Final Agency Determination: FAD-003

FAD-003

Subject: The Peanut Crop Insurance Provisions, 7 C.F.R. § 457.134.

On February 16, 2001, the Risk Management Agency (RMA) was asked for a final agency determination concerning the interpretation of section 2(b) of the Peanut Crop Insurance Provisions, 7 C.F.R. § 457.134 for the 2000 crop year. The relevant provision states:

We may reject or modify any FSA reconstitution for the purpose of the unit definition, if we determine the reconstitution was done in whole or in part to defeat the purpose of the Federal crop insurance program or to gain a disproportionate advantage under the policy.

On March 14, 2000, RMA issued an Informational Memorandum that stated:

Any producer who has acreage that has been reconstituted and results in the producer receiving a yield that is higher than what it would have received had the reconstitution not taken place will satisfy the requirements of section 2(b) unless other valid reasons for the reconstitution exist . . . .

The interpretation of section 2(b) permits rejection of the reconstitution on the sole basis that the reconstitution enabled the producer to increase the guarantee and that such yield increase creates the inference that the reconstitution was done to defeat the purpose of the crop insurance program or gain a disproportionate advantage, even if there is no direct evidence of fraudulent intent. The requestor also considers that a reconstitution that increases a producer's yield by 20 percent or more meets this threshold.

Yields and guarantees are supposed to reflect the actual production capacity of the acreage on which the commodity is grown. Obtaining yields and guarantees for acreage that exceeds its production capacity violates the principles of insurance and defeats the purpose of the crop insurance program.

Most programs rely on the actual records of the producer for the unit so yields and guarantees are based on the actual production capacity of the acreage

Guarantees for peanuts are generally established for individual producers using production records maintained by the Farm Service Agency (FSA) on a county basis. Therefore, the yields established by a producer in one county may not be representative of the yield potential of that producer in the adjoining county. Further, units are based on farm serial numbers, which can permit acreage physically located in one county to be considered located in another. If the yields of the counties are different, it is possible for the producer to manipulate the constitution or reconstitution of the farm to increase the yield and guarantee. This is what section 2(b) of the Peanut Crop Provisions was intended to prevent.

It is the final agency determination that a reconstitution that results in a yield for the unit that is higher than the yield would be if the farm is not reconstituted is prima facie evidence that it was done in whole or in part to defeat the purpose of the program or gain a disproportionate advantage. This evidence would permit the reinsured company to reject or modify the reconstitution unless FSA required the constitution under its regulations. If required by FSA, the reinsured company must accept the reconstitution.

The conditions for when reconstitution is required are published at 7 C.F.R. § 718.201(c). However, 7 C.F.R. § 718.201(d)(2) states that even reconstitutions that are required under § 718.201(c), are not be approved if it is determined that the primary purpose of the reconstitution is to circumvent any other chapter in title 7, including chapter IV crop insurance.

To accept reconstitutions for reasons such as the convenience of the producer would effectively negate section 2(b) of the Peanut Crop Provision and expose the program to the very type of abuse that this section was intended to prevent. Producers bear the burden of proving that their reconstitution was required under § 718.201(c).

It is also the final agency determination that there is no basis for the 20 percent increase in yield threshold stated by the requestor. If reconstitution is not required and there is any increase in yield, the reconstitution must be rejected or modified. Rejection of a reconstitution means that, for the purposes of crop insurance only, the farm serial numbers, and therefore units, remain as they were before the reconstitution and production must be kept accordingly. Modifications could include allowing the reconstitution but reducing the yield to the level the acreage would have received had the reconstitution not taken place. The unit would then have a blended guarantee using the acreage and yield for each county in which the unit is located.

In accordance with 7 C.F.R. § 400.765(c), this constitutes a final agency determination and is binding on all participants in the Federal crop insurance program.

Date of Issue: May 7, 2001