Arbitration of Insurance Disputes Must Be Taken Seriously

Defending Crop Claim Requires Presentation of Evidence of Basis of Refusal to Pay

Crop insurance is a creature of the U.S. Government whose terms and conditions are mandated by federal statutes. Disputes over coverage, based on the statutes, are required to be resolved by arbitration. Arbitration awards are difficult, if not impossible, to overturn and will almost invariably be upheld by federal courts. Therefore, it is the obligation of the insurer refusing to pay a crop insurance claim, to come to the arbitration thoroughly prepared with evidence and witnesses to counter the presentation of the insured farmer and be ready to challenge the testimony and calculations of the farmer’s expert.

In Great American Insurance Company v. Jonathan L. Russell, No. 17-2441, United States Court of Appeals For the Eighth Circuit (January 31, 2019) the insurer convinced the District Court to vacate an arbitration award because the arbitrators failed to break down how they arrived at the amount of the award.

Jonathan Russell appealed the district court’s vacatur of the arbitration award he received against his insurer, Great American Insurance Company, for wrongfully denying his claim for damage to his 2013 corn crop.

FACTS

Russell submitted claims to Great American for damage to his 2013 corn and soybean crops in Atchison, Holt, and Nodaway counties in Missouri. Russell’s crop insurance policy is governed by federal regulations that form the policy’s essential terms. After Great American denied his claims, Russell invoked the arbitration provision. Although the regulations impose certain limitations on the powers of arbitrators assessing federally-reinsured crop insurance claims like Russell’s, arbitral awards are still governed by the Federal Arbitration Act.

Following an evidentiary hearing, the three-arbitrator panel awarded Russell $1,433,008 for damage to his corn crop in the three counties but denied his soybean claim. The panel found that Great American’s denial of Russell’s corn claim—based on (1) Great American’s inability to substantiate an insurable cause of loss and (2) Russell’s failure to provide adequate records to establish production “by unit”—was erroneous. After reviewing the evidence, the panel concluded that Russell’s accounts of insurable crop damage were independently verified but that Great American had failed to conduct a timely on-site inspection until after harvest was completed. The arbitrators credited testimony of witnesses that the crops in question experienced significant damage from drought, rootworm, and heavy winds. The panel accepted the analysis of Russell’s damages expert, who calculated the total damage to the corn crop as $1,433,008. Great American did not challenge this calculation or offer a different calculation.

Great American then appealed the award to the district court. Great American argued that the arbitrators “imperfectly executed” their powers because they failed to comply with the regulations governing the arbitration proceeding. The applicable regulations required the panel to provide “a written statement describing the issues in dispute, the factual findings, the determinations and the amount and basis for any award and breakdown by claim for any award.”

The district court agreed that the panel had failed to properly break down the award “by claim,” nullifying the entire award. The court based its decision on § 457.113 ¶ 11(a), which states in part that the insurer “will determine [the insured’s] loss on a unit basis,” and on § 457.8 ¶ 1, which defines an enterprise unit as “[a]ll insurable acreage of the same insured crop . . . in the county in which you have a share on the date coverage begins for the crop year.”

Relying on this statutory and regulatory language, the district court concluded that the arbitration panel was required to break down the award into separate awards for each of the three counties to provide the required “breakdown by claim.” It vacated the award and did not address Great American’s argument that the panel made improper interpretations of the regulations.

ANALYSIS

The Federal Arbitration Act is a congressional declaration of a liberal federal policy favoring arbitration agreements.

The arbitration award needed only to describe the issues in dispute, the factual findings, the determinations and the amount and basis for any award and breakdown by claim for any award.  A Claim for indemnity is defined as a claim made on the insurer’s form that contains the information necessary to pay the indemnity. Russell submitted a single claim covering both his corn and soybean crops, and Great American assigned it a single claim number. Nothing in the regulations required the panel to segregate this claim into multiple separate claims.

Although the insurer was required to make conclusions by county unit the arbitration panel was obligated to break down its award only by claim, not by unit.  Moreover, the arbitration panel concluded that Great American had “collaps[ed] all acres farmed by Russell into a single unit pursuant to policy provisions.” As a result there appeared to the Eighth Circuit to be no reason why the arbitration panel could not accept Great American’s decision to treat Russell’s claim as singular when rendering its decision. Indeed, it appears that Great American raised no objection to this approach until its motion to vacate or modify the award.

The Eighth Circuit concluded that the panel’s written explanation for the award amount was adequate. Although the panel simply adopted the calculation of Russell’s expert, Great American failed to contest this calculation or provide its own alternative at the evidentiary hearing.

Since there is no requirement in the statutory and regulatory policy that the arbitrator’s decision be particularly detailed if  it adequately explained the disposition of each claim at issue, it should be upheld.

Accordingly, the Eighth Circuit vacated the district court’s order vacating the arbitration award.

However, since Great American’s alternative argument that the arbitration panel’s decision rests on improper interpretations of the applicable regulations, which the district court did not address, the Eighth Circuit sent the case back to the district court to determine whether the arbitrators used improper interpretations of the applicable regulations.

ZALMA OPINION

The Eighth Circuit gave the insurer a gift – the right to argue more in the district court – even though they made sure they understood that the insurer failed to protect its rights, failed to present evidence to counter the opinions of the farmer’s expert, and simply allowed the district court to err. Had they been properly prepared with their own expert during the arbitration they might have avoided the trial and appeal. Arbitrations seem to be informal and easy but they must be prepared for in the same manner and with the same effort as any jury trial, recognizing that the trial is before three knowledgeable jurors.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

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 50 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.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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