Final Agency Determination: FAD-118

Subject: Two requests, dated April 5, 2010, requesting a Final Agency Determination (FAD) for the 2007 crop year regarding the interpretation of section 10(c)(3) of the Nursery Crop Insurance Provisions, published at 7 C.F.R. § 457.162. This request is pursuant to 7 C.F.R. part 400, subpart X.

Section 10(c)(3) of the Nursery Crop Insurance Provisions states, as here pertinent:

10. Causes of Loss.

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(c) In addition to the causes of loss excluded in section 12(a) through (f) of the Basic Provisions, we do not insure against any loss caused by:
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(3) Cold temperatures, if cold protection is required in the Eligible Plant List, unless:

(i) You have installed adequate cold protection equipment or facilities and there is a failure or breakdown of the cold protection equipment or facilities resulting from an insurable cause of loss specified in section 10(a) (the insured plants must be damaged by cold temperatures and the damage must occur within 72 hours of the failure of such equipment or facilities unless we establish that repair or replacement was not possible between the time of failure or breakdown and the time the damaging temperatures occurred); or
(ii) The lowest temperature or its duration exceeded the ability of the required cold protection equipment to keep the insured plants from sustaining cold damage;

A joint request for a Final Agency Determination was submitted by two parties. Both parties submitted their interpretation of the provisions.

The first requestor interprets the provisions to mean, in order for damage due to cold temperatures to be covered under the Nursery Crop Insurance Provisions, a producer must have utilized the cold protection equipment as set forth in the Eligible Plant List. Stated another way, section 10(c)(3)(ii) does not permit a producer to forgo the use of the required cold protection equipment simply because those measures may ultimately prove futile.

In support of this interpretation, the first requestor notes section 10(c)(3)(ii) refers to the “required cold protection equipment.” This suggests a producer must, in fact, utilize requisite cold protection equipment in order to obtain this coverage. Moreover, it would be impossible for a producer to determine whether “the lowest temperature or its duration exceeded the ability of the required cold protection equipment to keep the insured plants from sustaining cold damage” unless such cold protection equipment was, in fact, used. That is, if cold protection equipment is not utilized, any attempt to determine the futility of the cold protection equipment would be pure speculation. Thus, a producer cannot recover an indemnity for damage due to cold temperatures based upon section 10(c)(3)(i) or 10(c)(3)(ii) unless the producer actually utilizes the applicable cold protection measures set forth in the Eligible Plant List.

The second requestor interprets the provisions to mean section 10(c)(3)(ii) affords coverage for damage due to cold temperatures if the lowest temperature or its duration exceeded the ability of the required cold protection equipment to keep the insured plants from sustaining cold damage, regardless of whether the cold protection equipment was actually utilized. Section 10(c)(3)(i) specifically requires the producer to “have installed adequate cold protection equipment or facilities” for purposes of coverage; section 10(c)(3)(ii) contains no such requirement. Sections 10(c)(3)(i) and 10(c)(3)(ii) are stated as alternative conditions and are not dependent on each other. The producer is entitled to coverage if either subsection is met.

In a similar context, the Federal Crop Insurance Corporation (FCIC) has recognized in FAD-048 language from a previous provision does not apply to a subsequent provision if the subsequent provision specifically does not contain such language. The requirement in section 10(c)(3)(i) that producers “have installed adequate cold protection equipment or facilities” would be unnecessary if the same requirement is implied in section 10(c)(3)(ii).

Accordingly, a producer has coverage under section 10(c)(3)(i) where cold temperatures cause a failure or breakdown of installed cold protection equipment or facilities, while a producer has coverage under section 10(c)(3)(ii) where the lowest temperature or its duration exceeded the ability of the required cold protection equipment to keep the insured plants from sustaining cold damage. This plain reading of the Nursery Crop Insurance Provisions conforms to insurance industry standards that an insurer cannot deny coverage where performance of a policy provision would have been futile. To find otherwise would make section 10(c)(3)(ii) impose a nonsensical burden on the producer; an imposition not found in the language or intent of the provision.

For coverage under section 10(c)(3)(ii), where the producer has failed to install adequate cold protection equipment, the producer bears the burden of proving competent evidence that the lowest temperature or its duration exceeded the ability of the required cold protection equipment to keep the insured plants from sustaining cold damage.

FCIC agrees with the first requestor’s interpretation of section 10(c)(3). Section 10(c) provides a list of causes of loss not covered by the policy. Under section 10(c)(3), cold temperatures are not a covered cause of loss if cold protection is required in the Eligible Plant List. Subparagraphs (i) and (ii) provide two exceptions that would allow coverage for cold temperatures when cold protection is required. However, both exceptions only apply if cold protection is required.

Therefore, while the second requestor is correct that subparagraphs (i) and (ii) are independent of each other and the producer can qualify for an indemnity if one or the other condition exists, section 10(c)(3) applies to both subparagraphs (i) and (ii). The fact that subparagraph (ii) does not specifically state that the cold protection equipment must be installed does not change the fact that such facilities are required in section 10(c)(3). Subparagraphs (i) and (ii) were drafted as they were to make the distinction between failure of the cold protection equipment due to an insurable cause of loss and the situation where the equipment is working normally but it is too cold for it to be effective.

To accept the second requestor’s interpretation that subparagraph (ii) does not require that the cold protection equipment actually be utilized would not be logical. Coverage is only provided if cold storage protection is used and for the stated reasons it is not effective. Further, without the cold protection utilized, it is not possible to determine whether the cold temperatures were such that it rendered it ineffective. Under the second requestor’s interpretation, any cold temperature would likely cause damage if the cold protection equipment was not used and it would be covered notwithstanding the language that states that cold temperatures are not an insurable cause of loss when cold protection equipment is required. When the language says the cold protection equipment is required, it must also be used before any losses can 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 2007 crop year. Any appeal of this decision must be in accordance with 7 C.F.R. 400.768(g).

Date of Issue: Jun 21, 2010