Final Agency Determination: FAD-147

FAD-147

Subject: Request dated July 12, 2011, requesting a Final Agency Determination for the 2011 crop year regarding the interpretation of section 7(b) 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.

Background:

The introductory text of section 2(e) of the Basic Provisions states:

2. Life of Policy, Cancellation, and Termination.

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(e) Any amount due to us for any policy authorized under the Act will be offset from any indemnity or prevented planting payment due you for this or any other crop insured with us under the authority of the Act.
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Section 7 of the Basic Provisions states, as here pertinent:

7. Annual Premium and Administrative Fees.

(a) The annual premium is earned and payable at the time coverage begins. You will be billed for the premium and administrative fee not earlier than the premium billing date specified in the Special Provisions.
(b) Premium or administrative fees owed by you will be offset from an indemnity or prevented planting payment due you in accordance with section 2(e).
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Section 11(a) of the Basic Provisions states:

11. Insurance Period.

(a) Except for prevented planting coverage (see section 17), coverage begins on each unit or part of a unit at the later of:

(1) The date we accept your application (For the purposes of this paragraph, the date of acceptance is the date that you submit a properly executed application in accordance with section 2);
(2) The date the insured crop is planted; or
(3) The calendar date contained in the Crop Provisions for the beginning of the insurance period.

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Section 24B of the 2011 Reinsurance Year - Risk Management Agency Appendix III to the Standard Reinsurance Agreement and the Livestock Price (Appendix III) states, as here pertinent:

24. Application of Paids and Loss Credits.
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3) After the Loss Credit has been applied to the same Policy and any Billed crops on any related policy then a check for the remaining loss amount must be submitted to the producer.

(Note: the only exception to this subsection will be if the company can provide documentation stating the producer agreed to have the unbilled amounts offset from the remaining amount of the loss.)

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Example #2
09/15/09 - $600.00 Loss on Policy #1 - Wheat

	Policy 1 - Wheat	Policy 2 - Oats	Policy 2 - Wheat	Policy 3 - Corn
Unpaid Interest	3.25	3.75	4.88	-
Unpaid Fees	30.00	30.00	30.00	30.00
Unpaid Premium	100.00	120.00	165.00	230.00
Bill Date	7/1/2009	7/1/2009	7/1/2009	10/1/2009

1. Apply $3.25 to interest on Policy #1 - Wheat, $30 to fees on Policy #1 - Wheat, and $100 to Premium on Policy #1 - Wheat
2. Apply the remaining Loss Credit to Policy #2 - Oats - $3.75 Interest, and Policy #2 - Wheat - $4.88 Interest (Note: if multiple crops have the same bill date, apply to interest on all crops before proceeding)
3. Apply the remaining Loss Credit to Policy #2 - Oats - $30 Fee, and Policy #2 - Wheat $30 Fee (Note: if multiple crops have the same bill date, apply to administrative fee on all crops before proceeding)
4. Apply the remaining Loss Credit to Policy #2 - Oats - $120 Premium and Policy #2 - Wheat - $165 Premium.
5. A check for the remaining $113.12 must be submitted to the producer, unless the exception under subsection 24 B (3) is met.
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The Risk Management Agency is requested to provide an interpretation relating to the authority of the Approved Insurance Provider (AIP) to apply a loss credit to offset premium and administrative fees which have been earned and are payable, but which have not actually been billed by the AIP because the applicable premium billing date has not yet passed.

Interpretation Submitted

The requestor interprets sections 7(a) and (b) of the Basic Provisions to mean that premium and administrative fees are "earned and payable" to an AIP prior to the time the AIP actually bills the policyholder. The requestor interprets the sections of the Basic Provisions referenced above to mean that the AIP may use a loss credit to offset any premium or administrative fee that is earned and is payable regardless of whether the policyholder has yet to be billed.

The requestor provided an example to illustrate their interpretation of sections 7(a) and (b).

Policy No. 1 - Wheat
Indemnity Due: $1,000 (September 15, 2010)

1. Apply $30 to administrative fee for wheat under Policy No. 1.
2. Apply $200 to premium for wheat under Policy No. 1.
3. Apply $30 to administrative fee for oats under Policy No. 2.
4. Apply $400 to premium for oats under Policy No. 2.
5. Apply $30 to administrative fee for corn under Policy No. 3.
6. Apply remaining loss credit of $310 to premium for corn under policy No. 3. This would leave a remaining balance due of $190 for corn premium under Policy No. 3.

The requestor believes the policy provisions referenced above are clear and that its interpretation is in accordance with these provisions. Nonetheless, parts of Appendix III appear to diverge from the policy. Specifically, section 24 of Appendix III addresses the application of loss credits, and in doing so, establishes a hierarchy as to the order in which they are to be used. Section 24 explains that a loss credit is first applied to the same policy and the same crop associated with the claim. After that, a loss credit is applied against finance charges, premium, and administrative fees under "the same policy, any crops, starting with the earliest premium bill date." It is at this juncture that the Basic Provisions and Appendix III seem to part ways.

The requestor does not believe that the above-referenced sections of the Basic Provisions can be read consistently with Appendix III. As the Basic Provisions are codified as a regulation in the Code of Federal Regulations, it is the position of the requestor that the terms of the policy should prevail. Again, it is the requestor's interpretation of RMA policy that a loss credit can be applied to offset any premium or administrative fee that has been "earned and payable" (section 7(a) of the Basic Provisions) in connection with "any policy authorized under the [Federal Crop Insurance] Act" (section 2(e) of the Basic Provisions). The requestor believes this to be true regardless of whether the "earned and payable" premium and administrative fees have actually been billed by the AIP.

Final Agency Determination

The Federal Crop Insurance Corporation (FCIC) disagrees with the requestor's interpretation.

The Basic Provisions referenced above do not mean that the AIP may use a loss credit to offset any premium or administrative fee that is earned and is payable regardless of whether the policyholder has yet to be billed. Section 7(b) of the Basic Provisions explicitly states "Premium or administrative fees owed [emphasis added] by you will be offset from an indemnity or prevented planting payment due you in accordance with section 2(e)." According to section 7(a) of the Basic Provisions, the premium and administrative fees are earned and payable at the time insurance attaches. This means the premium is owed but it is not yet due.

However, section 2(e) of the Basic Provisions states "Any amount due [emphasis added] to us for any policy authorized under the Act will be offset from any indemnity or prevented planting payment due you for this or any other crop insured with us under the authority of the Act". Although section 7(a) of the Basic Provisions states premium is earned and payable at the time coverage begins, the premium or administrative fees are not required to be paid until after the premium billing date as specified in the Special Provisions. Therefore, they would not be considered to be due until after the billing date. This means an indemnity for one crop can only be used to offset an amount from another crop that is "due" (i.e., already billed). However, Appendix III allows AIPs the latitude to contact the policyholder and inquire as to whether the policyholder would agree to have the "unbilled" administrative fees and premium offset from the remaining amount of the loss. In these cases AIPs must retain supporting documentation. Therefore, with the policyholder's consent the premium and administrative fees can be offset from any prevented planting or indemnity due the insured even if it is prior to the billing date.

The FCIC agrees with the interpretation that the Basic Provisions control any procedures, including Appendix III. However, FCIC does not agree there are conflicting standards between the Basic Provisions and Appendix III. As stated above, earned and payable is not the same as due. Under the Basic Provisions premium or administrative fees are not due until after the premium billing date. Section 24B of Appendix III is consistent with these 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 2011 crop year and succeeding crop years the policy provisions are in effect. Any appeal of this decision must be in accordance with 7 C.F.R. part 400.768(g).

Date of Issue: September 6, 2011