Subject: The Peanut Crop Insurance
Provisions, 7 C.F.R. § 457.134.
On February 16, 2001, the Risk Management Agency (RMA) was
asked for a final agency determination concerning the interpretation
of section 2(b) of the Peanut Crop Insurance Provisions, 7 C.F.R.
§ 457.134 for the 2000 crop year. The relevant provision
We may reject or modify any FSA reconstitution for the purpose
of the unit definition, if we determine the reconstitution was
done in whole or in part to defeat the purpose of the Federal
crop insurance program or to gain a disproportionate advantage
under the policy.
On March 14, 2000, RMA issued an Informational Memorandum that
Any producer who has acreage that has been reconstituted and
results in the producer receiving a yield that is higher than
what it would have received had the reconstitution not taken
place will satisfy the requirements of section 2(b) unless other
valid reasons for the reconstitution exist . . . .
The interpretation of section 2(b) permits rejection of the
reconstitution on the sole basis that the reconstitution enabled
the producer to increase the guarantee and that such yield increase
creates the inference that the reconstitution was done to defeat
the purpose of the crop insurance program or gain a disproportionate
advantage, even if there is no direct evidence of fraudulent intent.
The requestor also considers that a reconstitution that increases
a producer's yield by 20 percent or more meets this threshold.
Final Agency Determination
Yields and guarantees are supposed to reflect the actual production
capacity of the acreage on which the commodity is grown. Obtaining
yields and guarantees for acreage that exceeds its production
capacity violates the principles of insurance and defeats the
purpose of the crop insurance program.
Most programs rely on the actual records of the producer for
the unit so yields and guarantees are based on the actual production
capacity of the acreage
Guarantees for peanuts are generally established for individual
producers using production records maintained by the Farm Service
Agency (FSA) on a county basis. Therefore, the yields established
by a producer in one county may not be representative of the yield
potential of that producer in the adjoining county. Further, units
are based on farm serial numbers, which can permit acreage physically
located in one county to be considered located in another. If
the yields of the counties are different, it is possible for the
producer to manipulate the constitution or reconstitution of the
farm to increase the yield and guarantee. This is what section
2(b) of the Peanut Crop Provisions was intended to prevent.
It is the final agency determination that a reconstitution
that results in a yield for the unit that is higher than the yield
would be if the farm is not reconstituted is prima facie evidence
that it was done in whole or in part to defeat the purpose of
the program or gain a disproportionate advantage. This evidence
would permit the reinsured company to reject or modify the reconstitution
unless FSA required the constitution under its regulations. If
required by FSA, the reinsured company must accept the reconstitution.
The conditions for when reconstitution is required are published
at 7 C.F.R. § 718.201(c). However, 7 C.F.R. § 718.201(d)(2)
states that even reconstitutions that are required under §
718.201(c), are not be approved if it is determined that the primary
purpose of the reconstitution is to circumvent any other chapter
in title 7, including chapter IV crop insurance.
To accept reconstitutions for reasons such as the convenience
of the producer would effectively negate section 2(b) of the Peanut
Crop Provision and expose the program to the very type of abuse
that this section was intended to prevent. Producers bear the
burden of proving that their reconstitution was required under
It is also the final agency determination that there is no
basis for the 20 percent increase in yield threshold stated by
the requestor. If reconstitution is not required and there is
any increase in yield, the reconstitution must be rejected or
modified. Rejection of a reconstitution means that, for the purposes
of crop insurance only, the farm serial numbers, and therefore
units, remain as they were before the reconstitution and production
must be kept accordingly. Modifications could include allowing
the reconstitution but reducing the yield to the level the acreage
would have received had the reconstitution not taken place. The
unit would then have a blended guarantee using the acreage and
yield for each county in which the unit is located.
In accordance with 7 C.F.R. § 400.765(c), this constitutes
a final agency determination and is binding on all participants
in the Federal crop insurance program.
Date of Issue: May 7, 2001