BULLETIN NO.: MGR-95-005 TO: All Reinsured Companies CFSA Headquarters, State, and County Offices All Risk Management Field Offices FROM: Kenneth D. Ackerman Acting Deputy Administrator SUBJECT: Regulatory and Procedural Revisions/Clarifications for Implementation of the Federal Crop Insurance Reform Act of 1994 ISSUE: Various issues have been raised regarding certain procedures for the implementation of the Federal Crop Insurance Reform Act of 1994 (Act). In addition, public comments received on the catastrophic risk protection endorsement and the general administrative regulations, 7 CFR Part 400, Subpart T, published in the Federal Register as Interim Rule require some revisions. The following provides clarification for these issues and revisions to regulations that Federal Crop Insurance Corporation (FCIC) intends to make at time of Final Rule. DISCUSSION: 1. Issue: The catastrophic risk protection (CAT) endorsement subsection 6.(c), specifies that the producer may separately insure acreage that has been designated as high risk land by the FCIC provided that the producer has executed a High Risk Land Exclusion Option under additional coverage and obtained a CAT policy for the high risk land with the same insurance provider. Clarification: Some approved insurance providers may not participate in the sales and service of CAT coverage. Therefore, if the producer has obtained limited or additional coverage from an approved insurance provider who does not sell CAT coverage and the producer has executed a High Risk Land Exclusion Option under that policy, the producer may obtain the CATcoverage on the high risk land from another approved insurance provider (Consolidated Farm Service Agency (CFSA) or a reinsured company). Reinsured Companies not selling CAT coverage must advise policyholders that they must obtain the CAT coverage/policy to maintain eligibility for certain other Department of Agriculture (USDA) program benefits. 2. Issue: General administrative regulations, 7 CFR Part 400, Subpart T, paragraph 400.654 (d)(1) states: "An insured who is eligible to receive an indemnity under a limited or an additional coverage plan of insurance and who is also eligible to receive benefits for the same loss under any other USDA program may receive benefits under both programs unless specifically limited by the crop insurance policy. However, the total amount received for the loss will not exceed the amount of the actual loss sustained by the insured. The amount of the actual loss will be the difference between the fair market value of the production before and after the loss, as determined by the approved insurance provider based upon the insured's production records." Clarification: Companies are responsible for administering their contract with insured producers. The CFSA will be responsible for determining and paying the additional amount due the insured for any applicable USDA program benefit, after first considering the appropriate amount of indemnity to be paid for the loss. The provision "...as determined by the approved insurance provider" will be removed when the regulation is published as Final Rule. 3. Issue: The following question has been raised regarding the definition for "crop of economic significance." If a producer planted a crop in 1994 and does not intend to plant the same crop in 1995, does the crop meet the definition of "crop of economic significance" for the purpose of linkage requirements? Clarification: The CAT endorsement and general administrative regulation definition for crop of economic significance contains the following language: ". . . if the total expected liability under the catastrophic risk protection endorsement is equal to or less than the administrative fee required for the crop, such crop will not be considered a crop of economic significance." In this situation, the producer would not have to obtain insurance coverage for the crop to remain eligible for certain other USDA program benefits. However, if the producer later decides to plant the crop as an alternate crop, for whatever reason, the producer will not have insurance on the crop and may lose USDA program benefits. 4. Issue: The following question has been raised regarding administrative fees under crop reform for a carry-over insured. Would a carry-over insured owe an administrative fee on a 1995 crop, if the crop's contract change date was prior to enactment of the Act? Clarification: The following rules apply to a valid crop insurance contract in the 1995 crop year regardless of the contract change date. If the carry-over insured plants the crop for the 1995 crop year, the insured owes the $50 administrative fee for catastrophic or limited coverage or the $10 administrative fee for additional coverage. However, if a carry-over insured files a zero acreage report for the 1995 crop, the insured does not owe any administrative fee for that crop. Producers who had coverage in the 1994 crop year that was lower than catastrophic coverage and who increase the coverage to the catastrophic level or equivalent for the 1995 crop year, will owe the $50 administrative fee. 5. Issue: The following question has been raised regarding when to collect the administrative fee for carry-over insureds for the 1995 crop year who elected limited/additional coverage. Clarification: The administrative fee for the 1995 crop year will be collected: (a) At the same time the premium is collected for crops whose acreage report dates have passed and (b) When the acreage is reported, when the acreage reporting date has not passed (i.e.,spring crops). The chart in Attachment 1 has been developed to assist in the proper collection of administrative fees. 6. Issue: The CAT endorsement subsection 1.(h) states: "Crop of economic significance - A crop that has either contributed in the previous crop year, or is expected to contribute in the current crop year, ten percent (10%) or more of the total expected value of your share of all crops in which you have an insurable share that are grown in the county. However, notwithstanding the preceding sentence, if the total expected liability under the catastrophic risk protection endorsement is equal to or less than the administrative fee required for the crop, such crop will not be considered a crop of economic significance." Clarification: The Act does not state that a crop of economic significance must be insurable. The CAT endorsement is being amended to delete the words, ". . . in which you have an insurable share." This change will make the definition for crop of economic significance the same as the correct definition contained in 7 CFR Part 400, Subpart T, Federal Crop Insurance Reform Act of 1994; Regulations for Implementation. 7. Issue: Many questions have been raised on how to determine a crop of economic significance. Clarification: It is primarily the insured's responsibility to determine crops of economic significance by using information that is pertinent to his/her farming operation. For example, the insured may choose to use the current local market price, the futures price, the established price, etc. for the price when determining crops of economic significance. A worksheet has been developed that insureds may use to aid them in their determination (see Attachment 2). 8. Issue: There is some confusion on how to determine annual gross income to determine if an insured qualifies as a limited resource farmer. Questions are being raised on whether to count the total income from the sale of livestock and other items regardless of whether or not the product was initially purchased for resale or raised and sold. The catastrophic risk protection endorsement subsection 1.(l) states: "Limited resource farmer - A producer or operator of a small or family farm, including a new producer or operator, with an annual gross income of less than $20,000 derived from all sources of revenue for each of the prior two years and who demonstrates a need to maximize farm income. Notwithstanding the preceding sentence, a producer on a farm of less than 25 acres aggregated for all crops, where the producer derives a majority of the producer's gross income from the farm but the producer's gross income from farming operations does not exceed $20,000, will be considered a limited resource farmer." Clarification: The initial cost of livestock or other items bought for resale, will be deducted from the sale price of the animal or item and the remaining sum will be gross income for that animal or item. The figure in Line 11 of the Internal Revenue Service, Schedule F (form 1040) "Profit or Loss From Farming" is the gross income from farming for any applicable year. ACTION: The CAT endorsement and the general administrative regulations, 7 CFR Part 400, Subpart T, have been published in the Federal Register as Interim Rule. FCIC intends to amend the regulations to incorporate the revisions discussed above before the regulations become Final Rule. Effective immediately, the revisions above are to be administered in accordance with the intended changes. ============================================================================ Attachment 1 COLLECTION OF ADMINISTRATIVE FEES FOR CATASTROPHIC (CAT), LIMITED AND ADDITIONAL COVERAGE CAT Coverage is 50/60 or equivalent. Limited Coverage is 50/100, 65/77 through 65/99 or 75/67 through 75/86. Additional Coverage is 65/100 or 75/87 to 75/100. 1995 CARRY-OVER POLICIES CROPS WHOSE ACREAGE REPORT DATE HAS PASSED: * Coverage less than CAT, no acreage planted, No fee due or CAT/Limited coverage with bona fide zero acreage report timely filed * CAT/Limited Coverage $50 at premium billing * Additional Coverage $10 at premium billing CROPS WHOSE FINAL ACREAGE REPORT DATE HAS NOT PASSED: * No Acreage Planted No fee due * CAT/Limited Coverage Report $50 with acreage report * Additional Coverage $10 at premium billing NEW OR CONVERTED POLICIES *(Includes new applications for 1995 and 1994 carry-over policies changing coverage/price to maintain eligibility for certain other USDA program benefits) * New CAT/Limited Coverage $50 with application * Converted CAT/Limited Coverage $50 with premium billing * Additional Coverage $10 at premium billing ------------------------------------------------------------------------------------------------ * Limited Resource Waiver Granted No fee due (applicable to $50 fees only) * Maximum Fees Already Collected No fee due (applicable to $50 fees only) ($200 per County or $600 per Insured) NOTE: Reinsured Companies selling the contract are responsible for collecting the fee. Reinsured Companies will NOT collect a $50 fee for limited coverage when Cat Coverage was previously issued by CFSA. Crop insurance information assembled by the CFSA will be transferred to the Reinsured Company and the $50 fee will be retained by CFSA. (This does not apply to policies with additional coverage. In these situations the Reinsured Company is entitled to collect the $10 fee. The CFSA will transfer the insurance information and refund the $50 fee previously collected to the insured.) ============================================================================ Attachment 2 WORKSHEET FOR DETERMINING CROPS OF ECONOMIC SIGNIFICANCE ------------------------------------------------------------------------ CROP ACRES SHARE YIELD PRICE $ VALUE PERCENT ------------------------------------------------------------------------ Corn 200 100 100 bu. $ 2.25 $ 45,000 34.2 Soybeans 200 100 40 bu. 5.50 44,000 33.4 Oats 50 100 60 bu. 1.45 4,350 3.3 Forage Pro. 50 100 3 t. 75.00 11,250 8.5 Forage Seed. 20 100 -- 104.00 2,080 1.6 Green Peas 40 100 4,000 lb. 0.10 16,000 12.2 Watermelon 5 100 30,000 lb. 0.05 1,500 1.1 ------------------------------------------------------------------------ TOTAL 565 -- -- -- $131,680 -- ------------------------------------------------------------------------ Acres--Intended to plant for 1995 Yield--APH if insured for 1994, ASCS program yield if new for 1995 or producers best estimate if Non-Program Crop. Price--Market price (if applicable) or established price or highest amount of insurance Value--Calculated (acres times , shared times, yield times price) Pct. --Calculated (value for crop divided by total value)