Final Agency Determination: FAD-140

FAD-140

Subject: Request dated February 16, 2011, requesting a Final Agency Determination (FAD) for the 2007 and 2008 crop years regarding the interpretation of section 3 of the Common Crop Insurance Policy Basic Provisions (Basic Provisions), published at 7 C.F.R. part 457.8. This request is pursuant to 7 C.F.R. part 400, subpart X.

Background

Section 508(g) of the Federal Crop Insurance Act (7 U.S.C. 1508(g)) states, as here pertinent:

(g) Yield Determinations

(1) In general Subject to paragraph (2), the Corporation shall establish crop insurance underwriting rules that ensure that yield coverage, as specified in this subsection, is provided to eligible producers obtaining catastrophic risk protection under subsection (b) of this section or additional coverage under subsection (c) of this section.

(2) Yield coverage plans (A) Actual production history Subject to subparagraph (B), the yield for a crop shall be based on the actual production history for the crop, if the crop was produced on the farm without penalty during each of the 4 crop years immediately preceding the crop year for which actual production history is being established, building up to a production database for each of the 10 consecutive crop years preceding the crop year for which actual production history is being established. (B) Assigned yield If the producer does not provide satisfactory evidence of the yield of a commodity under subparagraph (A), the producer shall be assigned a yield that is not less than 65 percent of the transitional yield of the producer (adjusted to reflect actual production reflected in the records acceptable to the Corporation for continuous years), as specified in regulations issued by the Corporation based on production history requirements.

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7 C.F.R. part 400.765 states, as here pertinent:

Section 400.765 Basis and applicability. (a) The regulations contained in this subpart prescribe the rules and criteria for obtaining a final agency determination of the interpretation of any provision of the Act or the regulations promulgated thereunder.

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Section 400.766 Definitions. Act. The Federal Crop Insurance Act, 7 U.S.C. 1501 et seq. Regulations. All provisions contained in 7 C.F.R. chapter IV.

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The Preamble of the Basic Provisions states, as here pertinent:

The provisions of the policy may not be waived or varied in any way by us, our insurance agent or any other contractor or employee of ours or any employee of USDA unless the policy specifically authorizes a waiver or modification by written agreement.

Section 3 of the Basic Provisions states, as here pertinent:

3. Insurance, Guarantees, Coverage Levels, and Prices. (a) Unless adjusted or limited in accordance with your policy, the production guarantee or amount of insurance, coverage level, and price at which an indemnity will be determined for each unit will be those used to calculate your summary of coverage for each crop year.

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(f) It is your responsibility to accurately report all information that is used to determine your approved yield. You must certify to the accuracy of this information on your production report. (1) If you do not have written verifiable records to support the information on your production report, you will receive an assigned yield in accordance with section 3(e)(1) and 7 C.F.R. part 400, subpart G for those crop years for which you do not have such records. (2) If you misreport any material information used to determine your approved yield: (i) We will correct the unit structure, if necessary; and (ii) You will be subject to the provisions regarding misreporting contained in section 6(g), unless we correct the information because the incorrect information was the result of our error or the error of someone from USDA.

(g) In addition to any consequences in section 3(f), at any time the circumstances described below are discovered, your approved yield will be adjusted: (1) By including an assigned yield determined in accordance with section 3(e)(1) and 7 C.F.R. part 400 subpart G, if the actual yield reported in the database is excessive for any crop year, as determined by FCIC under its procedures, and you do not provide verifiable record to support the yield in the database

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Section 4 of the Basic Provisions states, as here pertinent:

4. Contract Changes. (a) We may change the terms of your coverage under this policy from year to year. (b) Any changes in policy provisions, amounts of insurance, premium rates, program dates, and price elections (except as allowed herein or as specified in section 3) can be viewed on the RMA website at www.rma.usda.gov or a successor website not later than the contract change date contained in the Crop Provisions. We may only revise this information after the contract change date to correct clear errors (For example, the price election for corn was announced at $25.00 per bushel instead of $2.50 per bushel or the final planting date should be May 10 but the final planting date in the Special Provisions states August 10). (c) After the contract change date, all changes specified in section 4(b) will also be available upon request from your crop insurance agent. You will be provided, in writing, a copy of the changes to the Basic Provisions and Crop Provisions and a copy of the Special Provisions not later than 30 days prior to the cancellation date for the insured crop. Acceptance of the changes will be conclusively presumed in the absence of notice from you to change or cancel your insurance coverage.

A statement on the 2007 and 2008 Corn Special Provisions for LaMoure County, North Dakota states:

In addition to any requirements for separate APH yields (databases) contained in the policy and in FCIC approved procedures, separate databases for certified and transitional acreage are required for any insured crop grown using an organic farming practice. Acreage and production history from certified organic or transitional acreage will be contained in the certified organic or transitional APH databases. Each database will include production and acreage from any applicable buffer zone. Any yearly average APH yields, for the most recent four crop years only, from the transitional acreage database will be used in place of Transitional Yields (T-Yields) to establish the certified organic APH database. A variable T-yield will be used to complete the database, if required. Yields shown on the Transitional Yield and YA Substitution Table apply to the organic farming practice.

Section 3 of the 2007 Crop Insurance Handbook (CIH) provides, in pertinent part:

Variable T-Yields- Sixty-five, 80,90, or 100 percent of the applicable T-Yield based on the number of years of actual, assigned, or temporary yields provided on a crop (policy) and county by the insured for Category B & C crops.

Exhibit 38 of the 2007 Crop Insurance Handbook (CIH) provides, in pertinent part:

Exhibit 38 Organic Crop Underwriting Procedures

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3C Recordkeeping Requirements

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The insured must provide to the AIP: C(1) Records of acreage and production from the operation that show the exact location of each field for transitional, certified organic, buffer zone, and conventional acreage not maintained under an organic farming practice. An onsite inspection report completed by an inspector as defined in the NOP standards may be used for the current crop year. Variable T-Yields will apply; special procedures for added land P/T/V [Exhibit 36] and New Producers [Exhibit 37] do not apply.

The Risk Management Agency (RMA) is requested to provide an interpretation that clarifies whether the applicable Basic Provisions terms require an approved insurance provider (AIP) to revise the approved yield upon which the policy guarantee is based, and then revise the guarantee, if the AIP finds that it has determined an approved yield beyond that which the policy and related rules allow.

The requestors state that identical or nearly identical language is set forth in the Revenue Assurance (RA) insurance policy. Accordingly, they request this Final Agency Determination explicitly be made applicable to the RA policy as well.

Interpretation Submitted

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

The first requestor interprets the Basic Provisions policy to be a contract between the AIP issuing the policy and the policyholder. The first requestor interprets 7 U.S.C. 1508(g) to mean a policyholder who does not have an actual production history (APH) for a particular commodity may be assigned a yield of up to 100 percent of the T-Yield, but in no event may the assigned amount be less than 65 percent of the T-Yield.

The first requestor interprets section 3(a) of the Basic Provisions to allow adjustment or limitations on the production guarantee only when specifically provided for under the terms of the policy. The provisions in the policy that authorize an adjustment or limitation on the production guarantee or approved yield are addressed in section 3(f) of the Basic Provisions.

The first requestor interprets section 3(f) of the Basic Provisions to authorize the AIP to correct or adjust the approved yield only in situations where there is evidence that the policyholder has misreported material information used to determine the approved yield. The first requestor interprets section 3(g) of the Basic Provisions to authorize adjustment of the approved yield only in cases where the actual yield in the database is excessive. The requestor further interprets this provision as not applying or authorizing adjustment of an approved yield that is based on an assigned yield due to the lack of any prior production of the commodity by the policyholder. The requestor further interprets section 3(g) as inapplicable to new producers of a commodity.

The first requestor interprets section 4 of the Basic Provisions as allowing changes to coverage after the contract change date only in the case of obvious clerical or typographical errors by the AIP. The requestor believes this provision establishes that the policy is a contract between the AIP and the policyholder. The requestor continues, the policy contains no provision that authorizes the AIP to adjust (or correct) the approved yield or the production guarantee in the absence of misrepresentation by the policyholder, the policyholder providing false information, or clear, easily identifiable error by the AIP in recording the guarantee or approved yield.

The first requestor interprets 7 C.F.R. part 400.766 to limit a FAD interpretation to provisions of the Federal Crop Insurance Act (Act) and the provisions contained in 7 C.F.R. part 400. The requestor interprets this to exclude the CIH from final agency determinations.

The first requestor believes nothing in either the Act or the regulations excludes organic producers from the provisions regarding new producers. Therefore, the requestor does not believe that in the example provided, the approved yield provided and stated on the policy documents was beyond what the policy and related rules allow.

The first requestor believes FAD-085 interprets a section of the Group Risk Protection (GRP) Wheat Crop Insurance Provisions and relates to revisions or corrections of National Agriculture Statistics Service (NASS) data and FAD-085 is not applicable to the issues raised in this request.

The second requestor interprets that an AIP cannot provide coverage beyond that which the policy terms allow, and that an AIP must correct any errors in policy documents which indicate that coverage exceeds that which RMA allows.

The second requestor believes 7 U.S.C. 1508(g) requires RMA (which administers the Federal Crop Insurance Corporation (FCIC)) to establish crop insurance underwriting rules that ensure yield coverage to policyholders and provides that if policyholders cannot provide sufficient evidence of a commodity's yield, then the AIP must assign the policyholder a yield in accordance with 7 U.S.C. 1508(g). The requestor interprets 7 U.S.C. 1508(g)(1) and (2)(B) to mean that a policyholder is only eligible for the maximum coverage level that RMA sets, and that it cannot provide greater coverage than RMA allows.

The second requestor states both the 2007 and 2008 Special Provisions for LaMoure County, North Dakota for corn provided that "coverage for the insured crop grown using an organic farming practice is provided in this county." Those provisions also mandated that "yearly average APH yields [and a] variable T-yield will be used to complete the database," rather than the 100 percent of T-Yield that a qualifying new producer might otherwise receive. The coverage rate for LaMoure County non-irrigated corn in 2007 was 65% of the applicable T-Yield for LaMoure County of109 bushels (which was 71).

The second requestor interprets the policy to mean, for example, that a new producer of organic corn in 2007 was not eligible for coverage at the rate of the county T-Yield, but was eligible for coverage at the rate of the variable T-Yield for the county as specified in the Special Provisions.

The second requestor believes that their interpretation of policy requirements is consistent with the CIH, and that RMA has already interpreted the policy to mean the same. The requestor clarifies that they do not request an interpretation of CIH procedure but have provided language for supporting information.

The second requestor states Exhibit 37, section 1(A)(1) of the CIH generally provides that for a new producer of a crop, the applicable 100 percent T-Yield is the approved APH yield the initial year of insurance. This rule did not apply to new producers of organic crops in 2007; rather, Exhibit 38 of the CIH mandated that variable T-Yields would apply.

The second requestor believes the Basic Provisions states the policy terms are non-waivable. To permit the policyholder to retain a larger approved yield and guarantee than the policy allows would constitute an impermissible waiver of the policy terms. The second requestor also interprets the policy to mean that it is required to correct policy documents where the documents contain a coverage level inconsistent with RMA's rules. The second requestor interprets section 3(a) of the Basic Provisions to require when the summary of coverage states an incorrectly calculated production guarantee that is contrary to the coverage the policy permits, that guarantee must be "adjusted or limited in accordance with" the policy terms to correct it to what it should have been.

The summary of coverage is not a part of the policy terms and it is excluded from the definition of "Policy" in the Basic Provisions. The Basic Provisions instead define the summary of coverage as the AIP's "statement to you, based upon your acreage report, specifying the insured crop and the guarantee or amount of insurance provided by unit" (with "you" referencing the named insured). Errors or miscalculations on the summary of coverage do not give the policyholder any substantive rights, nor can such errors waive the policy terms since the policy preamble does not allow waiver. The AIP can and must correct the summary at any time to conform to what the policy terms require.

The second requestor believes where an AIP inadvertently or mistakenly miscalculates an approved yield and guarantee, such as by basing them upon 100 percent of the T-Yield when a policyholder is only eligible for a variable T-Yield based guarantee, and then states those miscalculated figures on a summary of coverage that it sends the policyholder, section 3(g) of the Basic Provisions requires the AIP to adjust any excessive approved yield to conform to what 7 C.F.R. part 400, subpart G and FCIC procedures permit. A miscalculated approved yield determined from T-Yields rather than actual historical yields is one for which the policyholder obviously cannot provide verifiable records, and if that yield is excessive in comparison to what the policy otherwise permits, both conditions of section 3(g) are met and the AIP must assign a yield in accordance with whatever yield the policy permits.

The second requestor believes that FAD-085 addresses similar issues to this interpretation. The second requestor believes that FAD-085 supports their interpretation that the policy provisions require an AIP to correct mistakes, which if left uncorrected, would result in an indemnity overpayment to the policyholder.

The second requestor interprets section 4 of the Basic Provisions to relate only to changes to policy provisions (e.g. the language of the policy terms), available coverage level percents, premium rates, and program dates. Those provisions do not apply to, and do not forbid, changes or corrections that an AIP makes in relation to the coverage under the policy or to items that appear on forms such as an individual policyholder's summary of coverage in order to conform to the written policy terms. Many details of coverage are not even known until after the contract change date, or are subject to revision at or after claim time.

The second requestor, in summary, believes where the policy provisions require using variable T-Yields in a database rather than the 100 percent of T-Yield that qualifying new producers would otherwise typically receive, an AIP must correct mistakes in the database and guarantee, may issue a new summary of coverage and must base any loss payments it makes and any premiums it charges on the corrected figures rather than the original, miscalculated ones.

Final Agency Determination

The Federal Crop Insurance Corporation (FCIC) agrees in part with the second requestor's and first requestor's interpretations. FCIC agrees with the second requestor that an AIP cannot provide coverage beyond that which the policy terms allow, and that an AIP must correct any errors in policy documents which indicate that coverage exceeds that which RMA allows. FCIC agrees with the second requestor that the approved yield and production guarantee must be determined in accordance with the requirements of 7 U.S.C. 1508(g), the regulations published at 7 C.F.R. part 400, subpart G, the provisions of the policy and applicable procedure (collectively referred to as "approved policy and procedure"). The "policy" is defined as:

The agreement between you and us to insure an agricultural commodity and consisting of the accepted application, these Basic Provisions, the Crop Provisions, the Special Provisions, other applicable endorsements or options, the actuarial documents for the insured agricultural commodity, the Catastrophic Risk Protection Endorsement, if applicable, and the applicable regulations published in 7 CFR chapter IV. Insurance for each agricultural commodity in each county will constitute a separate policy.

FCIC agrees with the second requestor that when it is discovered that the approved yield or production guarantee is not calculated in accordance with the approved policy and procedure, the yield and guarantee must be corrected to conform to the requirements. It does not matter who made the error. The crop insurance program can only operate and make payments in accordance with its applicable provisions, which may necessitate correction of erroneous information or application of provisions. This requirement for strict adherence to the policy provisions and the need for corrections was clearly established by the Supreme Court in Federal Crop Insurance Corp. v. Merrill,332 U.S. 380 (1947).

Such correction is not considered an adjustment under section 3(a) of the Basic Provisions. Section 3(a) assumes that a yield is calculated in accordance with the applicable approved policy and procedure. However, there are instances when even though there is compliance with all applicable provisions, FCIC has determined it is still appropriate to revise or adjust the yield, such as when the yield is excessive or the acreage used to calculate the yield is much smaller than the acreage to which it will apply. Therefore, FCIC does not agree with the first requestor's interpretation that section 3(a) of the Basic Provisions allow adjustment or limitations on the production guarantee only when specifically provided for under the terms of the policy and that the provisions in the policy that authorize an adjustment or limitation on the production guarantee or approved yield are addressed in section 3(f) of the Basic Provisions.

For the reasons stated above, FCIC also does not agree with the first requestor's interpretation that section 3(f) of the Basic Provisions only authorizes the AIP to correct or adjust the approved yield only in situations where there is evidence that the policyholder has misreported material information used to determine the approved yield. Any time there has been a non-compliance with approved policy and procedure, the situation must be corrected to comply with approved policy and procedure. FCIC also disagrees with the first requestor's interpretation that section 3(g) of the Basic Provisions authorizes adjustment of the approved yield only in cases where the actual yield in the database is excessive and it does not apply or authorize adjustment of an approved yield that is based on an assigned yield due to the lack of any prior production of the commodity by the policyholder. FCIC disagrees with the first requestor's interpretation of section 3(g) as inapplicable to new producers of a commodity. As stated above, any time there is not conformance with the approved policy and procedures, the AIP must take such actions as are necessary to achieve conformance.

Since incorrect application of approved policy or procedure must be corrected, this means the AIP may issue a new summary of coverage to the policyholder and base premiums charged and any loss payments made on the corrected information.

FCIC agrees with the first requestor that nothing in either the Act or the regulations excludes organic producers from the provisions regarding new producers. However, the Special Provisions contain provisions regarding the determination of approved yields and the use of variable T-Yields for organic producers. Further, the preamble of the Basic Provisions states that if there is a conflict between the Basic Provisions, Crop Provisions or Special Provisions, the Special Provisions control. Similarly, under the preamble to the Basic Provisions, if there is a conflict between the terms of the policy and the procedures issued by FCIC, the terms of the policy control. This means that if the Special Provisions have a different procedure for calculating yield than other provisions of the policy or procedures, the provisions in the Special Provisions control.

FCIC agrees with the second requestor that the provisions in section 4 of the Basic Provisions pertain to changes made to the policy provisions through the rulemaking process or through publication of new Special Provision statements. Section 4 simply states if policy changes are to be made, they must be made by the contract change date. However, corrections of data or other information is not a change to the policy provisions. The policy provisions stay the same. However, as stated above, when there are errors in the application of the policy provisions, they must be corrected to be in conformance with approved policy and procedure.

Further, the first requestor's interpretation that section 4 would preclude corrections is not rational. The contract change date is usually at least 120 days before the start of the crop year. To say that no changes in reported data can be made after that date would mean that only the previous crop year's information can be used because the current crop year's data would not be reported for months after the contract change date. Clearly, this is not how the policy operates. Policyholders can change their price election and coverage levels by the sales closing date, which is usually 120 days after the contract change date. Policyholders can submit production reports to update the APH and production guarantees, with a deadline after the sales closing date. Policyholders can report acreage after the crop is planted and months after the contract change date. Based on the language in section 4 and other policy provisions, section 4 is clearly not applicable to corrections in data or other information relied upon to calculate approved yields, production guarantees, premium, and indemnities.

FCIC agrees with the first requestor that FAD-085 itself is not applicable to the issues raised in this request. However, the principles underlying that FAD are reflected herein.

FCIC does not agree with the second requestor that a miscalculated approved yield determined from 100 percent of the T-Yield rather than the applicable variable T-Yield requires an adjustment according to 3(g)(1) of the Basic Provisions. Section 3(g)(1) only authorizes adjustment of the approved yield in cases where actual yields in the database are excessive. A new producer of a commodity who has never produced the crop does not have actual yields, and therefore 3(g)(1) does not apply. The first requestor is correct that section 3(g)(1) authorizes adjustment of the approved yield only in cases where the actual yields in the database are excessive when calculated in accordance with the approved policy and procedure. However, this provision is not applicable when errors have been made in the manner in which yields have been calculated. As stated above, there must be adherence to policy provisions and when this does not occur, there must be corrections to bring the information back into conformance with the approved policy and procedure.

FCIC agrees CIH procedures are clarification and support of the provisions provided in the policy. It is the Special Provisions that require the use of variable T-Yields and Exhibit 38, paragraph 3C is a clarification of how a variable T-Yield is calculated.

Even though 7 C.F.R. part 400, subpart X is only applicable to provisions of the Federal Crop Insurance Act and the regulations promulgated hereunder, and the Crop Revenue Coverage and RA policies are not codified in the Code of Federal Regulations, to the extent those provisions are identical or nearly identical, this Final Agency Determination applies accordingly to assure consistent, uniform, and equitable treatment to all policyholders insured under the same policy provisions.

In accordance with 7 C.F.R. part 400.765(c); this Final Agency Determination is binding on all participants in the Federal crop insurance program for the 2007 and 2008 crop years. Any appeal of this decision must be in accordance with 7 C.F.R. part 400.768(g).

Date of Issue: May 10, 2011