BULLETIN NO.: MGR-95-017 TO: All Reinsured Companies CFSA Headquarters, Program Delivery and Field Operations All Risk Management Field Offices FROM: Kenneth D. Ackerman Acting Deputy Administrator SUBJECT: Violations of the Standard Reinsurance Agreement Provisions BACKGROUND The Office of Risk Management, Risk Compliance Division (RCD) has identified repeated violations of the Standard Reinsurance Agreement (Agreement) provisions by some reinsured companies. Some violations were clear CONFLICTS OF INTEREST; others gave the appearance of a CONFLICT OF INTEREST. For example: 1) unlicensed agents, solicitors, and other sales representatives participating in the sales and service of crop insurance contracts 2) a spouse or family member residing in the household of a loss adjuster is an employee of an agent 3) the commingling of sales supervision and loss adjustment activities by sales supervisors of reinsured company 4) the transfer of an agent's entire book of business from reinsured company to reinsured company while retaining the same loss adjustment staff 5) agents that directly participate in the verification of Actual Production History Yields The Agreement contains specific language as to what a reinsured company must do, and must not do with regard to their Insurance Operations and the penalties for violations. ACTION The purpose of this bulletin is to remind all reinsured companies that all provisions of the Agreement are valid and binding once the Agreement is duly signed and agreed to, by the Federal Crop Insurance Corporation and Company. If the above violations are found on subsequent company reviews, the RCD will issue initial determinations based on the identified violation(s) and recommend appropriate penalties as prescribed in the Agreement provisions. Those penalties may include, but are not limited to, suspension and debarment of Company employees, loss adjusters, or agents. 7 CFR Ch. 017 (1-1-94 Edition) Part 3017-Governmentwide Debarment and Suspension (Nonprocurement). Section V. GENERAL PROVISIONS of the 1995 Agreement Subsection F. Insurance Operations states in part: 2. The Company must sell all eligible crop insurance contracts reinsured under this Agreement through properly trained and licensed agents. Agents, brokers, solicitors, or any other sales representatives of the Company who are authorized to quote premium rates and coverage or provide other information pertaining to eligible crop insurance contracts must hold an insurance license issued by the state in which each such contract is written. 3. The Company may not permit its sales agents, local agency employees, sales supervisors, or any spouse or family member residing in the same household as any such sales agent, local agency employee, sales supervisor to adjust losses, or supervise, or otherwise control loss adjusters, nor to participate in the determination of the amount or cause of any loss nor to verify yields of applicants for the purpose of establishing any insurance coverage or guarantee, if eligible crop insurance contracts involved are sold or serviced by or through the sales agent, local agency employee, the local agency, any competing agency, or by any agent or local agency supervised by the sales supervisor. 4. The Company and FCIC agree that FCIC will assume and perform the obligations of the Company if the FCIC determines that the Company's loss adjustment performance and practices are not carried out in accordance with this Agreement. . . . 5. The Company must verify all yields and other information used to establish insurance guarantees. . . . 6. The Company and its agents must use standards, procedures, forms, methods and instructions approved by FCIC in the sale and service of MPCI contracts of insurance reinsured under this Agreement. Subsection H. Compliance and Corrective Action states: 1. The Company must be in compliance with the provisions of this Agreement, the Standards for approval as published by FCIC, the laws and regulations of the United States, the laws and regulations of the state in which the Company is conducting business under this Agreement, unless state laws and regulations are in conflict with this Agreement, and all instructions of FCIC. 2. The Company must cooperate with FCIC in the review of Company operations which are designed to assure policyholders are properly serviced, that monies are distributed in accordance with the Act, and that FCIC policies and procedures are being followed. 3. In lieu of termination of this agreement and in addition to suspension of this agreement in accordance with the provisions of subsection V.I., if FCIC finds that the Company has not complied with the provisions of paragraphs V.H.1. and 2. above, and the Company has not taken appropriate steps to correct the non-compliance, FCIC may, at its option: a. Require, in writing, that the Company take corrective action within forty-five (45) days of the date of such demand. The demand notice shall state each contract violation or occurrence of non-compliance or reported violation, including but not limited to, appropriate actions against any of its agents or other employees determined to be responsible for the violation; and b. Require that the Company refund or forfeit a share or all of the expense reimbursement, premium subsidy, or reinsurance with respect to the crop insurance contract violation identified. Subsection I. Termination and Suspension states: 1. If the Company does not fulfill all of its obligations under this Agreement, FCIC may immediately terminate this Agreement for cause. Subsection Q. Discrimination states: The Company must not discriminate against any employee, applicant for employment, insured, or applicant for insurance because of race, color, religion, sex, age, physical handicap, marital status or national origin. Subsection U. Liability for Agents and Loss Adjusters states: The Company is solely responsible for the conduct and training of its personnel, agents and loss adjusters within the parameters of this Agreement. Liability incurred, to the extent it is caused by agent or loss adjuster error or omission, or for failure to follow FCIC approved policy or procedure, is sole the responsibility of the Company. Reinsurance of a policy or policies will not be denied unless: (1) there exists a pattern of failure to follow FCIC approved policies or procedures, or allowance of errors or omissions; or (2) the Company knew or should have known of the failure to follow FCIC approved policies or procedures, or errors or omissions, and failed to take appropriate action to correct the situation. Any amounts paid by FCIC to the Company which later are determined to have been improperly paid because of failure to follow FCIC approved policies or procedures or because of error or omission, whether intentional or unintentional, will be repaid by the Company to FCIC with appropriate interest on the next monthly accounting or annual report, whichever is applicable. If the Company shows, to FCIC's satisfaction, that the agent or loss adjuster exercised reasonable care in the sales and service of the policies under this Agreement, FCIC may, at its sole discretion, waive, reduce or delay repayment.