Final Agency Determination: FAD-60

FAD-060

Subject: Request dated September 11, 2006, requesting a Final Agency Determination for the 2005 and subsequent crop years regarding the interpretation of section 10(b) of the Guaranteed Tobacco Crop Provisions, published at 7 C.F.R. 457.136, concerning fire as a cause of loss. This request is pursuant to 7 C.F.R. part 400, subpart X.

Section 10(b) of the Guaranteed Tobacco Crop Provisions states:

10. Causes of Loss

In accordance with the provisions of section 12 of the Basic Provisions, insurance is provided only against the following causes of loss that occur during the insurance period:

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(b) Fire;

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The preamble to the Common Crop Insurance Policy Basic Provisions (7 C.F.R. 457.8) (Basic Provisions) states:

AGREEMENT TO INSURE: In return for the payment of the premium, and subject to all of the provisions of this policy, we agree with you to provide the insurance as stated in this policy. If a conflict exists among the policy provisions, the order of priority is as follows: (1) the Catastrophic Risk Protection Endorsement, as applicable; (2) the Special Provisions; (3) the Crop Provisions; and (4) these Basic Provisions, with (1) controlling (2), etc.

12. Causes of Loss

The insurance provided is against only unavoidable loss directly caused by specific causes of loss contained in the Crop Provisions. All specified causes of loss, except where the Crop Provisions specifically cover loss of revenue due to a reduced price in the marketplace, must be due to a naturally occurring event. All other causes of loss, including but not limited to the following, are NOT covered:

(a) Negligence, mismanagement, or wrongdoing by you, any member of your family or household, your tenants, or employees;

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This request for a final agency determination was jointly submitted by the parties involved in an arbitration pursuant to section 20(a)(1) of the Basic Provisions.

The interpretation submitted by the approved insurance provider’s representative is as follows:

Any damage resulting from fire when the insured cannot establish that the ignition source of the fire was due to a natural cause or natural disaster is uninsurable. Paragraph 125A(1) of the Loss Adjustment Manual (LAM) states:

125 CLAIMS INVOLVING FIRE DAMAGE

A General Provisions

(1) In all cases where the insured can establish the ignition source of the fire was due to a natural cause or natural disaster (refer to FAD-35, dated 9/3/2004) and the fire damages or destroys an insured crop WITHIN THE INSURANCE PERIOD, upon final inspection, establish whether or not the insured has other fire insurance ON THE CROP IN THE FIELD.

Any damage resulting from fire when the insured cannot establish that the ignition source of the fire was due to a natural cause or natural disaster is uninsurable.

Additionally, FAD-035 states:

“The Federal Crop Insurance Corporation agrees with the interpretation provided. Read together, the Act, Basic Provisions, and the Guaranteed Tobacco Crop Insurance Provisions specify that fire is an insurable cause of loss when circumstances causing the fire are unavoidable and when the insured can establish that the ignition source of the fire is due to a natural cause or natural disaster.”

Thus, based upon the language of 7 C.F.R. 457.136, the approved insurance provider’s representative proposes the interpretation set forth in the LAM:

In all cases where the insured can establish the ignition source of the fire was due to a natural cause or natural disaster, the loss is insurable under the policy. When the insured cannot establish that the ignition source of the fire was due to a natural cause or natural disaster, any damage resulting from fire is uninsurable.

The interpretation submitted by the insureds’ representative is as follows:

The LAM is not an insurance policy and it is not a substitution for the actual policy provisions. The Basic Provisions and the Guaranteed Tobacco Crop Provisions do not reference the LAM and do not identify the LAM as a source of coverage or exclusion from coverage.

The insureds do not believe there is a conflict in the terms of the insurance policy. Section 10(b) of the Guaranteed Tobacco Crop Provisions states that fire is a covered loss. Section 14 of the Basic Provisions sets out the insureds’ duties in the event of damage or loss. To summarize, the insured has the duty to protect the crop from further loss, give notice within 72 hours of discovery, provide representative samples, and to cooperate with the investigation or settlement of the claim. The insured must submit the claim within 30 days and must provide a record of harvesting and marketing. Section 14(e) of the Basic Provisions also states the insured must:

establish the total production or value received for the crop, that the loss occurred during the insurance period, and that any loss of production or value was directly caused by one or more of the insured causes specified in the Crop Provisions.

Section 10(b) of the Guaranteed Tobacco Crop Provisions identifies fire is a covered loss. Adverse weather conditions and wildlife are also covered losses. There are no provisions in the Crop Policy establishing a burden on the insured to prove the cause of origin for the fire or other identified covered loss. The causes of loss set out in section 12 reference the covered causes of loss from the Crop Provisions and add that coverage is only provided for unavoidable losses directly resulting from a covered cause of loss, such as section 10(b) Fire.

An interpretation that the insured must prove the “ignition source of the fire is due to a natural cause or natural disaster” and reliance upon Paragraph 125A(1) of the Loss Adjustment Manual (LAM) is invalid. Unlike the policy provisions, the LAM is not published as a federal regulation. This LAM “requirement” directly conflicts with the published policy, and is invalid.

Final Agency Determination: FAD-005 (May 9, 2001), holds:

It is the final agency determination that the terms of the policy … are binding on the reinsured company, the insured, and the Federal Crop Insurance Corporation (FCIC). While sections V.G.2.g and V.H of the Standard Reinsurance Agreement require the reinsured companies to comply with FCIC’s loss adjustment procedures, there is an apparent conflict between the terms of the policy and the loss adjustment procedures. It is the final agency determination that when such conflicts occur, the terms of the policy control.

The same result is required under Davidson v. Glickman, 169 F.3d 996 (5th Cir.1999), in which the Fifth Circuit Court of Appeals invalidated a provision of a Farm Service Agency (FSA) handbook that prohibited revisions of acreage reports if the producer would benefit from the revision when the published regulations in question did not mention this condition on revision of acreage reports. The court held that the provision was a substantive rule that required notice and comment under the APA, and invalidated the application of the handbook provisions. Id. at 999. Section 14(h) of the Basic Provisions states that it is the insured’s duty to prove compliance with the provisions of this policy. The insured must observe and act in accordance with the policy requirements. The policy terms control the issue of coverage. The LAM does not define, create or circumscribe coverage. It is the policy that sets the parameters of insurance coverage.

In the present context, when the Basic Provisions and the Guaranteed Tobacco Crop Provisions are read together, the insuring agreement covers losses against unavoidable loss of production directly caused by specific causes of loss contained in the Crop Provisions, e.g., fire, unless due to negligence, mismanagement, or wrongdoing by the insured, any member of the insured’s family or household, the insured’s tenants, or the insured’s employees.

Denial of a claim based on the “possibility” that unidentified human cause “might” have caused the fires is contrary to the terms of coverage.

Based upon the language of 7 C.F.R. §457.136, the insureds’ propose the following interpretation:

The insured is not required to “prove” or “establish” that the ignition source of the fire was specifically due to a natural cause or natural disaster. Fire is a covered cause of loss under the policy unless evidence exists of negligence, mismanagement, or wrongdoing by the insured, a member of the insured’s family or household, the insured’s tenants, or the insured’s employees.

Final Agency Determination Determination

The Federal Crop Insurance Corporation (FCIC) disagrees with the interpretation submitted by the insureds’ representative.

The insureds’ representative is correct that the LAM is not part of the insurance policy and cannot change or modify existing terms of the policy. However, even under the terms of the policy, the insureds’ representative’s interpretation is not correct. Section 508(a)(1) of the Federal Crop Insurance Act (Act) states the losses of the insured commodity must be due to a drought, flood, or other natural disaster. The preamble to the Basic Provisions states that if there is a conflict between the Act and the Basic Provisions or Crop Provisions, the Act will control.

This means that sections 12 of the Basic Provisions and section 10 of the Guaranteed Tobacco Crop Provisions must be interpreted to require that any stated cause of loss must be due to a natural disaster or natural cause before it can be insured. In addition, in accordance with section 12 of the Basic Provisions, all specified causes of loss must be due to a naturally occurring event and must be unavoidable. This would include fire.

Further, section 14(e) of the Basic Provisions requires the insured to establish that any loss was directly due to an insured cause of loss. This places the burden on the insured to prove that an insured cause of loss caused the loss of production or revenue. As stated above, because the Act only authorizes coverage for losses due to natural disasters, the burden is on the insured to not only establish that a fire occurred, the insured must also establish that the fire was due to natural causes.

Contrary to the assertion of the insureds’ representative, the burden is not on the approved insurance provider to prove that the fire was caused by negligence, mismanagement, or wrongdoing by the insured, a member of the insured’s family or household, the insured’s tenants, or the insured’s employees. Not only is the burden on the insured to establish an insurable cause of loss caused the loss but the list of uninsured causes in section 12 of the Basic Provisions is not inclusive and other non-listed causes are also uninsurable.

Therefore, FCIC agrees with the interpretation of the approved insurance provider. Based on section 508(a)(1) of the Act, sections 12 and 14 of the Basic Provisions and section 10 of the Guaranteed Tobacco Crop Provisions, when the insured can establish the ignition source of the fire is due to an unavoidable, naturally occurring event, the loss is insurable under the policy. When the insured cannot establish the ignition source of the fire is due to an unavoidable, naturally occurring event, any damage resulting from such fire is uninsurable. 1/

In addition, FCIC does not agree with the insureds’ representative’s assertion that section 14 requires the insured to submit the claim within 30 days. Section 14(c) (Your Duties) states that the insured must submit a claim for indemnity not later than 60 days after the end of the insurance period.

FCIC previously issued a final agency determination for the same provision, section 10(b) of the Guaranteed Tobacco Crop Provisions, in FAD-035, which can be found at https://www.rma.usda.gov/regs/533/2004/fad-035.html. While the major issue in that case was whether causes of loss must be due to natural disasters, it also specified that the burden was on the producer to establish that an insurable cause of loss damaged the crop.

In accordance with 7 C.F.R. 400.765 (c), this Final Agency Determination is binding on all participants in the Federal crop insurance program for the 2005 and succeeding crop years. Any appeal of this decision must be in accordance with 7 C.F.R. 400.768(g).

Date of Issue: November 1, 2006

1/ The LAM requirement that the insured must prove the “ignition source of the fire is due to a natural cause or natural disaster” is consistent with the policy and does not create an exclusion or modify the terms of the policy. Therefore, the insureds’ representative’s references to FAD-005 and Davidson v. Glickman, 169 F.3d 996 (5th Cir.1999), which holds that when there is a conflict between the terms of the policy and the loss adjustment procedures, the loss adjustment procedures are not valid does not apply because the LAM provisions do not conflict with the published policy.