Final Agency Determination: FAD-183

Request dated January 4, 2013, requesting a Final Agency Determination for the 2011 and succeeding crop years regarding the interpretation of section 502(a) of the Federal Crop Insurance Act (Act) (7 U.S.C. § 1509). This request is pursuant to 7 C.F.R. § 400, subpart X.

Section 502(a) of the Act states:

SEC. 502. [7 U.S.C. 1502] PURPOSE AND DEFINITIONS.

(a) PURPOSE.—It is the purpose of this subtitle to promote the national welfare by improving the economic stability of agriculture through a sound system of crop insurance and providing the means for the research and experience helpful in devising and establishing such insurance.

*****

The requestor interprets that authority is granted by Congress through the Act at section 502(a), to refuse reinsurance under circumstances where a loss is imminent or it is impossible to determine the risk or where insurance experience has been so unfavorable as to preclude the possibility of a sound insurance program. The requestor believes that under the Act, the Federal Crop Insurance Corporation (FCIC) is subject to statutory duty to provide a sound insurance program and to cancel insurance where the unfavorable nature of the risk involved requires it.

The requestor believes the interpretation provided above was supported by the United States Court of Appeals, Ninth Circuit (506 F.2d 467.). The court found that under the Act, FCIC was subject to a statutory duty to provide ‘a sound insurance program’ and to cancel insurance where the unfavorable nature of the risk involved required it. The requestor believes that while this judgment was passed down in 1974, the authority of the Act and the statutory duty has remained consistent, and currently applies. Likewise, within 506 F.2d 467., the 78th Congress is cited as having stated that ‘under circumstances where a loss is imminent or it is impossible to determine the risk or where insurance experience has been so unfavorable as to preclude the possibility of a sound insurance program, the Corporation would be authorized to refuse insurance.’ The requestor believes this was and still is the intent of the congressionally mandated crop insurance program. The requestor believes Congress, and consequently the Act, do not provide FCIC the authority to operate crop insurance based on entitlements.

FCIC agrees, in part, with the requestor’s interpretation of the Act.

Section 502(a) of the Act does not explicitly grant any authority to deny reinsurance under the conditions stated by the requestor. Section 502(a) merely, as it clearly states, describes the purpose of this subtitle.

FCIC agrees it is subject to a statutory duty to provide a sound insurance program. This requirement is found in numerous provisions in the Act, including requiring actuarially sound premiums, premiums sufficient to cover the expected risk and a reasonable reserve, and to operate the program in an actuarially sound manner.

The following provisions of the Act are those specific to limiting coverage on the basis of insurance risk. This would include limitations on the ability to obtain coverage when a risk is imminent and the denial of insurance when the risk is determined to be excessive.

Section 508(a) AUTHORITY TO OFFER INSURANCE.— (1) IN GENERAL.—If sufficient actuarial data are available (as determined by the Corporation), the Corporation may insure, or provide reinsurance for insurers of, producers of agricultural commodities grown in the United States under 1 or more plans of insurance determined by the Corporation to be adapted to the agricultural commodity concerned. To qualify for coverage under a plan of insurance, the losses of the insured commodity must be due to drought, flood, or other natural disaster (as determined by the Secretary).

Section 508(b)(8) LIMITATION DUE TO RISK.—The Corporation may limit catastrophic risk coverage in any county or area, or on any farm, on the basis of the insurance risk concerned.

Section 508(c)(9) LIMITATIONS ON ADDITIONAL COVERAGE.—The Board may limit the availability of additional coverage under this subsection in any county or area, or on any farm, on the basis of the insurance risk involved. The Board shall not offer additional coverage equal to less than 50 percent of the recorded or appraised average yield indemnified at 100 percent of the expected market price, or an equivalent coverage.

However, only FCIC has the authority to deny insurance under these provisions. In accordance with the Standard Reinsurance Agreement, the approved insurance provider is required to accept applications, and continue coverage, for all producers unless they have been determined to be ineligible. FCIC exercises this authority through the policy provisions, which may limit the attachment of insurance when a loss is imminent, through Special Provisions, which may limit certain practices, types, or varieties because of the risk, or the other actuarial documents which may make certain acreage uninsurable because of the high risk. With respect to individual producers, FCIC limits insurance through individual notice.

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 2011 and succeeding crop years the provisions are in effect. Any appeal of this decision must be in accordance with 7 C.F.R. § 400.768(g).