Summary of a Recent
Judicial Development in
Crop Insurance

Indemnification for Costs Resulting from an "Error or Omission"
of the Federal Crop Insurance Corporation

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In American Growers Insurance Co. v. Federal Crop Insurance Corp., 532 F.3d 797 (8th Cir. 2008), the Eighth Circuit Court of Appeals held that the indemnification provisions of 7 U.S.C. § 1508(j)(3) only covered losses incurred when an insurance provider was sued by a third party such as a producer, and therefore dismissed the insurance provider's claims against the Federal Crop Insurance Corporation.

Background

The Federal Crop Insurance Corporation (FCIC) administers and regulates the federal crop insurance program pursuant to the Federal Crop Insurance Act of 1938. Id. at 798. The FCIC executed a cooperative financial assistance agreement called a standard reinsurance agreement with American Growers Insurance Company (AGIC), an approved federal crop insurance provider, for the 1996 crop year and renewed it for the following crop years at issue in this case. Id. Pursuant to the agreement, the FCIC was to subsidize the premiums paid to AGIC by producers and compensate AGIC for administrative and operating expenses, calculated as a percentage of the premiums. Id. Multiple peril crop insurance (MPCI) policies cover numerous risks to crops including fire, flood, drought, and other natural disasters, and "basic prevented planting coverage" applies when a producer is prevented from planting a crop by such natural disasters. Id. at 799. The FCIC added basic prevented planting coverage to every MPCI policy in 1994, but in regions where natural disasters were unlikely the FCIC did not raise the premium rate charged for this extra coverage. Id. In 1995, the western region of the United States west of the Mississippi experienced flooding which prevented producers from planting their crops, but data from the flooding was not available to the FCIC at the time that it set the premium rates for the 1996 crop year so it kept its prevented planting premium rate at 0.0 percent. Id. at 800. The data was available for the 1997 crop year; however, the FCIC directed its resources towards other problem areas in its ratemaking process and the premium rates were not increased until 1998. Id.

AGIC submitted a claim to the FCIC seeking indemnification pursuant to 7 U.S.C. § 1508(j)(3) for costs incurred in 1996 in connection with the prevented planting changes, claiming that the FCIC had violated the terms of its standard reinsurance agreement by failing to adjust premium rates to reflect the additional coverage. Id. at 800-01. The FCIC is required, under 7 U.S.C. § 1508(j)(3), to provide approved insurance providers with indemnification for costs incurred due to "errors or omissions on the part of the FCIC." Id. at 801. The FCIC denied indemnity payments, and after exhausting its administrative remedies AGIC filed suit in federal court. Id. The district court granted summary judgment to the FCIC regarding the 1996 crop year because data from the flooding had not been available at the time the FCIC set premium rates for that year, and crop years 1998-2001 because the FCIC had increased the premium rates for those years. Id. at 802. Concerning the 1997 crop year, however, the district court concluded that the FCIC's decision "to maintain a zero premium for prevented planting coverage in the Western region in 1997, in the face of known prevented planting losses, was arbitrary and capricious, and therefore an 'error or omission' under 7 U.S.C. § 1508(j)(3)" and awarded damages based on the premium rates adopted in 1998, and the FCIC appealed the ruling. Id.

Arguments

American Growers Insurance Company claimed that it was entitled to indemnification by the FCIC pursuant to 7 U.S.C. § 1508(j)(3), because the FCIC added prevented planting coverage to basic federal crop insurance policies without increasing the premium rate that insurance companies could charge. Id. at 798. In response to the FCIC's argument, AGIC also argued that the statutory language in § 1508(j)(3) was broad enough to permit direct claims by insurers for indemnification for any type of errors by the FCIC. Id. at 803.

The FCIC argued that § 1508(j)(3) did not provide for direct claims against it by an insurer, but rather permitted the insurer to seek indemnification from the FCIC for a loss claim made against them by a producer. Id. at 802.

Analysis and Holdings

The appellate court found that several provisions in the parties' standard reinsurance agreement indicated that the FCIC and AGIC understood that indemnification under § 1508(j)(3) would only be available in situations in which they would be on the same side of an action brought by a third party, and so the district court should have dismissed AGIC's claims. Id. at 804. The court therefore reversed the judgment of the district court and remanded AGIC's complaints for dismissal for failure to state a claim upon which relief can be granted. Id. at 805.

The case was decided on July 15, 2008