INFORMATIONAL MEMORANDUM: R&D-95-048 TO: All Reinsured Companies All Risk Management Field Offices CFSA Headquarters, Program Delivery and Field Operations FROM: Tim B.Witt Acting Director Research and Development Division SUBJECT: Clarification of Nursery Claims Issues BACKGROUND: There is some confusion as to the determination of Field Market Value "A" and Field Market Value "B" for nursery losses. There are also concerns regarding nursery disease claims. In order to promote uniform and accurate program administration and loss adjustment, the following clarifications are provided. ISSUE 1: Clarification of Nursery Field Market Value "A" and Field Market Value "B" DISCUSSION: The establishment of market values for nursery plants differs from other crops because market reports that are available for most other insured crops are not available for nursery. The current nursery crop provisions require that the insured submit a projected annual crop report of all eligible nursery plants in the county, anticipated for each month of the crop year grown, by unit, type, container size, number of plants, and applicable wholesale price of plants for each month of the crop year. The policy also provides that the insurance provider may determine all losses on the basis of information on the policyholder's report or the inventory as appropriate. The nursery provisions and operating procedures require that the insurer inspect nursery crops prior to acceptance of the application. This inspection and subsequent annual crop report provide the insurer the opportunity to determine whether the wholesale prices submitted by the insured as part of their crop report are reasonable. If the insurer determines that the prices are not reasonable, the dispute must be resolved prior to the establishment of liability and premium. If the insurance provider does not believe that the wholesale price list is reasonable as submitted, the insurance provider may refuse to accept the nursery liability under terms of the policy. Previous year nursery wholesale sales records, pending sales contracts, wholesale price guides (such as Plant-Finder), and other insured area nursery wholesale price lists can be used to help determine "reasonableness" of the subject wholesale price list. ESTABLISHMENT OF FIELD MARKET VALUE "A" The nursery crop provisions define Field Market Value "A" as 90 percent of the wholesale market value for the insured plants in the unit immediately prior to the occurrence of the loss. Field Market Value "A" is established by using the wholesale price as provided on the crop report as the market value of the nursery plants. This requires the insurer to confirm the number of plants eligible for insurance, the value by type (reported wholesale price for month of loss occurrence for container size multiplied by number of plants) and the total value of all insurable types. ESTABLISHMENT OF FIELD MARKET VALUE "B" The nursery crop provisions define Field Market Value "B" as 90 percent of the wholesale market value remaining for the insurable plants in the unit immediately following the occurrence of the loss as determined by our appraisal conducted as soon as reasonably possible after the loss is reported. In establishing the total market value of the insured crop for the damaged unit, the loss adjuster must determine the value of plants that will fall into three groupings: 1) plants without damage; 2) damaged plants that will not recover at any time after the loss occurrence; and 3) damaged plants that will recover at some time after the loss occurrence. 1. Plants without damage are valued according to the insured's wholesale price as contained on the crop report for the month of loss occurrence for the plant type and container size and are the same values used to establish Field Market Value "A." 2. Damaged plants that will not recover to saleable quality at any time after the lossoccurrence should have zero value, unless such plants are to be used for propagation. The determination that damaged plants will not recover to saleable quality at any time after the loss occurrence should be supported with photographs and opinions of nursery specialists or any other documentation that justifies the determination. The insured should be directed to follow Extension Service recommended disposal methods for plants valued as zero. Any damaged plants retained by the insured (that is, retained for propagation) must be assigned an appropriate value. Propagation plants are considered uninsurable; therefore, any additional damage and loss, irrespective of cause, is considered uninsurable. 3. Damaged plants with the ability to recover at some time after the loss occurrence must be valued at a percentage of the wholesale price as described in item 1. Compute the applicable damage percentage by comparing the number of months required for the plant to recover to its growth stage when damaged. For example, assume that a plant that normally takes 14 months to reach its highest monthly market value is damaged in its tenth month of growth while in a 10-inch container. The wholesale price is $10 (as reported by the insured and accepted by the insurer). The plant will require 4 months to recover back to its current growth stage (10-inch container value); therefore, Field Market Value "B" would be $6 (4 months ö10 months = .400 damage; 1.000 - .400 = .600 remaining value factor; $10 X .600 = $6 remaining value (Field Market Value "B")). The damaged plants will remain insured at the reduced value (based on recovery time remaining) until the plants recover to the tenth month growth stage. When such growth stage is reached, the acreage report must be revised to reestablish the value of the inventory (since part or all of the amount of insurance attributable to those plants has been paid), with payment of any additional premium due. If the acreage report is not revised, the recovered plants will remain insured, but at the reduced (damaged) value ($6 for example above). Any additional damage resulting from the insured's failure to follow recommended damaged-plant treatment of salvageable plant material would be considered damage resulting from avoidable causes and is considered uninsurable. In establishing the expected number of months required for a damaged plant to recover, all available information must be considered, including qualified Extension Service specialists' opinions. Qualified specialists' opinions must be included as part of the official claim file documentation where a dispute arises between the insurer and the insured concerning the damaged plant recovery time. Any plant grown for a niche market (such as Poinsettia for Christmas) which is damaged by an insurable cause and due to such damage will not be a marketable plant within that "niche" marketing period, may be considered to have zero value, unless such plant has some residual value (salvage or alternate market) or is to be used for propagation. The inability to market plants solely due to marketing conditions (for example, an over-supply of Poinsettia, lack of demand, etc.) is not otherwise insurable. Propagation plants ("stock" plants for cuttings, air-layering, seed production, etc.,) are not considered insurable. Such plants must be assigned an appropriate value and coverage will cease. ISSUE 2: Disease Claims Additional clarification has been requested to assure uniformity in handling nursery claims involving disease. The nursery crop provisions specify that insurance is not provided against any loss caused by insufficient or improper application of disease control measures. If the policyholder fails to sufficiently and properly apply disease control measures, subsequent disease damage must be considered avoidable and therefore uninsurable. The official claim file for a nursery claim involving disease must be documented on a case-by-case basis, including complete records of control measures used and a record of diagnosis of the problem by a State university diagnostic lab, commercial lab, or qualified Extension Service nursery specialist, to support that the nursery crop damage was caused by insurable causes. Proper application of disease control measures may require destruction of affected plants. Plants recommended for destruction are to be considered as having zero value and the date and method of destruction must be documented in the official claim file. ISSUE 3: Nursery Crop Catastrophic Coverage (CAT) Insurance Deductible DISCUSSION: Nursery crop "limited" and "additional" coverage for 1995 was based on a 50, 65, or 75 percent level of coverage, times 90 percent of the insurable inventory value, based on 100 percent of the wholesale price. Catastrophic nursery crop coverage is based on a 50 percent coverage level, times 90 percent of the insurable inventory value, based on 100 percent of the wholesale price, multiplied by 60 percent. (More "limited" and "additional" coverage levels are available for 1996.) Some catastrophic coverage nursery claims have been finalized using an inappropriate insurance deductible. This has resulted in some claims being paid with an approximate 73 percent rather than with a 50 percent deductible. ACTION: For 1995 and succeeding crop years, loss deductibles will be calculated as follows (as described in the 1996 Crop Year Nursery Actuarial Table): For limited and additional coverage for 1995, the Unit Amount of Insurance is 90 percent of the average yearly inventory value, times the applicable percent level of coverage. For 1996 and succeeding years, the Unit Amount of Insurance is 90 percent of the highest reported monthly inventory value times the applicable percent level of coverage. The difference between 90 percent of the applicable inventory value and the Unit Amount of Insurance is the Crop Year Loss Deductible. The Unit Amount of Insurance and the Crop Year Loss Deductible are reported on the FCI-546 (Plant Inventory Summary), the acreage report, and any claim for indemnity. For 1996 and succeeding years, the difference between 90 percent of the reported monthly inventory value for the month of loss occurrence (at 100 percent of the wholesale price) and the Monthly Unit Amount of Insurance is the Monthly Loss Deductible. The lesser of the Monthly Loss Deductible or the Crop Year Loss Deductible is applicable to the calculation of any claim for indemnity. Once the Crop Year Loss Deductible has been satisfied, the monthly loss deductible is no longer applicable (Crop year Loss Deductible = 0). For CAT coverage, the Crop Year Loss Deductible is computed in the same manner as that for limited and additional coverage, regardless of the crop year involved. The Unit Amount of Insurance (used to calculate the Crop Year Loss Deductible), however, is reduced to reflect 60 percent of the wholesale price. The result is an adjusted Unit Amount of Insurance. The Crop Year Loss Deductible and the adjusted Unit Amount of Insurance are reported on the FCI-546 (Plant Inventory Summary), the acreage report, and any CAT claim for indemnity. EXAMPLE: (For illustrative purposes, differing percent coverage levels are presented) --------------------------------------------------------------------- $100,000 : : Inventory Value : ADDITIONAL : CAT --------------------------------------------------------------------- Insurable Value : 100,000 * .90 = $90,000 :100,000*.90 = $90,000 Coverage : 90,000 * .75 = $67,500 : 90,000*.50 = $45,000 Crop Year Loss : 90,000-67,500 = $22,500 : 90,000-45,000 = $45,000 Deductible : : Unit Amount : $67,500 : 45,000*.60 (% price)** of Insurance* : : = $27,000 --------------------------------------------------------------------- * Adjusted Unit Amount of insurance for CAT. ** Adjustment factor for CAT. ALL claims for indemnity are completed using the full, 90 percent of the wholesale price. For purposes of the claim, the only instances where the adjustment to wholesale price (60 percent for CAT) enters into the calculation is final determination of the applicable unit indemnity (unit loss X share X price election factor) and its comparison to the remaining (adjusted) Unit Amount of Insurance. CAT claims for indemnity which were processed utilizing an improper crop year loss deductible, must be corrected.