Final Agency Determination: FAD-127

FAD-127

Subject: Request dated August 13, 2010, for a Final Agency Determination for the 2009 and succeeding crop years regarding the interpretation of section 12(d) and (e) of the Guaranteed Tobacco Crop Provisions (99-071) as authorizing Approved Insurance Providers (AIP) to quality adjust mature tobacco production that is damaged by insurable causes, ONLY if it has an average value less than the market price, and section 12(e) requiring the tobacco producer to give the AIP an opportunity to inspect the tobacco before it is sold.

The Guaranteed Tobacco Crop Provisions (99-071), section 12(d) states:

Mature tobacco production that is damaged by insurable causes will be adjusted for quality based on the USDA Official Standard Grades for the insured type if it has an average value less than the market price, as follows.

(1) Divide the average value of the damaged appraised and/or harvested production by the market price;

(2) Multiply the result in section 12(d)(1)(not to exceed 1.0) by the number of pounds of damaged appraised and/or harvested tobacco; and

(3) Multiply the product by your price election. If no market price has been established for the grade of damaged tobacco, a market price will be imputed by reducing the lowest available market price by 20 percent for each grade that the production falls below the grade below the grade for which such lowest market price is available.

The Guaranteed Tobacco Crop Provisions (99-071), section 12(e) states:

To enable us to determine the fair market value of tobacco not sold through auction warehouses, we must be given the opportunity to inspect such tobacco before it is sold, contracted to be sold, or otherwise disposed. Failure to provide us the opportunity to inspect such tobacco may result in rejection of any claim for indemnity.

In addition, the Guaranteed Tobacco Crop Provisions (99-071) defines "average value" for appraised production as the estimated value of all such production divided by the appraised pounds. For a harvested production, the total value of such production divided by the harvested pounds.

The requester interprets 12(d) of the Guaranteed Tobacco Crop Provisions (99-071) as authorizing the AIPs to quality adjust mature tobacco production damaged by insurable causes, only if it has an average value is less than the market price.

In addition, the requester interprets 12(e) to mean if the producer did not give the AIP the opportunity to inspect the tobacco, and does not have sales records reflecting grades, then the producer is ineligible for quality adjustment.

In addition, the requester interprets in the 2009 Loss Adjustment Manual (LAM) 96 F mandates that an AIP ensure the person grading the tobacco is qualified to do quality adjustment. The requester understands the Risk Management Agency has deemed tobacco companies qualified to grade tobacco for quality adjustment purposes under the terms of the 2009 Guaranteed Tobacco Crop Provisions.

The Federal Crop Insurance Corporation agrees with the interpretation submitted. Under the formula stated in section 12(d)(1), if the average value is greater than the market price, the result would be in excess of 1.0. Under section 12(d) (2), the result of section, 12(d)(1) cannot exceed 1.0. Therefore, the average value must be less than the market price for the tobacco to be eligible for quality adjustment.

Section 12(e) of the Guaranteed Tobacco Crop Provisions (99-071) provides the AIP the authority to deny the claim when the AIP has not been given the opportunity to inspect the tobacco before it is sold, contracted to be sold, or otherwise disposed of. Section 12(d) states that mature tobacco may be adjusted for quality based on the U.S. Official Standard Grades for the insured type. This means the tobacco has to be graded before it is eligible for quality adjustment and paragraph 96F of the LAM provides the quality adjustment procedures and specifies that the AIP must ensure the entity grading the crop is qualified to do so. If the tobacco has not been graded, there is no basis for the AIP to pay a claim based on quality

In accordance with 7 C.F.R. 400.765(c), this constitutes the Final Agency Determination and is binding on all participants in the Federal crop insurance program for the 2009 crop year and succeeding crop years.

Date of Issue: Nov 2, 2010