Final Agency Determination: FAD-80

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FAD-80

Subject: Request dated October 29, 2007, requesting a Final Agency Determination for the 2006 and subsequent crop years regarding the interpretation of section 508(a)(1) of the Federal Crop Insurance Act (Act) and section 12 of the Common Crop Insurance Policy Basic Provisions (Basic Provisions) published at 7 C.F.R. 457.8. This request is pursuant to 7 C.F.R. part 400, subpart X.

Section 508(a)(1) of the Act states:

Sec. 508. Crop Insurance.

(a) Authority to Offer Insurance.

(1) In General. If sufficient actuarial data are available (as determined by the Corporation), the Corporation may insure, or provide reinsurance for insurers of, producers of agricultural commodities grown in the United States under 1 or more plans of insurance determined by the Corporation to be adapted to the agricultural commodity concerned. To qualify for coverage under a plan of insurance, the losses of the insured commodity must be due to drought, flood, or other natural disaster (as determined by the Secretary).

The introductory paragraph of section 12 and paragraph 12(a) of the Basic Provisions states:

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 wrong-doing by you, any member of your family or household, your tenants, or employees;

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.

Final Agency Determination (FAD) 035, as here pertinent, states:

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.

FAD-060, as here pertinent, states:

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/

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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.

The requestor interprets section 508(a)(1) of the Act to mean if fire is the result of arson caused by someone related to the insured and directed at the insured’s property, such claims would be barred and properly denied under section 12 of the Basic Provisions. The requestor maintains all other damage from such fire is insurable regardless of the whether the fire was the result of arson, or a result of a natural cause or natural disaster.

The requestor stated it is not reasonable to require the insured to prove the “ignition source” of a fire to be due to a natural cause or natural disaster. If the insured is required to prove the “ignition source” was not arson, the requestor claims an unjustifiable divergence of outcomes results. An insured who suffered a fire loss that did not result from arson would receive an indemnity, but an insured that suffered a fire loss from arson would not receive an indemnity. Since both of these losses were unavoidable and fortuitous from the position of the insured, both of these claims should be covered and the payment of an indemnity required.

Based on the intent of the Act to insure against unavoidable, fortuitous, catastrophic losses, the requestor proposed the following interpretation:

The insured is not required to “prove” or “establish” that the ignition source of a fire was specifically due to a natural cause or natural disaster. Fire, including arson is a covered cause of loss under the policy unless evidence exists of 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.

Final Agency Determination

FCIC disagrees with the requestor’s interpretation that the cause of loss does not have to be the result of a natural cause or natural disaster, or that the producer does not have to prove the cause of loss. First and foremost, section 508(a) of the Act only authorizes coverage for natural disasters. Therefore, neither the policy provisions nor the procedures can be interpreted in any manner that would conflict with this provision of the Act. Therefore, while section 12(a) of the Basic Provisions specifies negligence, mismanagement, or wrongdoing by the insured’s family or household, the insured’s tenant or employee are not covered, this provision cannot be interpreted to mean that wrongdoing by others, including arson, is covered under the policy.

Further, section 14(e) (Your Duties) of the Basic Provisions clearly states the insured is required to establish “that the loss of production or value was directly caused by one or more of the insured causes specified in the Crop Provisions.” Since only losses resulting from naturally occurring events can be paid under the Act and section 12 of the Basic Provisions, this means there must be an affirmative finding that the ignition source of the fire that caused the loss was naturally occurring. Under paragraph 125A(1) of the LAM, 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.

This does not mean that losses as a result of fires that started as arson, or other man-made causes, can never be covered. It is possible that fire experts may be able to establish that an arson or other man-made fire can eventually become a natural disaster because naturally occurring events, such as excessive wind or drought conditions, may cause the fire to spread much farther than it would without such naturally occurring events. If the fire experts determine that at some geographical point, a fire started by arson can be considered a naturally occurring fire, then those losses in the area where the expert has determined the ignition source of the fire is considered naturally occurring would be covered. However, those losses in the area where the ignition source of the fire remains attributable to arson or other man-made causes cannot be covered.

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 2006 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 16, 2007