Final Agency Determination: FAD-151

FAD-151

Subject: Request dated November 18, 2011, requesting a Final Agency Determination for the 2010 and three previous crop years regarding the interpretation of section 20(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:

Section 2(b).of the Basic Provisions states:

2. Life of Policy, Cancellation, and Termination.

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(b) Your application for insurance must contain your social security number (SSN) if you are an individual or employer identification number (EIN) if you are a person other than an individual, and all SSNs and EINs, as applicable, of all persons with a substantial beneficial interest in you, the coverage level, price election, crop, type, variety, or class, plan of insurance, and any other material information required on the application to insure the crop. If you or someone with a substantial beneficial interest is not legally required to have aSSN or EIN, you must request and receive an identification number for the purposes of this policy from us or the Internal Revenue Service (IRS) if such identification number is available from the IRS. If any of the information regarding persons with a substantial beneficial interest changes during the crop year, you must revise your application by the next sales closing date applicable under your policy to reflect the correct information.

(1) Applications that do not contain your SSN, EIN or identification number, or any of the other information required in section 2(b) are not acceptable and insurance will not be provided (Except if you fail to report the SSNs, EINs or identification numbers of persons with a substantial beneficial interest in you, the provisions in section 2(b)(2) will apply);

(2) If the application does not contain the SSNs, EINs or identification numbers of all persons with a substantial beneficial interest in you, you fail to revise your application in accordance with section 2(b), or the reported SSNs, EINs or identification numbers are incorrect and the incorrect SSN, EIN or identification number has not been corrected by the acreage reporting date, and:

(i) Such persons are eligible for insurance, the amount of coverage for all crops included on this application will be reduced proportionately by the percentage interest in you of such persons, you must repay the amount of indemnity, prevented planting payment or replanting payment that is proportionate to the interest of the persons whose SSN, EIN or identification number was unreported or incorrect for such crops, and your premium will be reduced commensurately; or

(ii) Such persons are not eligible for insurance, except as provided in section 2(b)(3), the policy is void and no indemnity, prevented planting payment or replanting payment will be owed for any crop included on this application, and you must repay any indemnity, prevented planting payment or replanting payment that may have been paid for such crops. If previously paid, the balance of any premium and any administrative fees will be returned to you, less twenty percent of the premium that would otherwise be due from you for such crops. If not previously paid, no premium or administrative fees will be due for such crops.

(3) The consequences described in section 2(b)(2)(ii) will not apply if you have included an ineligible person's SSN, EIN or identification number on your application and do not include the ineligible person's share on the acreage report.

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Section 20 of the Basic Provisions states, as here pertinent:

20. Mediation, Arbitration, Appeal, Reconsideration, and Administrative and Judicial Review.

(a) If you and we fail to agree on any determination made by us except those specified in section 20(d) or (e), the disagreement may be resolved through mediation in accordance with section 20(g). If resolution cannot be reached through mediation, or you and we do not agree to mediation, the disagreement must be resolved through arbitration in accordance with the rules of the American Arbitration Association (AAA), except as provided in sections 20(c) and (t), and unless rules are established by FCIC for this purpose. Any mediator or arbitrator with a familial, financial or other business relationship to you or us, or our agent or loss adjuster, is disqualified from hearing the dispute.

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(b) Regardless of whether mediation is elected:

(1) The initiation of arbitration proceedings must occur within one year of the date we denied your claim or rendered the determination with which you disagree, whichever is later;

(2) If you fail to initiate arbitration in accordance with section 20(b)(1) and complete the process, you will not be able to resolve the dispute through judicial review;

(3) If arbitration has been initiated in accordance with section 20(b)(1) and completed, and judicial review is sought, suit must be filed not later than one year after the date the arbitration decision was rendered; and

(4) In any suit, if the dispute in any way involves a policy or procedure interpretation, regarding whether a specific policy provision or procedure is applicable to the situation, how it is applicable, or the meaning of any policy provision or procedure, an interpretation must be obtained from FCIC in accordance with 7 CFR part 400, subpart X or such other procedures as established by FCIC. Such interpretation will be binding.

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Section 27(a)(1) of the Basic Provisions states:

27. Concealment, Misrepresentation or Fraud.

(a) If you have falsely or fraudulently concealed the fact that you are ineligible to receive benefits under the Act or if you or anyone assisting you has intentionally concealed or misrepresented any material fact relating to this policy:

(1) This policy will be voided; and

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Interpretation Submitted

The requestor interprets section 20(b) of the Basic Provisions to require that arbitration be initiated within one year of the date a claim is denied or the date a determination with which the policyholder disagrees is rendered by the insurance company. If arbitration is not initiated within one year and completed, the policyholder will not be able to resolve the issue through judicial review.

The requestor has a question as to whether the issuance of a policy is a formal "determination" under section 20(a) that the policyholder is eligible for the coverage. The requestor interprets the policy such that the acceptance of an application (which does not include all required substantial beneficial interests (SBI)) and the issuance of the policy is not a "determination" under section 20(a). A "determination" as used in section 20(b) does not encompass the insurance provider's initial act of accepting an insurance application or the insurance provider's act of issuing an insurance policy, and the one year time limitation does not begin to run from those dates. If the issuance of the policy were a "determination" under section 20(b), it would render meaningless the provisions found in section 27 as well as the voidance provisions in section 2(b) noted above. It would have the effect of requiring the insurance company to identify ineligible policyholders within one year of the issuance of the policy or the insurer would lose the right to void the policy since the arbitration proceedings would have to be initiated within one year of the date the "determination" was rendered. This interpretation would allow parties who falsely concealed their lack of eligibility for insurance to be covered anyway if a year goes by after policy issuance before the ineligibility is discovered.

Further, the requestor provides the following comment and response which appeared in the Common Crop Insurance Regulations, Basic Provisions; and Various Crop Insurance Provisions Final Rule published March 30, 2010, in the Federal Register appearing at 75 FR 15793 and 15794:

Comment: A commenter recommended proposed section 2(b)(1)(ii) (redesignated section 2(b)(7)(iii)) be clarified in more detail regarding whether or not the return of premium applies to only the current year or all previous years when the application has the wrong SSN. For example, a producer reported the wrong SSN to an insurance provider and paid the premium for the last three years with no loss. If in the fourth year, the producer is paid a small payment and later it is determined the producer reported the incorrect SSN, would the insurance provider return the prior three years premium or does the return of premium only apply to the year the loss was paid. If it applies to all four years, the program runs the risk of a producer intentionally misreporting his SSN in hopes of receiving a small claim payment, then notifying the insurance provider of the wrong SSN. The producer would have to repay the small payment, but the insurance provider would have to return the prior three years premium.

Response: If an incorrect identification number is provided and it would result in the application not being acceptable, no insurance would have been, or considered to have been, in place, and the policy is voided under the revised provisions. Therefore, any crop policies associated with that application would be void for all crop years for which such identification number was incorrect. If the policy is void, it has been the practice of FCIC to only require the producer to pay 20 percent of the premium to offset costs (see sections 23 and 27). There is no basis to change this practice for these producers who similarly have their policies voided. There should not be a significant risk that producers will seek to have their policies voided for the return of premium because it presumes that the producer will know that there will be a number of good years in which no indemnity will be due and only a small claim made in later years. This is unlikely .to occur. FCIC has clarified that if the policy is void, no insurance is considered to have attached for any year in which the incorrect identification number has been provided, and the producer would be responsible for 20 percent of the premium for all years covered by the application. FCIC has also moved provisions regarding the effect of voidance to a new section 2(b)(7). Additionally, the provisions in section 27(b) have been clarified to specify the amount of premium that can be retained by the insurance provider when a policy is void is 20 percent of the premium amount the producer would otherwise be required to pay. Current provisions in section 27(b) do not specify whether the 20 percent of premium is based on producer paid premium or the total premium under the policy (producer paid premium plus subsidy). All other sections of the policy that referred to retention of 20 percent of the premium were clear that it is based on the amount paid by the producer. FCIC has revised section 27 to specify the 20 percent is applied to the producer paid portion of the premium.

The requestor interprets the FCIC response as making it clear that a policyholder can seek return of previous years' premiums where policies are voided at a later date. Thus, there is no "determination" under section 20(a) when the policy is issued. Both the insurer and the policyholder can seek voidance of the policy more than one year after issuance.

The requestor further interprets the policy such that the act of the insurer later deciding whether an existing issued policy is void is not a "determination" under section 20(a) such that it needs to be arbitrated under section 20(b).

Final Agency Determination

The Federal Crop Insurance Corporation (FCIC) agrees with the requestor's interpretation that section 20(b) of the Basic Provisions requires an arbitration to be initiated within one year of the date a claim is denied or the date of a determination with which the policyholder disagrees is rendered by the approved insurance provider (AlP), whichever is later. lf the arbitration is not initiated within one year, the policyholder will not be able to resolve the issue through judicial review.

FCIC disagrees that the issuance of a policy is not a determination by the AlP. The AlP must determine whether the policy was acceptable based on the information known to the AlP at the time of application. However, FCIC agrees that acceptance of the application is not likely a determination for the purposes of section 20(a) of the Basic Provisions that starts the one year time period for appeal. The one year date starts from the date the policyholder receives a determination to which the policyholder disagrees. Since the producer elected to apply for insurance, the producer would not disagree with the acceptance of that application by the AlP. Therefore, acceptance of the application would not trigger the one year time period.

Conversely, if the AlP rejects the application, and the producer disagrees with such rejection the one year time period starts to run on the date of such rejection. Such rejection could occur when the application is submitted. For example, the AlP knew the applicant was ineligible, or years later when the AlP discovered that an incorrect number for a person with a substantial beneficial interest was reported at the time of application and the person was not eligible, but the incorrect number is not discovered by the AlP until sometime later, then the AlP voids the policy. In such, a communication of the rejection or the voidance of the policy would have to be sent by the AlP to the policyholder. If the policyholder disagrees with these determinations, the one year period starts to run on the date of such communication.

FCIC agrees with the requestor's interpretation that the comment and response cited above demonstrates that a determination of voidance can occur years after the application was accepted. FCIC agrees that section 2(b) allows the AlP to void the policy whenever the company discovers that a basis for voidance exists, the policy is void for all years the basis for voidance existed, and that under such circumstances the policyholder is entitled to the return of a portion of the premium paid for those years the policy is void.

Finally, it is noted the requestor asked that the Final Agency Determination provide that the decision is applicable to the 2010 and three previous crop years (2007 through 2010 crop years). Even though 7 C.P.R. part 400, subpart X states requesters may seek interpretations of those provisions of the Act and the regulations promulgated thereunder that are in effect for the crop year in which the request under this subpart is being made and the three previous crop years, to the extent the language in the provisions interpreted is identical to the language applicable for any other crop year, the same interpretation can be applied to such other crop year. It is the responsibility of the person seeking to use the published interpretation for a different crop year to ensure that the language of the provisions is identical. Even minor language changes can have an effect on the interpretation.

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 2008 through 2010 crop years. Any appeal of this decision must be in accordance with 7 C.F.R. 400.768(g).

Date of Issue: February 13, 2012