Crop Insurance Arbitration: Navigating the Landmines

Two years ago, a Kentucky farmer won an unusual $640,000 arbitration award against his Federal crop insurance AIP (approved insurance provider).  During the arbitration, the farmer presented evidence to prove that the AIP had mishandled his policy, leaving the farm unprotected for two major crop losses. In one case, the AIP’s agent had placed the farmer’s unit on the wrong policy in the wrong county.  In the other, the company’s agent had reported the farmer’s prevented planting claim on the wrong form.  In each case, the company refused to pay the claim.  The arbitrator, hearing the evidence, ultimately ruled for the farmer, finding the company had committed negligence, breach of fiduciary duty, breach of contract, and constructive fraud. The arbitrator also applied state law to triple the award in her final ruling.

Neither side contested the underlying facts.  Still, the farmer never saw a penny.  Just recently, a federal Court of Appeals, upholding the decision of a federal District Court, ordered that the farmer’s victory be vacated, a decision made all the more surprising given the “strong presumption” in federal law toward arbitration awards.  Why?  The arbitrator had been sloppy, and the lawyers appear to have presented the case in a way that allowed the arbitrator to exceed her permissible scope.  See Williamson Farm v. Diversified Crop Insurance Services, No. 18-1463 (4th Cir., Feb. 27, 2019) and Fourth Circuit Holds That Arbitrator Exceeded Powers, National Law Review, April 19, 2019.

Farmers always face a daunting task challenging their AIP over a disputed FCIC (Federal Crop Insurance Corporation) crop insurance claim.  Not only do AIP’s have greater expertise and deeper pockets, but FCIC rules create an unusually complex (and expensive) set of procedures for farmers to press their claims.  Unless the AIP agrees to mediate, FCIC policies force the farmer to pursue any factual disputes regarding their claim in arbitration under rules of the American Arbitration Association or some similar system.  Then, unlike normal insurance cases, it places heavy restrictions on what the arbitrators can do.  Any elements of a claim beyond the actual FCIC policy, such as state-law customer protections including rules again negligence, fiduciary duties, detrimental reliance, fraud, so on, must be handled separately in state court after the arbitration and after getting approval from USDA’s RMA (Risk Management Agency), as must any award of attorney fees.  

During the arbitration, any question about the interpretation of an FCIC rule must be submitted back to RMA for a binding interpretation.  If the farmer’s complaint involves direct intervention by RMA, then the farmer might need to bring an additional separate action against RMA directly before the USDA National Appeals Division.

Navigating these rules can be treacherous, and mistakes unforgiving.  In this case, the arbitrator, apparently sympathetic to the farmer, overreached by making three critical errors, which convinced the federal Court of Appeals to overturn the award:

  • First, the arbitrator, having ruled for the farmer, ordered that the AIP pay damages both for FCIC policy violations and, in addition, for state-law claims including negligence and breach of fiduciary duty. Many farmer complaints contain such combinations of federal and state claims, and the parties, by mutual agreement, often find it more efficient to litigate them together in a single venue.  But RMA’s rule is clear; awards based on state law claims have to wait.  The better practice is for the farmer to ask the arbitrator to hear the evidence and issue findings of fact on the state law claims, but stop short of actually awarding the damages.  These findings of fact may then be used by the farmer (or the AIP) to settle the state-law issues quickly in subsequent litigation or mediation.
  • Second, the arbitrator chose to bundle all the award elements, federal and state, Into a single number, rather than an itemized accounting. This way, once the federal court decided to reject the portions of the award based on state claims, it had no way to isolate the remaining amount due for the federal claims standing alone.  As a result, it had no choice but to throw out the whole package.
  • Finally, the arbitrator, faced with what she considered a vague provision of the FCIC policy, developed her own interpretation, which she explained in her decision. Once again, RMA’s rule is clear: such questions had to be submitted to RMA for an interpretation.

Lawyers cannot always control how an arbitrator proceeds, and it is often unfair to Monday-morning-quarterback how litigation unfolds in complicated cases.  But the bottom line in this case was clear:  after spending some $98,000 in attorney fees and another $14,000 in arbitration costs, having built a factual record to support a compelling claim against his crop insurance AIP for mishandling its policy, the farmer saw his award disappear.   Whether they can still go forward is unclear.

Crop insurance arbitration is a highly specialized, serious business and needs to be approached cautiously and carefully.

Ken Ackerman served as the Director of RMA from 1993 through 2001.   He and Elliot Belilos have represented agricultural interests in all facets of crop insurance law, including arbitration of claims. 

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