Final Agency Determination: FAD-188

Subject: One request dated April 23, 2013, and two requests dated May 3, were submitted to the Risk Management Agency requesting a Final Agency Determination for the 2012 and three previous crop years regarding the interpretation of sections 2(b) and 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. § 400, subpart X.

Background:

Section 2(b) of the 2005 Basic Provisions (05-br) states, in relevant part:

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 a SSN 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.

Section 2(b) of the 2012 Basic Provisions (11-br) states, in relevant part:

2. Life of Policy, Cancellation, and Termination.

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(b) With respect to your application for insurance:

(1) You must include your social security number (SSN) if you are an individual (if you are an individual applicant operating as a business, you may provide an employer identification number (EIN) but you must also provide your SSN); or

(2) You must include your EIN if you are a person other than an individual;

(3) In addition to the requirements of section 2(b)(1) or (2), you must include the following for all persons who have a substantial beneficial interest in you:

(i) The SSN for individuals; or

(ii) The EIN for persons other than individuals and the SSNs for all individuals that comprise the person with the EIN if such individuals also have a substantial beneficial interest in you;

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(6) With respect to persons with a substantial beneficial interest in you:

(i) The insurance coverage for all crops included on your application will be reduced proportionately by the percentage interest in you of persons with a substantial beneficial interest in you (presumed to be 50 percent for spouses of individuals) if the SSNs or EINs of such persons are included on your application, the SSNs or EINs are correct, and the persons with a substantial beneficial interest in you are ineligible for insurance;

(ii) Your policies for all crops included on your application, and for all applicable crop years, will be void if the SSN or EIN of any person with a substantial beneficial interest in you is incorrect or is not included on your application and:

(A) Such number is not corrected or provided by you, as applicable;

(B) You cannot prove that any error or omission was inadvertent (Simply stating the error or omission was inadvertent is not sufficient to prove the error or omission was inadvertent); or

(C) Even after the correct SSN or EIN is provided by you, it is determined that the incorrect or omitted SSN or EIN would have allowed you to obtain disproportionate benefits under the crop insurance program, the person with a substantial beneficial interest in you is determined to be ineligible for insurance, or you or the person with a substantial beneficial interest in you could avoid an obligation or requirement under any State or Federal law; or

(iii) Except as provided in sections 2(b)(6)(ii)(B) and (C), your policies will not be voided if you subsequently provide the correct SSN or EIN for persons with a substantial beneficial interest in you and the persons are eligible for insurance;

(7) When any of your policies are void under sections 2(b)(5) or (6):

(i) You must repay any indemnity, prevented planting payment or replant payment that may have been paid for all applicable crops and crop years;

(ii) Even though the policies are void, you will still be required to pay an amount equal to 20 percent of the premium that you would otherwise be required to pay; and

(iii) If you previously paid premium or administrative fees, any amount in excess of the amount required in section 2(b)(7)(ii) will be returned to you;

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Section 20 of the 2012 Basic Provisions (11-br) states, in relevant part:

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 (f), 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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Interpretation Submitted

The requestor states FAD-180 states that section 2(b)(2)(ii) of the 2005 Basic Provisions is “unambiguous and states that if the conditions stated therein are met, ‘the policy is void.’” Furthermore, FAD-180 provides that “this determination by the AIP can occur years after the application was provided.”

The requestor stated that FAD-151 discusses the possibility referred to in FAD-180 that an approved insurance provider (AIP) may discover years after a policy is issued that an incorrect identification number for a person with a substantial beneficial interest was reported at the time of application and the person was not eligible. In this case, FAD-151 states that in such case “a communication of the rejection or the voidance of the policy would have to be sent by the AIP to the policyholder.” The one-year period under section 20(b) of the Basic Provisions would run from the date of the communication from the AIP, if the policyholder disagrees with the determination.

The requestor states thus, FADs 151 and 180 indicate that both the determination that the policy is void and the communication to the policyholder of the voidance of the policy are made by the AIP. However, when the conditions of section 2(b)(2)(ii) of the 2005 Basic Provisions are met, the requestor interprets the provision as providing the policyholder with a right to compel the voidance of the policy and obtain the return of the premium from the AIP. Section 2(b)(2)(ii) of the 2005 Basic Provisions states: “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.”

The requestor believes therefore, in a situation when the policyholder has provided the AIP with information that requires the policy to be voided and the AIP fails to take action, the policyholder has a right to compel the AIP to make a determination that the policy is void and return the premium paid. The policyholder has a right to this determination for the current year’s policy and for all prior years for which the basis for voidance existed. As provided in FAD-151, the one-year time period in section 20(b) of the Basic Provisions would begin to run from the date of the determination as to whether the policy is void, if it is one with which the policyholder disagrees.

The requestor states that although changes were made to the Basic Provisions published at 7 C.F.R. § 457.8, effective April, 29, 2010, the provisions under section 2(b) and 20(b) in the prior and new regulations are substantially similar regarding what makes a policy void, the return of the premium when a policy is void, and the one year period in which to begin and arbitration proceeding. Therefore, we believe FAD-151 and FAD-180 apply to the new Basic Provisions.

Section 2(b)(6)(ii) of the 2012 Basic Provisions states that if the SSN or EIN of any person with a substantial beneficial interest in the policyholder is incorrect or is not included on the application, the policies for all crops included in an application and for all applicable crop years will be void. In addition, the policies will be void if the conditions stated in sections 2(b)(6)(ii)(A), (B), or (C) of the 2012 Basic Provisions apply. Consequently, section 2(b)(7)(iii) of the 2012 Basic Provisions provides that when any policies are void under sections 2(b)(6) of the 2012 Basic Provisions, and any premium or administrative fees have been previously paid by the policyholder, any amount in excess of 20 percent of the premium will be returned to the policyholder.

When the conditions of section 2(b)(6)(ii) of the 2012 Basic Provisions are met, the requestor interprets the provision as providing the policyholder with a right to compel the voidance of the policy and obtain the return of the premium, as provided under section 2(b)(7)(iii) of the 2012 Basic Provisions. Thus, in a situation when the policyholder has provided the AIP with information that requires the policy be voided- for example, that the SSN or EIN or any person with a substantial beneficial interest was not included in the application and that such person is not eligible to receive Federal benefits—and the AIP fails to take action, the policyholder has a right to compel the AIP to make a determination that the policy is void and return the premium paid. Moreover, the policyholder has a right to this determination for the current year’s policy and for all prior years for which the basis for voidance existed. If the determination as to whether the policy is void is one with which the policyholder disagrees, the one year time period in section 20(b)(1) would begin to run from the date of the determination.

Final Agency Determination

FCIC disagrees that the provisions provide the policyholder with the right to compel the voidance of the policy. While FAD-151 refers to “allowing” the AIP to void the policy, section 2(b)(6)(ii) of the 2012 Basic Provisions is unambiguous and states that if the conditions stated therein are met, “the policy is void.” As FAD-151 provided, “section 2(b) allows the AIP to void the policy whenever the company discovers that a basis for voidance exists. The policy is then 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.”

According to the preamble in the Basic Provisions for reinsured policies, “us” refers to the AIP and “you” represents the named insured. This means that the contract is between the AIP and the named insured, not FCIC. Therefore, the determination of when the conditions of section 2(b)(6)(ii) of the 2012 Basic Provisions are met is the AIPs determination. There is no provision in the policy that allows the policyholder to compel the AIP to make a decision under section 2(b)(6)(ii) of the 2012 Basic Provisions. Further, it would jeopardize program integrity to allow such action because policyholders may see this as a way to recoup premium if no loss is incurred even though they will have received the benefits of coverage against insurable losses. In addition it would jeopardize program integrity to allow producers to benefit from their own breach of contract by failing to properly report identification numbers.

FCIC agrees that the one year time period under section 20(b) of the 2012 Basic Provisions would begin to run on the date the AIP makes any decision, including one to void the policy. It is noted the requestor asked that the FAD provide that the decision is applicable to the 2012 and three previous crop years (2009 through 2012 crop years). 7 C.F.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 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 crop years the policy provisions are in effect. Any appeal of this decision must be in accordance with 7 C.F.R. § 400.768(g).

Date of Issue: July 15, 2013