by FCIC. Each reinsured company signed an SRA based on an understanding of its terms, including the obligation to adhere to the FCIA and related regulations. After-the-fact and unilateral alteration of those obligations by the government adversely impacts fundamental contractual and performance obligations and expectations, thereby introducing uncertainty and instability in the contractual relationship. B. Public-Private Risk and Gain Sharing. The SRA, which was intensely negotiated over the course of many months in 1997, contains detailed formulas for allocating underwriting risk and gain between the public and private sectors. The major changes introduced by that year’s SRA substantially expanded the risk allocated to the private sector. C. Commitment to Program Integrity. Because the crop insurance industry bears a substantial, and an increasingly large, share of the risk of loss, it has been committed to maintaining the integrity of the program. Enactment of the Agricultural Risk Protection Act of 2000 (“ARPA”), which the crop insurance industry supported, strengthened all parties’ commitments to improve program integrity. Since enactment of ARPA, the private sector has sought to work with RMA and the Farm Service Agency in implementing ARPA’s program integrity provisions. II. Does MGR-01-010 Violate Key Principles? MGR-01-010 violates each of the key principles identified above. A. After-the-Fact and Unilateral Liberalization of Coverage. MGR-01-010 stated that the notice of loss provisions contained in the crop insurance policy may not be enforceable. While this bulletin only dealt with sugar beets grown in sixteen Minnesota counties in crop year 2000, its rationale was not limited to the factual circumstances. Thus, issuance of the bulletin destabilized and introduced uncertainty into the contractual relationship between each reinsured company and the FCIC and between each reinsured company and its insureds. This issue has an impact broader than the relationships among the FCIC, SRA holders, and their insureds. For example, the SRA permits reinsured companies to obtain in commercial markets reinsurance for the risks retained by them; after-the-fact and unilateral changes in coverage terms increase the difficulty of obtaining acceptable commercial reinsurance at reasonable rates. B. After-the-Fact and Unilateral Alteration of Risk Exposure. Each year every SRA holder submits to the FCIC, and obtains approval for, a Plan of Operation. That document, which explicitly becomes part of the contractual relationship, defines the amount of risk exposure to be undertaken by each company in each state. Once approved, reinsured companies then seek to market crop insurance on a state-by-state basis within the parameters established by the plan. Because of the relatively low loss experience in insuring sugar beets, most members of NCIS place that coverage in the commercial fund, where they bear substantial exposure for risk of loss. MGR-01-010 injured the members of NCIS by creating loss exposure where none previously had existed, thereby adversely affecting the contractually negotiated loss sharing arrangement under the SRA. C. Detriment to Program Integrity. MGR-01-010 is detrimental to maintenance of program integrity. First, by statute, the FCIC can not expand coverage beyond harvest for any crop other than tobacco and potatoes. 7 U.S.C. § 1508(a)(2). MGR-01-010, contrary to this provision and through its relaxation of the notice of loss provisions, permits recovery for losses caused subsequent to harvest. Second, by regulation, neither FCIC nor any reinsured company (or any of their employees or agents) is permitted to waive or vary any provision of a crop insurance policy. 7 C.F.R. § 457.8. MGR-01-010 unavoidably constitutes a unilateral action by FCIC/RMA to vary the terms of the policy which it wrote, approved, and determined could not be varied. Moreover, issuance of that bulletin placed reinsured companies in the precarious position of having signed a contract obligating them to adhere both to regulations and all FCIC-issued bulletins, despite the inconsistency between the applicable regulations and MGR-01-010. In short, instead of acting as a guardian of the program under ARPA, FCIC issued a bulletin extending coverage beyond what both the statute and the regulations permit. Reinsured companies certainly do not take the position that FCIC never can amend the terms of coverage. What they expect, however, is that any amendment will follow the procedures established by the Administrative Procedure Act (“APA”). III. Did Any Equitable
Considerations Warrant FCIC’s Violation of Key Principles? No equitable considerations justified departing from the key principles. The growers covered by MGR-01-010 certainly may have made less money in 2000 than they desired, but their harvest was not so deficient that violating any of the key principles is warranted. A. Sugar Content and Purity Exceeded Levels of Acceptability. The dominant sugar beet processor in the sixteen counties affected by MGR-01-010 is the Southern Minnesota Beet Sugar Cooperative (“SMBSC”). SMBSC entered into a series of processing contracts with its members, and those contracts specify minimum sugar content and purity levels. If a grower has not harvested beets that yield the required content and purity levels, the processor has no obligation to accept the harvested beets. In turn, deficiencies of this type have implications for insurance coverage. Specifically, Section 13(e) of the sugar beet crop provisions provides the formula for determining the amount of indemnity payable when a processor is tendered beets that do not meet the standards of acceptability in the processor contract as a result of an insured cause of loss. In this case, documentation provided by SMBSC to RMA on or about March 23, 2001, demonstrated unequivocally that all beets processed by it exceeded its standards of acceptability. The processor contracts in question specify that beets are not acceptable if their sugar content is below 12% and sugar purity is below 80%. SMBSC’s records show that all beets processed after the freeze had an aggregate sugar content at or above 15.42% and purity at or above 84.16%. Moreover, the total crop processed in 2000 by SMBSC had sugar content of 15.99% and purity of 86.51%. The processor did discard approximately 483,000 tons of sugar beets, out of a total production in excess of 2,330,000 tons. Even with this discard factor, however, SMBSC’s processing production in 2000 was its fourth best year of the last ten. The sugar beet policy does not deal explicitly with purity issues. Instead, the special provisions (issued on a county-by-county basis) speak in terms of sugar content levels. Thus, if the content level of a grower’s harvest meets or exceeds the applicable level for his or her county, there is no insured loss. In this case, the highest content level in the special provisions for any one of the sixteen counties was 15.4%. Thus, under the records submitted by SMBSC to RMA showing that all beets processed after the freeze had sugar content above 15.4%, there would be no insured loss. It should be noted that RMA on June 4, 2001, issued MGR-01-010.1 concerning loss adjustment procedures applicable to claims in the sixteen counties covered by the original bulletin. The information conveyed in the second bulletin indicated that little, if any, insurable loss occurred. First, the sugar content and purity data provided in the new bulletin reconfirmed that beets actually processed by SMBSC not only exceeded its standards of acceptability under contracts with its members, but also exceeded the sugar content levels specified in each of the special provisions. Second, data provided by RMA in the second bulletin on discarded beets indicated that the only discarded beets potentially subject to payment of an insurance indemnity were those delivered to piling stations where the computed discard factor was below .65; thus, among the discarded beets, indemnity would be payable only with respect to 206,129 tons (assuming that all other terms and conditions of the policy were met) out of total 2000 crop year production of 2,333,086 tons. In sum, the fourth best harvest of the last ten years does not present a situation warranting violation of the principles outlined above. B. Notice of Loss Issues. The underlying crop insurance policy requires notice of loss within seventy-two hours, but in no event later than fifteen days following the end of the insurance period. While it may be appropriate to waive the seventy-two hour provision, there is no statutory, regulatory, or other legal basis for waiving the absolute requirement that notice of loss must be provided within fifteen days of the end of the insurance period. As a legal matter, the insurance period ended with harvest. 7 C.F.R. § 457.8, ¶ 11(b)(2). As a factual matter, the harvest ended in the sixteen Minnesota counties in late October 2000. Thus, the fifteen-day grace period for notice would have expired prior to November 15, 2000. The foregoing leads to a very fundamental question: Did the insured growers have a factual basis for providing notice of loss to their carriers within the insurance period, or fifteen days thereafter? The unequivocal answer is, “yes.” How do we know this? The answer is simple. SMBSC sent an electronic communication to its members on October 11, 2000, stating explicitly that beets damaged by frost would not be accepted and advising them to ensure that any frost damage had healed. C. Loss Causation Problems. There is no doubt that a frost occurred. This does not end the analysis, however. First, there is evidence, including documentation prepared by SMBSC, showing that it failed to ventilate the piled beets at some of its receiving stations following delivery of its members’ harvested production. Coupled with post-harvest abnormally high temperatures, this failure by the processor damaged beets delivered to it and awaiting processing. This means that beets were damaged by the processor’s own actions subsequent to harvest, and that type of damage is not an insured loss or cause of loss. There also is evidence that SMBSC, which controlled the harvest, permitted some beets to be lifted and topped before any freeze damage could heal, thus failing to mitigate the extent of any loss. Second, there was commingling of damaged and undamaged beets. In fact, there even was commingling of beets from counties not covered by MGR-01-010 with beets from counties covered by that bulletin. Commingling, therefore, made it impossible to render a post-harvest assessment of the extent of any loss actually caused by the freeze from October 6 to 10. IV. Does the A.W.G. Farms Case Alter the Equities? The report accompanying H.R. 2213 references a decision in 1985 by the Eighth Circuit Court of Appeals, A.W.G. Farms, Inc. v. Federal Crop Ins. Corp., 757 F.2d 720 (8th Cir. 1985). RMA has cited the case as justifying issuance of MGR-01-010. That case was properly decided under the facts and law presented to the Court of Appeals, but it does not require payment of indemnity claims for the 2000 crop. A. A.W.G. Farms Had No Late Notice Issue. The Court of Appeals in A.W.G. Farms explicitly assumed that all loss notices were presented in a timely fashion. Id. at 728, n.8. In contrast, there is a very obvious late notice issue involved with respect to growers in the sixteen counties covered by MGR-01-010. B. A.W.G. Farms Had No Coverage Issue. The Court also made clear that there was no dispute that a covered loss occurred during the insurance period. Id. at 722. Here, there is a very distinct issue of post-harvest activities by the processor which either caused the loss or dramatically increased its dimensions. C. A.W.G. Farms Dealt With the Effect of a Pre-harvest Freeze. In litigating the A.W.G. Farms case, the parties produced scientific evidence regarding the effect of a pre-harvest freeze. Based on that evidence, the Court of Appeals stated: “The freezing and subsequent thawing of an unharvested sugar beet, however, causes damage to the beet’s cellular structure and reduces the storability of the beet.” Id. at 723. The trial court in that case had made a similar finding. 586 F. Supp. 690, 692. Thus, if one accepts A.W.G. Farms as a reasoned and properly decided case, one also must accept the proposition that the fact of a freeze should be known to cause damage of the type described by the court in that case. Thus, any person relying on A.W.G. Farms to support the position of the growers in question here must concede the point that the case also stands for the proposition that the existence of a freeze will trigger a loss and, therefore, that anyone who knows of a freeze should provide prompt notice of a loss. Letter From NCIS to Phyllis Honor, RMA, Regarding Minnesota Sugar Beets
June 8, 2001 VIA FACSIMILE and FEDERAL
EXPRESS Ms. Phyllis W. Honor, Acting
Administrator
Re:
MGR-01-010.1 Dear Ms. Honor: This letter identifies several fundamental questions about actual application of MGR-01-010.1 by reinsured companies in their processing of 2000 sugar beet loss claims received from insureds in the sixteen counties covered by MGR-01-010. We are operating on the assumption that this bulletin (although it does not so state) constitutes the special loss adjustment procedures promised at our meeting with you and other representatives of the Risk Management Agency (“RMA”) on March 28, 2001, and that adherence to these procedures is mandatory. If this assumption is incorrect, please notify us immediately and in no event later than close of business on June 14, 2001. Since time is critical, we propose a meeting (at a location to be selected by you) on or before June 21, 2001, to address the questions which are listed below. This meeting should address also any additional questions separately submitted by reinsured companies. In short, both reinsured companies and the sugar beet growers whom they insure deserve a quick resolution of still unresolved questions and the opportunity to bring to the process their concerns and experience. We believe several key issues need to be addressed before our members can have any reasonable level of assurance that they are implementing MGR-01-010 and MGR-01-010.1 correctly. Thus, please ask your staff to be prepared to answer the questions on the attached list at the meeting which we have requested. Promptly following the meeting for obtaining answers to the questions on the attached list, we propose a joint approach to adjusting all claims of producers. Participants in the process would be representatives of all reinsured companies who are involved, of the Southern Minnesota Beet Sugar Cooperative (“SMBSC”) and its insured members, of RMA (including Risk Compliance Division personnel), and of the Farm Service Agency (“FSA”), if it elects to participate. All documentation pertinent to each claim will be available and reviewed in this process. Because the 2000 crop year has long since ended, and because there are no representative samples available at this stage for inspection or testing, the only bases for adjusting the claims at this time are documentation from SMBSC and its insured members, the policy, and pertinent loss adjustment procedures, including MGR-01-010 and MGR-01-010.1. Each company would proceed, on a claim-by-claim basis, to present for consideration all claims received from its insureds. Then, the participants would be expected to provide input on whether or not a claim is payable and, if payable, the amount of indemnity to be paid. In the absence of a consensus disposition of a claim, the final determination would be made jointly by the insuring company and RMA, the two risk-bearers involved. Any producer who disagrees with the joint determination of the insuring company and RMA would be permitted to pursue his or her available remedies under the policy. A producer would be required, however, to waive any challenge to a consensus disposition. We believe our alternative proposal has at least three benefits. First, it is designed to expedite completion of the loss adjustment process. As noted on page 1, APH determinations are to be made by June 30, 2001, and that process involves addressing crop year 2000 losses. Second, except in those instances where the insured disagrees, subsequent legal or administrative proceedings can be avoided. Third, it provides another opportunity for reinsured companies, RMA, and FSA to work together to fight fraud, waste, and abuse as directed by the Agricultural Risk Protection Act of 2000. As stated at the outset of this letter, time is critical. We believe that Section V.Y. of the Standard Reinsurance Agreement affords reinsured companies the right to meet with you within ten business days of your receipt of this notice (which will be by facsimile transmission today). Even if you disagree with that construction of Section V.Y. or its applicability to MGR-01-010.1, common sense dictates holding a meeting within the next two weeks. Otherwise, there is absolutely no way to complete 2000 crop year loss determinations and 2001 crop year APH determinations by June 30, 2001. Sincerely yours, Questions About MGR-01-010.1 A. Item 4. Item 4 of MGR-01-010.1 (page 3) references four electronic communications sent by the Southern Minnesota Beet Sugar Cooperative (“SMBSC”) to its members that “could be considered as notice of damage to insureds.” As the bulletin notes, NCIS has copies; they have been distributed to all reinsured companies. MGR-01-010 extensively dealt with late manifestation of damage and enforceability of Section 14(a)(2) of the Basic Provisions. In light of both bulletins, we must ask: 1. Are insurers to proceed on the basis that RMA deems waived the notice of loss provisions of Section 14(a)(2) of the Basic Provisions? 2. Similarly, is Section 14(c) deemed waived also? 3. Conversely, does item 4 in MGR-01-010.1 mean that reinsured companies are to treat the SMBSC communications as sufficient manifestation of damage, thereby requiring notice of loss to be sent by the insureds to insurers within the terms of the Section 14(a)(2) of the Basic Provisions? B. Sugar Beet Crop Provisions, Section 13. Section 13 of the Crop Provisions has two different methods (§ 13(d) and § 13(e)) to be used in different situations in determining the amount of an indemnity payment. MGR-01-010 appeared to mandate use of Section 13(e); MGR-01-010.1 appears, however, to supply data for use of Section 13(d). Thus, we must ask: 1. Are reinsured companies now being directed to use only Section 13(d)? 2. If Section 13(e) still is to be used, is it to be used only to determine the value of discarded tons, which appears to be the reason for including item 1? 3. If so, does this also mean that Section 13(d) is to be used only to determine the net production of the sliced tons, which appears to be the reason for including item 2? 4. If reinsured companies are to use Section 13(e) with respect to any indemnity payable for discarded tonnage, how are they to determine the uninsurable portion of the discarded tons since MGR-01-010 observed at pages 2 and 3 that damage may have occurred after storage (from causes other than the October 6 – 10 freeze) and commingled beets may include beets harvested prior to the freeze? Please be prepared to provide examples illustrating use of the data in items 1 and 2 in actually computing indemnity payments. Receipt of examples is especially important since “shrink,” “sliced tons,” and “cossette purity” are not used in making loss calculations under Section 13 of the Crop Provisions.
C. Samples. Both the Basic Provisions, in Section 14(a)(3), and the Crop Provisions, in Section 12(a), require leaving representative samples of the damaged crop intact in the field. The Basic Provisions, in Sections 14(a)(4)(i) and 14(a)(4)(ii), separately require insureds to show damaged production to their insurers and to allow insurers to take samples for testing. Neither MGR-01-010 nor MGR-01-010.1 discusses these duties of the insureds. Thus, we must ask: 1. Is RMA exempting all insureds and insurers from any obligation under Section 14(a)(3)? 2. Is RMA exempting all insureds and insurers from any obligation under Sections 14(a)(4)(i) and 14(a)(4)(ii)? D. Production Records. Items 1 and 2 of MGR-01-010.1 indicate that the processor (SMBSC) has production records and that producers may have individual, verifiable records of sugar percentages applicable to their own delivered beets. Item 2 instructs use of the data contained therein in the absence of individual records. Thus, we must ask:
E. Delivery Date. Because item 2 in MGR-01-010.1 indicates that approximately 400,000 tons of beets were delivered and processed (i.e., approximately 23.5% of SMBSC’s total processing of the 2000 crop) before the freeze discussed in MGR-01-010, we have questions about the effect of deliveries made prior to that frost. Since item 1 of MGR-01-010.1 notes that each insured should have personal delivery records, it evidently is possible to exclude pre-freeze deliveries from the calculation of any indemnities payable. That bulletin, however, fails to address the issue. Thus, we must ask: 1. Are pre-freeze deliveries to be included or excluded from loss computations? 2. If they are to be excluded, how are reinsured companies to treat the “tons discarded” and “factor” data in item 1? 3. If they are to be excluded, does the “factor” in item 1 remain correct and, if not, what would be the correct factor? 4. If they are to be included, how are reinsured companies to treat undamaged production in calculating any indemnity payments? 5. If they are to be included, how are reinsured companies to distinguish between undamaged pre-freeze beets, beets damaged by the freeze, and beets damaged by other causes? 6. If they are to be included and made eligible for
indemnity, what provision of the sugar beet policy or loss adjustment procedures
authorizes payment of indemnity on undamaged production?
June 11, 2001
Dear George: This will acknowledge receipt of your facsimile of June 8. We assume that the form letter, since it also was dated June 8, was sent then to each of the insurers. If so, they should receive their individualized copies of the letter today or tomorrow. Your letter to me and the form letter contains some serious mistakes about our position and the legal exposure of the insurance companies. I plan to deal with the most egregious ones below. Before doing so, however, I want to add our appreciation for your continuing willingness to communicate with us regarding this matter, despite what may become very serious disagreements about the merits. In this vein, please note that Mr. Parkerson’s correspondence of June 8 to Ms. Honor (a copy of which was faxed to you Friday afternoon) substantively invites participation by your clients in the resolution of individual insureds’ claims. We also hope that you and your clients will appreciate that National Crop Insurance Services, Inc. ("NCIS") is trying to establish a process by which claims determinations, as well as APH determinations, can be made by the end of the month. With this said, I turn to the substance of your two letters. First, the last sentence of the second paragraph of your letter to me suggests that delay in payment of claims is based on two factors: further instruction from the Risk Management Agency ("RMA") or an indemnification commitment by RMA. We obviously have a serious disagreement regarding whether additional instruction is required; we think it is, as indicated by Mr. Parkerson’s letter of June 8 and the attached list of questions. We never have taken the position that receiving indemnification or an agreement to hold insurance companies harmless is a precondition of payment of any claims. In fact, the litigation filed by our clients in the United States District Court for the District of Kansas is expressly premised on the insurance companies’ decision to proceed to process claims, to reject those which are not allowable, and to pay those which are allowable without regard to any prior commitment for indemnification. As the Complaint clearly indicates in paragraph 45, indemnification would occur subsequent to payments to insureds and be effected through the Annual Settlement under the Standard Reinsurance Agreement ("SRA"). We trust, therefore, you and your colleagues will conclude that our clients’ disagreement with RMA’s issuance of MGR-01.010 is not being interposed as a reason to reject claims. To the extent the claims are rejected or paid in amounts that are unacceptable to your clients, those determinations will be solely the result of application of the terms and conditions of the sugar beet insurance policy, applicable loss adjustment procedures, and the instructions of RMA. Second, your form letter of June 8 to the insurance companies appears to limit the terms of the sugar beet policy to the provisions codified in 7 C.F.R. § 457.109. In fact, there are a minimum of three components to the sugar beet crop insurance policy: the special provisions applicable to insureds in each county, the basic provisions codified at 7 C.F.R. § 457.8, and the crop provisions codified at 7 C.F.R. § 457.109. For insureds who purchased only catastrophic risk protection insurance ("CAT"), the CAT endorsement would constitute a fourth portion of the policy. Third, your letter contains references to Minnesota law and demands performance thereunder. Minnesota law has been preempted by the Federal Crop Insurance Act and regulations issued thereunder. Please refer to 7 U.S.C. § 1506(l), 7 C.F.R. § 400.176(b), and 7 C.F.R. § 457.8, ¶ 31. We ask you to take particular note of the following portion of the last cited authority: "State and local laws and regulations in conflict with federal statutes, this policy, and the applicable regulations do not apply to this policy." Plainly, all insureds should understand the preemption of state law. The full sugar beet policy and RMA’s loss adjustment manual, in fact, set forth a comprehensive description of the loss adjustment duties of the insurance companies. Insurance companies are bound to follow federal, not state, loss adjustment procedures. See, , e.g., SRA § V.I.1. and 7 C.F.R. § 457.8, "Our Duties". Fourth, even if Minnesota law were to apply, insurers are not obligated to complete all investigations within thirty days, contrary to your statement in the third paragraph on Page 1. Section 72A.201, subdivision 4(3), provides that when an "investigation cannot be reasonably completed" within thirty days, the insurer can notify the insured that additional information is required and state what is required. We understand that insurers generally have done so, as permitted by controlling federal law. 7 C.F.R. § 457.8, ¶¶ 14(b) and 14(c) ("Our Duties"). Next, your form letter states in the next-to-last paragraph: "Failure to pay these claims may well result in at least $300 million in consequential losses to the members of the Cooperative." You and your clients need to be aware that the basic provisions explicitly exclude any recovery of compensatory, punitive, or other damages. 7 C.F.R. § 457.8, ¶ 26(a). The only monetary remedies available against the insurance companies are recovery of indemnity payments calculated pursuant to the terms of the policy and simple interest thereon. Finally, although the insurance companies are not subject to the provisions of Minnesota law, your clients nevertheless can expect expeditious handling of the claims under the terms of the policy and the loss adjustment procedures mandated by the federal government. As Mr. Parkerson’s letter of June 8 amply indicated, there are important reasons for handling all claims in an expeditious fashion, including avoidance of litigation and making determinations critical to the current crop year. Your form letter concludes by inviting a response to you by this Friday, June 15. NCIS has advised its members that they should communicate directly with their insureds since your letter does not state affirmatively that you represent all insureds.
June 14, 2001 VIA FACSIMILE AND REGULAR MAIL
Re:
Southern Minnesota Sugar Beet Grower Claims – MCR-01-010 Dear George: This letter will update you on some developments since my letter of June 11. It also will address several substantive issues regarding claims of sugar beet growers for indemnity payments for their 2000 crop in the counties covered by the referenced bulletins. As a preface, I want to report that the members of National Crop Insurance Services, Inc. ("NCIS") are proceeding to consider on their merits the individual claims of their insureds. This has two consequences related to our recent exchange of correspondence. First, each insurer will continue to meet its fiduciary and contractual obligations under the sugar beet policy to individual insureds, including consideration of recently discovered facts and a willingness to consider information which their insureds, or representatives of them, may present in the future. Second, you can expect insurers' communications to be directed to their insureds, in the absence of specific directions by them to communicate with you or other counsel, instead of to you. Although your comments remain welcome, it only is clear at this stage that your firm represents the Southern Minnesota Beet Sugar Cooperative ("SMBSC"). Now let me turn to two recent developments. First, the Risk Management Agency ("RMA") has responded positively to Mr. Parkerson's June 8 request for a meeting seeking clarification of MGR-01-010.1. We confirmed arrangements yesterday afternoon to meet next Wednesday, June 20, in Washington with RMA personnel and attorneys from the Department of Agriculture's Office of General Counsel. The specific purpose of the meeting is to respond to insurers' questions about implementation of loss adjustment procedures in light of the two referenced bulletins. We view this as a development which may expedite resolution of yet unresolved claims of growers. Insurers will continue to rely, therefore, on 7 C.F.R. § 457.8, ¶ 14 (c) ("Our Duties") as they obtain additional information necessary for consideration of claims. Second, NCIS (in particular, Mr. Parkerson) has been receiving inquiries from growers. NCIS will not be answering these questions due both to existing litigation against the Federal Crop Insurance Corporation ("FCIC") and to threatened litigation by SMBSC’s members against members of NCIS. Instead, NCIS will post on its website information generally expressive of issues of concern to crop insurers. The now posted information includes Mr. Parkerson's letter of June 8 to Ms. Honor, the enclosed list of questions, and my letter to you of June 8; it will include this letter as of Friday morning. The NCIS website can be accessed at ag-risk.org. Before turning to the next topic of this letter, I want to repeat that insurers are proceeding to investigate still open claims. Obviously, next Wednesday's meeting is an important part of that process. The insurers remain mindful of the need to close the books on last year's crop and to move forward with their obligations with respect to the current year's crop. The last topic of this letter is to identify serious and material impediments to making indemnity payments for the 2000 crop. Discussion of these impediments should not be construed to represent the position of all insurers on all claims. That would be impossible since the members of NCIS are making individual determinations with respect to the merits of each producer's claim. Also, documentation provided by an individual grower may present issues to be addressed other than those discussed below. You need to understand, however, that consideration of claims involves dealing with multiple issues, especially in light of MGR-01-010.1 and the documents provided by RMA to NCIS for use by all insurers (as referenced in Item 4 thereof). Your June 8 letter recognizes that obligations to pay insurance coverage arise out of the individual contracts between insurers and each member-grower. Those contracts, as embodied in FCIC regulations, have the full force and effect of law. (In the discussion that follows, “Basic Provisions” refer to the portions of the sugar beet policy codified at 7 C.F.R. § 457.8, “Crop Provisions” refer to the portions of the policy codified at 7 C.F.R. § 457.109, and “Special Provisions” refer to the county crop programs for sugar beets.) FCIC reinsured companies are not permitted to waive or vary policy provisions, including those provisions that delineate the duties of insured producers. Based on the information we have at this time, and not data submitted by any individual insured to any specific insurer, all of the following issues are likely to arise with respect to handling and adjustment of individual claims:
The foregoing discussion necessarily is based on the aggregate data contained in MGR-01-010.1 and separately provided by RMA to NCIS. We assume that any grower who has individual records substantiating a different analysis will present that data to the insurer writing his or her coverage. In closing, let me reiterate our willingness to continue a dialogue seeking ways to resolve claims of sugar beet growers for 2000 crop year losses. Moreover, despite any disputes with RMA and FCIC, the members of NCIS will continue to adjust claims without regard to those disputes and to proceed under the policy, prescribed loss adjustment procedures, the referenced bulletins, and clarifying information from RMA. Very truly yours, Morrison & Hecker
L.L.P. P. John Owen TO: MPCI Members (SRA Holders) FROM:
Robert W.
Parkerson DATE: June 21, 2001 RE: Sugar Beets – June 20 Meeting with Risk Management Agency
On June 8, 2001, NCIS requested a meeting with RMA seeking answers to questions raised by its issuance of MGR-01-010.1 on June 4, 2001, and its earlier issuance of MGR-01-010. That meeting occurred yesterday in Washington. Although three USDA employees were present, the only one who spoke was Kim Arrigo from the Office of General Counsel. This memorandum provides a topical summary of the highlights of the June 20 meeting. An overall observation is that limited direction was provided, but we did gain some insights into RMA’s thinking on MGR-01-010 and MGR-01-010.1. The Sugar Beet Policy. Ms. Arrigo stated numerous times that the policy controls in all circumstances. This means RMA is not waiving any of its provisions, including the notice of loss provisions. She concurred with comments that insureds remain obligated to establish the existence of an insured loss and the amount thereof. These statements were the only direction provided. Ms. Arrigo also made clear that SRA holders must make their own decisions interpreting, enforcing, and applying the policy. These comments mean that, in her view, MGR-01-010 changed nothing, with the possible exception of identifying when the notice of loss obligation is triggered. Timely/Untimely Notice of Loss. Documentation sent to RMA after issuance of MGR-01-010 by the processor, the Southern Minnesota Beet Sugar Cooperative (“SMBSC”), can be interpreted to mean that insureds knew on October 11, 2000, that they may have sustained an insurable loss. This is the documentation mentioned in Item 4 of MGR-01-010.1. Ms. Arrigo maintained, however, that reinsured companies must determine for themselves whether the circumstances constituted timely or untimely (late) notice of loss. According to her, the standard to be applied is this: If a company normally would deny a claim under the circumstances which exist here, it should reject the claims of SMBSC’s members; if a company normally would waive any late notice defense in these circumstances, it will be reinsured if it does so here. With respect to the documentation mentioned in Item 4 of MGR-01-010.1, Ms. Arrigo stated that, if she had known the information contained therein prior to March 2, 2001, MGR-01-010 would not have been issued. This position is consistent with other comments which she made at the meeting stating that SMBSC had misled her. Commingling. Item 1 of MGR-01-010.1 was RMA’s way of dealing with commingling and the A.W.G. Farms case (lost by FCIC in 1985), according to Ms. Arrigo. Thus, in the absence of individual producer-by-producer information, the factors in Item 1 can be used. She acknowledged that there were commingling problems not resolved by MGR-01-010.1, including the effect of pre-harvest deliveries and delivery of beets from one or two counties not covered by MGR-01-010. (Lawyers present did not accept Ms. Arrigo’s interpretation of A.W.G. Farms, but discussing the legal implications of that case is beyond the scope of this memorandum.) Extent of Losses. Based on the information available to RMA, insurance coverage (if any) would be limited to discarded beets at piling stations with a discard factor (the right-most column in Item 1) below .65. This means that coverage would be limited to discarded beets at three piling stations (in the absence of any individual producer records). A company would encounter a problem if it made an indemnity payment on processed beets without evidence that an individual producer’s beets failed to meet the acceptability standards of the processing contract (12% sugar content, 80% purity). This observation relates to the information conveyed in Item 2, which provides aggregate content and purity data. Loss Calculation. Ms. Arrigo would not state whether loss calculations are to be made under paragraph 13(d) or paragraph 13(e) of the crop provisions. Each SRA holder must decide which applies – 13(d) if the beets met the standards under the processing contract, 13(e) if they did not. She stated this would be an issue only if a company decided not to reject a claim based on late notice. Individual Records. Ms. Arrigo believes that there are individual records of delivery dates and quantities, and perhaps testing records for beets at the time of delivery. She was led to believe by SMBSC that there are no individual records showing sugar content and purity, on a producer-by-producer basis, at the time of slicing. This is why RMA provided in Items 1 and 2 aggregate data based on information supplied by SMBSC. This also explains her comment that an SRA holder would encounter a problem if it paid indemnity on processed beets in the absence of individual records. Other Parts of RMA. When asked the position of the division of RMA responsible for development of policies and procedures (i.e., Kansas City) and its interpretation of the available data, Ms. Arrigo answered that she had no idea what these people have to say about the issue, but now that the matter is in litigation, the industry must deal with the Washington office of RMA. Shrink. The shrink (Item 1) information was noted because it was below normal for SMBSC. Thus, shrink would not be a factor in determining the amount of any covered loss. RMA Participation in Loss Adjustment Process. The second aspect of the June 8 NCIS letter asked RMA to participate in individual loss adjustment decisions. At the meeting, Ms. Arrigo was asked if she would participate (whether in Washington or Renville) in meetings between reinsured companies (which decided to pay claims of their insureds) and insureds (or their representatives, such as SMBSC) to determine the indemnity amounts payable. She agreed to do so and to send a memorandum to others in RMA identifying claims which she believed to have been processed properly. Compliance Questions. There were a few questions about potential future actions of the Compliance Division if claims were paid. No one from the Compliance Division was present at the meeting. Ms. Arrigo did state that the bulletins in questions should bind all of RMA. This memorandum does not convey any privileged or confidential information. Instead, it seeks to report to members on positions taken, or declined to be taken, by RMA at the June 20 meeting. Morrison & Hecker is preparing a separate memorandum, which will be privileged and confidential, analyzing the legal significance of information obtained yesterday and the basic legal issues involved in paying or declining claims. That memorandum will be presented to the Board of Directors next week. Insurance Companies' Answer to Sugar Beet Lawsuit
Ag Force Insurance Services, Inc. Farmers Alliance Mutual Insurance Company Farm Bureau Mutual Insurance Company Fireman's Fund Insurance Company Great American Insurance Company Hartford Insurance Company of the Midwest UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA MOTION
TO DISMISS OR, ALTERNATIVELY, TO COMPEL ARBITRATION
AND STAY DISCOVERY
Defendants in these consolidated cases move this Court to enter an order, based on
plaintiffs’ failures to arbitrate factual disputes, either dismissing these actions
or, alternatively, compelling arbitration of factual disputes in accordance with the rules
of the American Arbitration Association. In
support of this motion, defendants are submitting and incorporating herein their
Memorandum in Support.
WINTHROP & WEINSTINE, P.A.
By:
Thomas H. Boyd, #200517 P. John Owen (KS Bar #11835; MO Bar #22523) MORRISON & HECKER L.L.P.
By:
Steven J. Boyd (MO Bar #37597)
WILLSON & PECHACEK, P.L.C. By:
Frank W. Pechacek, Jr. Additional
Counsel for Defendants in HENKE BUFKIN By:
W. Kurt
Henke CERTIFICATE OF SERVICE This is to certify that on the ____ day of May, 2002, a true and
correct copy of the foregoing was served by first-class United States Mail, postage
prepaid on: George
G. Eck Dale M.
Wagner Attorneys
for Plaintiffs
UNITED STATES DISTRICT COURT
) DEFENDANTS’ MEMORANDUM IN SUPPORT OF MOTION TO DISMISS OR, Defendants submit the following brief in support of their motion to dismiss or, in the alternative, to compel arbitration and stay discovery. I. INTRODUCTION This action centers around policies of multiple peril crop insurance ("MPCI") issued to plaintiffs by defendants pursuant to the Federal Crop Insurance Act, 7 U.S.C. § 1501 et seq. ("FCIA"). Plaintiffs contend that they are entitled to indemnity under their MPCI policies for alleged losses associated with their sugar beet crops in crop year 2000. Defendants deny that they are responsible to plaintiffs for any crop insurance indemnity payments. The express terms of plaintiffs’ MPCI policies require arbitration. Specifically, the policies, published at 7 C.F.R. §§ 457.8 and 457.109, contain an arbitration provision requiring that any disagreement between the insurer and the insured as to "factual determinations" be resolved through arbitration. See 7 C.F.R. § 457.8, Form Policy ¶ 20. The arbitration clause contained in the policies is both valid and enforceable pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. §1 et seq. As such, defendants respectfully request the Court to enter an order either dismissing these actions or compelling arbitration of factual disputes and staying discovery and all other proceedings pending the resolution of those factual disputes through arbitration. II. FACTUAL BACKGROUND Plaintiffs are numerous sugar beet growers located in southern Minnesota to whom defendants issued MPCI policies for the 2000 crop year pursuant to the FCIA and their reinsurance agreements with the Federal Crop Insurance Corporation ("FCIC"). Plaintiffs filed ten suits against defendants in Minnesota state courts, asserting claims for alleged breach of contract, breach of the duty of good faith and fair dealing, estoppel, and violation of the Minnesota Prevention of Consumer Fraud Act. Defendants thereafter removed the cases to the United States District Court for the District of Minnesota. Plaintiffs’ MPCI policies, like all MPCI policies, are issued by private insurance companies, such as defendants, pursuant to a Standard Reinsurance Agreement ("SRA") with the FCIC. The FCIC is a wholly owned government corporation within the United States Department of Agriculture. 7 U.S.C. § 1503. The MPCI policy is part of the federal crop insurance program and is administered in accordance with the FCIA, as well as the terms of the attendant regulations (7 C.F.R. Part 400) and the SRA between the FCIC and each approved insurance provider. The sugar beet crop insurance policy offered by defendants and reinsured by the FCIC is a combination of several sets of provisions. Two sets of those provisions are published as regulations of the FCIC and appear in the Code of Federal Regulations. One, often referred to as the basic provisions, is set forth at 7 C.F.R. § 457.8 and is denominated as the common crop insurance policy. The other is set forth in the sugar beet provisions, sometimes referred to as the crop provisions, and published at 7 C.F.R. § 457.109. Although other endorsements or special provisions may exist, the portions of the sugar beet crop insurance policies relevant to this motion are found in the published regulations. The MPCI policies at issue contain the following arbitration clause: 20. Arbitration
See 7 C.F.R. § 457.8, Form Policy ¶ 20, a copy of which is attached as Exhibit A (emphasis added). The factual disputes in this litigation fall squarely within the parameters of the binding arbitration clause. Plaintiffs claim that their 2000 sugar beet crops were damaged by a freeze that occurred on or about October 6-10, 2000. Defendants dispute vital allegations of fact, as evidenced by plaintiffs’ complaints and defendants’ answers. Thus, because fundamental disagreements exist with respect to factual determinations that are central to plaintiffs’ claims for indemnity, defendants are entitled to have all claims asserted by the plaintiffs herein either dismissed or remanded to binding arbitration for resolution in accordance with the terms of their policies. III. ARGUMENT This action involves multiple factual disputes. These disputes must be arbitrated under paragraph 20 of the basic provisions of the sugar beet policy and under the FAA. Plaintiffs’ failure to arbitrate warrants either outright dismissal or a remand to arbitration accompanied by a stay. The Parties Disagree as to Factual Determinations. To determine whether plaintiffs’ claims fall within the arbitration provision of the policies, the Court should focus on the factual allegations in the complaints. See Nobles v. Rural Community Ins. Services, 122 F. Supp. 2d 1290, 1296 (M.D. Ala. 2000) (citing Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte, GmbH, 141 F.3d 1434, 1449 n. 21 (11th Cir. 1998)). Examining the complaints reveals many disputed facts that are essential to the viability of plaintiffs’ claims and, therefore, subject to resolution through mandatory arbitration before any remaining legal issues may be addressed by the Court. Among the disputed facts alleged by plaintiffs are the following: Whether plaintiffs and the Southern Minnesota Beet Sugar Cooperative ("SMBSC") took reasonable precautions prior to harvest in an effort to minimize and/or eliminate freeze damage to plaintiffs’ beets, including leaving beets in the field for additional time to heal (Complaint, ¶¶ 30, 34); Whether freeze damage was detectable at the time of harvest (id., ¶ 31); Whether freeze damage was detectable at the time of delivery and piling of the beets (id., ¶ 32); Whether SMBSC took reasonable steps to attempt to process noticeably freeze damaged beets, if any, when any damage became visible (id., ¶¶ 36, 39); Whether plaintiffs or SMBSC knew or reasonably could have known prior to December 2000 that freeze damage might give rise to an insurable loss (id., ¶ 37); Whether any decreased sugar production and loss of revenue was the direct result of freeze damage (id., ¶ 41); Whether plaintiffs’ harvested and processed beets produced less sugar and were therefore less valuable (id., ¶ 42); and Whether plaintiffs informed defendants of the freeze within 72 hours of its occurrence, or in no event later than fifteen days after harvest (id., ¶ 43). One central point of factual and legal disagreement between plaintiffs and defendants is whether plaintiffs provided timely notice of their claimed losses in accordance with the requirements of their policies. The FCIC regulations define explicitly when notice of loss or damage must be provided. In accordance with 7 C.F.R. § 457.8, Form Policy ¶ 14(a), an insured must provide notice of loss "within 72 hours of your initial discovery of damage (but not later than 15 days after the end of the insurance period). . . ." Under the definition of the insurance period set forth in the policy, coverage can end at various times, based on the earliest of the events specified therein. For instance, if sugar beets have been harvested, the absolute latest date for notice of any loss would be fifteen days following the harvest. Based upon information provided by plaintiffs to the FCIC, defendants believe that harvesting of the beets in question was completed in October prior to delivery of the beets to SMBSC for processing. Therefore, the insurance period would have ended in October, and any notice of loss would need to have been given prior to November 15, 2000. The applicable regulations also define an insured producer’s duties with respect to permitting appropriate and accurate adjustment of any claimed losses. These duties include leaving "representative samples intact for each field" (which "must be at least ten feet wide and extend the entire length of each field"), allowing removal of samples, providing copies of records, and not taking specified actions (such as destroying unharvested portions of the insured crop without the consent of the insurer). See 7 C.F.R. §§ 457.8, Form Policy ¶ 14, and 457.109, Form Policy ¶ 12(a). Availability of representative samples is critical because, without samples, it is impossible to determine the cause and degree of a claimed loss and may be difficult, if not impossible, to determine the amount of a loss. The insured producer’s duties also include submitting a fully documented claim for loss indemnity "not later than 60 days after the end of the insurance period." 7 C.F.R. § 457.8, Form Policy ¶ 14(c). Based on defendants’ belief that harvest was completed in October of 2000, the latest date for submitting such documentation would have been prior to December 31, 2000. The insured producer, moreover, must comply with 7 C.F.R. § 457.8, Form Policy ¶ 14(e), which states: You must establish the total production or value received for the insured crop on the unit, that any loss of production or value occurred during the insurance period, and that the loss of production or value was directly caused by one or more of the insured causes specified in the Crop Provisions. Factual disputes exist as to whether plaintiffs fulfilled the foregoing duties. Another illustration of disputed factual issues relates to SMBSC’s handling of the stored beets. Defendants believe, for instance, that SMBSC’s post-harvest conduct caused the losses at issue (Answer, ¶ 74) The parties’ factual disputes concerning the issues outlined above (and others) fall squarely within the parameters of the MPCI arbitration clause covering failures to agree on "any factual determination." Determinations of reinsured companies as to the amounts due under federally-reinsured crop insurance policies have been found to be "factual determinations" subject to arbitration. See Ledford Farms, Inc. v. Firemans’s Fund Ins. Co., 184 F. Supp. 2d 1242 (S.D. Fla. 2001); Nobles v. Rural Community Ins. Services, 122 F. Supp. 2d 1290 (M.D. Ala. 2000); see also Heaberlin Farms, Inc. v. IGF Insurance Co., No. 31/00-754 (April 3, 2002, Iowa Supreme Court) (reversing lower court’s denial of motion to compel arbitration of dispute under crop insurance policy; copy of slip opinion attached hereto). B. The Federal Arbitration Act Requires Arbitration. The arbitration clause at issue was created pursuant to the FAA, 9 U.S.C. § 1, et seq. In fact, the FCIC reaffirmed its commitment to arbitration during its 1997 rulemaking revisions to 7 C.F.R. § 457.8 when it stated that "arbitration by the rules of the AAA has been a satisfactory and desirable solution to policy disputes . . . ." 62 Fed. Reg. 65130, 65150 (1997). The FAA mandates the enforcement of the arbitration clause in the subject MPCI policies. Section 2. of the FAA, provides in part that: [a] written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be 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. Thus, the FAA requires enforcement of an arbitration agreement upon proof: (1) that a written agreement to arbitrate exists and (2) that the written agreement is contained within a contract evidencing a transaction involving "commerce." Once a transaction in litigation is found to meet the FAA standards, then state courts cannot apply state law that would invalidate the arbitration agreement. In Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 115 S. Ct. 1212, 1215-16, 131 L.Ed.2d 76 (1995), the Court explained: [T]he FAA not only ‘declared a national policy favoring arbitration,’ but also ‘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.’
In Allied-Bruce Terminex Companies, Inc. v. Dobson, 513 U.S. 265, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995), the United States Supreme Court explained that "the basic purpose of the Federal Arbitration Act is to overcome courts’ refusals to enforce agreements to arbitrate." Allied-Bruce Terminex, 115 S.Ct. at 838. In short, the FAA was said "to put arbitration provisions on ‘the same footing’ as a contract’s other terms." Id. at 840. In light of that purpose, the United States Supreme Court has recognized that even federal statutory claims can be appropriately resolved through arbitration and has enforced agreements to arbitrate such claims. Green Tree Financial Corp.-Alabama v. Randolph, 121 S. Ct. 513, 521 (2000) (claims under the Truth in Lending Act); Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S. Ct. 1917, 104 L.Ed.2d 526 (1989) (claims under the Securities Act of 1933); Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (claims under the Securities Exchange Act of 1934 and under the Racketeer Influenced and Corrupt Organizations Act); Mitsubishi Motors Corp. v. Soler Chrysler--Plymouth, Inc., 473 U.S. 614, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985) (claims under the Sherman Act). The Supreme Court likewise has rejected generalized attacks on arbitration that rest on "suspicion of arbitration as a method of weakening the protections afforded in the substantive law to would-be complainants." Rodriguez de Quijas, 490 U.S. at 481. These cases demonstrate that even claims arising under a statute designed to further important social policies may be arbitrated "so long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum." Mitsubishi, 473 U.S. at 637. The Supreme Court has interpreted the FAA expansively, decreeing that it is to reach all transactions or contracts that fall within the broad scope of congressional powers relating to interstate commerce. Allied-Bruce Terminex, 115 S.Ct. at 839. The Court has confirmed that the FAA applies to all transactions that "in fact" involve interstate commerce. Id. at 843. Furthermore, in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 940, 74 L.Ed.2d.765 (1983), the Supreme Court held that any doubt concerning the scope of the issues covered by the arbitration agreement should be resolved in favor of arbitration. Moses H. Cone Memorial Hospital, 103 S. Ct. at 941. The FAA, as interpreted by the Supreme Court, is clearly applicable to this dispute and mandates arbitration. Under the relevant analysis as articulated by the Court, there can be no question that the subject policies involve interstate commerce. See Allied Bruce Terminex, 115 S.Ct. at 841-43. Rather than examining the parties’ contemplation of interstate activity, a court considering whether there is a contract involving interstate commerce should simply look to whether the transaction involved interstate commerce "in fact." Id. at 841-43. The issue of whether the sale of crop insurance satisfies the "involving commerce" requirement of 9 U.S.C. § 2 recently was addressed and resolved by the Iowa Supreme Court in Heaberlin Farms, Inc. v. IGF Insurance Co. (copy attached). After a thorough analysis of relevant United States Supreme Court precedent, the legislative purpose of the FCIA, and the activities of the FCIC, the court concluded that "[t]he sale of federal crop insurance clearly has a sufficient economic nexus with interstate commerce . . . to invoke the arbitration provisions of 9 U.S.C. § 2 . . . ." Slip op. at 10. The contracts at issue here meet the FAA criteria of evidencing transactions affecting interstate commerce. Plaintiffs, citizens of Minnesota, purchased insurance policies from insurance companies incorporated in a variety of different states, and the policies were promulgated pursuant to federal laws and regulations. In addition, each of the companies is party to a reinsurance agreement (the SRA) with a governmental corporation of the United States Department of Agriculture (the FCIC). Because the requirements for applicability of the FAA are met, this Court must enforce the arbitration provision and either dismiss this case or remand it to arbitration for determination of factual disputes and also stay all discovery pending completion of the arbitration process. C. Dismissal Is Appropriate under the Terms of the Insurance Policy. Plaintiffs’ failure to pursue their claims through binding arbitration of factual disputes, in accordance with the terms of the insurance policy, means that dismissal of this action is appropriate. The basic provisions of the sugar beet policy make it absolutely clear that compliance with all terms of the policy is a precondition to commencement of any legal action. Paragraph 25 of the basic provisions states, in relevant part: (a) You may not bring legal action against us unless you have complied with all of the policy provisions. 7 C.F.R. § 457.8, Form Policy ¶ 25(a) (emphasis added). Because binding arbitration is an explicit term of the policy, as explained above, plaintiffs’ failure to arbitrate means that these suits are precluded under the policies which they have purchased. Accordingly, dismissal is warranted. D. Alternatively, a Remand to Arbitration and a Stay Are Appropriate. If the Court elects not to exercise its authority under the insurance policies in question to dismiss these cases, based on plaintiffs’ failure to arbitrate, at a minimum it should remand them to arbitration for determination of factual disputes and stay all discovery until those disputes have been resolved. This was the approach elected by the court in Ledford Farms, supra. Plaintiffs cannot be prejudiced by this result, since each of them has sought insurance coverage in accordance with terms and conditions of an insurance policy explicitly requiring arbitration. Additionally, all considerations of judicial economy dictate a remand to arbitration and a concurrent stay as appropriate alternative relief. There is no reason for the parties to undertake discovery and to burden the judicial process with discovery disputes (and ultimately a trial) until they have completed the mandatory dispute resolution process established by the FCIC for resolving factual disputes. Once those disputes have been resolved by the arbitration process, any legal issues requiring resolution can be presented to this Court in the context of a fully developed arbitration record. If the Court determines that a stay, rather than dismissal, is appropriate, defendants request that the Court specifically retain jurisdiction over this matter to enforce arbitration procedures as may be necessary. When the Court properly orders arbitration, it necessarily retains authority to enforce related arbitration procedures, such as subpoenas issued in connection with the arbitration process. See Western Emp. Ins. Co. v. Merit Ins. Co., 492 F. Supp. 53 (N.D. Ill. 1979). Since the policy specifies that the arbitration is to be conducted under the rules of the American Arbitration Association ("AAA"), the remand to arbitration should confirm the application of these rules. In accordance with the AAA’s rules, a referring court may determine whether the dispute is to be handled under the Optional Rules for Large, Complex Commercial Disputes. See AAA Rule L-1(a)(2). Defendants urge the Court to order the applicability of those rules. In doing so, it also should consider holding that the arbitration panel will consist of three arbitrators, as defendants do and will request. IV. CONCLUSION The claims presented by the plaintiffs under their MPCI policies are subject to the arbitration clause contained therein, and the arbitration clause is valid and enforceable pursuant to the FAA. Accordingly, defendants respectfully move the Court to enter an order either dismissing these actions or compelling arbitration of factual disputes in accordance with the terms and conditions of the subject MPCI policies and staying all discovery and other proceedings until completion of the arbitration process. Defendants are submitting two forms of proposed orders since they are seeking alternative relief. Respectfully submitted, WINTHROP & WEINSTINE, P.A. By: Thomas H. Boyd, #200517 P. JOHN OWEN
By: P. John Owen (KS Bar #11835; MO Bar #22523) MORRISON & HECKER L.L.P. By: Steven J. Boyd (MO Bar #37597) Counsel for All Defendants WILLSON & PECHACEK, P.L.C. By: Frank W. Pechacek, Jr. Additional Counsel for Defendants in No. 01-CV-1629 HENKE BUFKIN By: W. Kurt Henke Additional Counsel for Defendants in Nos. 01-CV-1632 and 01-CV-1637
CERTIFICATE OF SERVICE This is to certify that on the ____ day of May, 2002, a true and correct copy of the foregoing was served by first-class United States Mail, postage prepaid on: George G. Eck Attorneys for Plaintiffs Dale M. Wagner Attorneys for Plaintiffs
[1] On April 15, 2002, the Court ruled on the plaintiffs’ remand motions filed in the ten removed cases. The Court granted the motions in two cases, remanding Nos. 01-CV-1631 and 01-CV-1688, but denied them in the other eight cases. Defendants in No. 01-CV-1631 previously named and served the FCIC as a third-party defendant, and they understand that the FCIC soon will be exercising its removal authority under 28 U.S.C. § 1442(a). Once the FCIC has removed No. 01-CV-1631, the defendants therein will file a motion identical to this motion and join in this memorandum in support. [ 2] In accordance with the preamble of the policy, throughout the policy “you” and “your” refer to the named insured shown on the accepted application, and “we,” “us,” and “our” refer to the insurance company providing the coverage.[3]References herein are made to the complaint filed in Agre v. Rain and Hail, LLC, No. 01-CV-1629. The complaints in the other cases each contain identical or substantively similar factual allegations, with some differences in paragraph numbering. [ 4] Based on FCIC’s published regulations, the insurance period under plaintiffs’ policies for the 2000 crop year ended at the earliest of total destruction of the crop, harvest, final adjustment of a loss claim, abandonment of the crop in the field, or November 15, 2000. See 7 C.F.R. §§ 457.8, Form Policy ¶ 11, and 457.109, Form Policy ¶ 9. With respect to sugar beets, the term “harvest” is defined in the regulations as “[t]opping and lifting of sugar beets in the field.” 7 C.F.R. § 457.109, ¶ 1.[ 5] The reference is to the Answer, Affirmative Defenses, and Third-Party Complaint in No. 01-CV-1629. Identical or substantively similar factual allegations are made in all defendants’ answers.[ 6] State laws which invalidate or limit arbitration agreements covered by the FAA violate the Supremacy Clause of the United States Constitution. See Southland Corp. v. Keating, 465 U.S. 1, 104 S. Ct. 852, 79 L. Ed. 2d 1 (1984). The Court need not reach this issue here, however. The subject arbitration clause is valid and enforceable under Minnesota law as well as federal law. See Minn. Stat. §§ 572.08 – 572.30 (2000); Stillwater Leased Housing Associates v. Kraus-Anderson Constr. Co., 319 N.W.2d 424 (Minn. 1982).UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA DISMISSAL ORDER This matter is pending on defendants’ Motion To Dismiss or, Alternatively, To Compel Arbitration and Stay Discovery. Defendants base their motion on paragraphs 20 and 25(a) of the insurance policy at issue since there is no dispute that plaintiffs have failed to arbitrate the underlying factual disputes under that policy. Accordingly, after full consideration of the parties’ submissions, including oral argument, it hereby is ordered, adjudged, and decreed that these actions are dismissed. Dated: , 2002
JAMES M. ROSENBAUM UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA ARBITRATION ORDER This matter is pending on defendants’ Motion To Dismiss or, Alternatively, To Compel Arbitration and Stay Discovery. Defendants base their motion on paragraphs 20 and 25(a) of the insurance policy at issue since there is no dispute that plaintiffs have failed to arbitrate the underlying factual disputes under that policy. Accordingly, after full consideration of the parties’ submissions, including oral argument, it hereby is ordered, adjudged, and decreed (i) that plaintiffs’ claims under the sugar beet insurance policy are remanded to arbitration for determination of all factual disputes under the rules of the American Arbitration Association (“AAA”); (ii) that the arbitration shall proceed under the AAA’s Optional Rules for Large, Complex Commercial Disputes; (iii) that the arbitration panel shall consist of three neutral arbitrators to be appointed in accordance with procedures acceptable to the parties; (iv) that this Court retains jurisdiction to enforce arbitration procedures, including enforcement of subpoenas to appear at depositions, to produce documents and other tangible things, and to appear to testify at the arbitration hearing; and (v) all other proceedings in these cases are stayed pending completion of the arbitration process. Dated: , 2002
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