Final Agency Determination: FAD-198
Subject: Two requests, dated August 30, 2013, and September 13, 2013, to the Risk Management Agency (RMA) requesting a Final Agency Determination for the 2012 crop year regarding the interpretation of section 27 of the Common Crop Insurance Basic Provisions (Basic Provisions), published at 7 C.F.R. § 457.8. This request is pursuant to 7 C.F.R. § 400, subpart X.
Section 27(a) of Basic Provisions states, in pertinent part:
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
(2) You may be subject to remedial sanctions in accordance with 7 CFR part 400, subpart R.
(b) Even though the policy is void, you will still be required to pay 20 percent of the premium that you would otherwise be required to pay to offset costs incurred by us in the service of this policy. If previously paid, the balance of the premium will be returned.
(c) Voidance of this policy will result in you having to reimburse all indemnities paid or the crop year in which the voidance was effective.
Two interpretations were submitted in this joint FAD request.
First requestor’s interpretation:
The first requestor interprets section 27(a) of the Basic Provisions to mean and the term intentionally to mean a willful or deliberate action, irrespective of evil motive or reliance on erroneous advice, and irrespective of whether the person so-acting intended to cause a specific result.
The first requestor is requesting FCIC’s interpretation of section 27(a) of the Basic Provisions of what the term intentionally means.
Second requestor’s interpretation:
The second requestor believes that under the plain meaning of this standard, not just any material misrepresentation justifies the drastic penalty of voiding the policy—only an intentional misrepresentation qualifies. In addition, for a misrepresentation to be intentional, logic requires that, at the time of the material representation, the “speaker” must (1) know that the representation is false, and (2) intend to make it anyway.
The second requestor states this interpretation is consistent with FCICs previous positions on the topic, with case law interpreting this policy section, and with precepts of fundamental fairness to the policyholder. For example, in 1997, when responding to comments on proposed changes to the crop insurance rules, FCIC interpreted section 27 of the Basic Provisions as follows:
“If the insured has intentionally misrepresented or concealed any material fact, the policy may be voided under section 2 and the insured may be disqualified under section 508(n) of the Act. If the error or omission is inadvertent, no sanctions are available.”
62 FR 65130-01 at 65138 (emphasis added). Similarly, in 2002, FCIC proposed a rule that would deny any indemnity to policyholders that misreported the correct acreage on their acreage reports. However, in response to comments that such a rule was too harsh and made crop insurance unreliable to producers and lenders, FCIC removed the loss of indemnity sanction, and increased tolerances for mistakes. 69 FR 48652-01 at 48654. There is no doubt that the number of covered acres is a material fact. However, the proposed rule was revised to avoid penalizing unknowing mistakes. This approach is consistent with section 27 of the Basic Provisions only if section 27 is limited to intentional misrepresentations that meet the requestor’s proposed interpretation described above.
The second requestor continues, in the same vein, the warnings on FCIC forms provide further proof that section 27 of the Basic Provisions does not punish inadvertent mistakes with the drastic remedy of retroactive voidance of the policy. For example, the Plant Value Inventory Report (PIVR) that policyholders must sign in connection with nursery crop insurance applications includes prominent warnings that over-reporting inventory values will cause higher premiums, a higher deductible, and in case of a loss, may cause indemnities to “be prorated down by an under-report factor.” Warnings such as these would be inconsistent with an interpretation of section 27 of the Basic Provisions which applied to all material misrepresentations. In order to be consistent, section 27 of the Basic Provisions must be interpreted as limited to intentional misrepresentations as described above.
The second requestor states, furthermore, on the closely-related topic of sanctions for false or inaccurate reporting, FCIC has carefully limited sanctions to situations involving intentional misrepresentations. Thus, in 2008, when responding to comments on these provisions, FCIC clarified the following:
“In the definition of “willful and intentional,” FCIC has included the requirement that the person know that the statement was false or inaccurate at the time the statement was made or the person know that the act or omission was not in compliance with a requirement of FCIC at the time the act or omission occurred. Therefore, sanctions will not be imposed for innocent mistakes.”
73 FR 76868-01 at 76874 (emphasis added). Similarly, FCIC later explained:
The definition of “willful and intentional” makes it clear that the person must have knowledge of the falseness or inaccuracy of the information. Unless FCIC can establish the person has such knowledge no sanction under section 515(h) of the Act can be imposed.”
Id. Accordingly, the second requestor’s interpretation of section 27 of the Basic Provisions is consistent with FCIC’s goal of avoiding the punishment of inadvertent mistakes, but penalizing those who know at the time that they are being untruthful. See also 7 CFR 457.8 section 22(a) (providing that policyholders who obtain other crop insurance on their share under the Act are subject to sanctions if they acted intentionally, but not in cases of inadvertent mistakes).
The second requestor states, consistent with FCIC’s prior positions, when reviewing section 27 of the Basic Provisions, the National Appeals Division (NAD), and Federal Courts have agreed with the second requestor’s interpretation. For example, in Great Am. Ins. Co. v. Mills, No. 4:06-cv-01971-RBH, 2008 WL 2250256 (D.S.C. May 29, 2008), a farmer had mistakenly listed himself, rather than his wholly-owned corporation as the insured party. Nonetheless, the Court held that his policy could not be voided under section 27 of the Basic Provisions because, “by its own language [section 27] refers to intentional misrepresentation or concealment, not mere accident or mistake.” Id. At *8 (emphasis added). There is no doubt that the farmer in Mills actually knew (if he had thought about it) that after he decided to incorporate his farming operation, id. at *1, his corporation became the landowner and producer. Nonetheless, the Court held that his representation to the contrary could not justify voiding his policy under section 27 of the Basic Provisions because it was not an intentional misrepresentation.
The second requestor believes, similarly, in both a 2009 NAD appeal and Director Review, the NAD held that section 27 of the Basic Provisions required intentional misrepresentation, and thus could not justify voiding the policy of an insured who believed his representations to be acceptable at the time he made them. Risk Management Agency v. XXXXX, Hearing Officer Determination, Case No. 2009S000180 (hereinafter “RMA-180H”); Risk Management Agency v. XXXXX, Director Review Determination, Case No. 2009S000180 (hereinafter “RMA-180R”). In this case, the RMA relied upon section 27 of the Basic provisions to void a nursery owner’s policy after he suffered a loss. Specifically, RMA maintained that the owner had intentionally misrepresented material facts by grossly over-reporting the value of his plants and incorrectly listing his pot sizes and plant ages. RMA-180H at 1. However, the NAD Hearing Officer reversed, holding that the owner’s prior crop insurance experiences and his Approved Insurance Provider’s (AIP) actions led the owner to believe that his representations were acceptable. Id. At 4-5. Even though the owner’s reports were inaccurate, section 27 did not apply because the owner did not know he was making misrepresentations at the time he made them. Id. Importantly, on Director’s review, the NAD rejected RMA’s estoppel argument. This was not a case where RMA was estopped from asserting anything due to the AIP’s actions. Rather, it was a case where the owner’s past experiences, including the AIP’s actions, led the owner to believe at the time or reporting that he was being truthful. Therefore, there was no intentional misrepresentation that justified voidance under section 27 of the Basic Provisions. RMA-180R at 3.
The second requestor believes their interpretation accords with fundamental precepts of fairness to farmers and other members of the public who rely upon crop insurance to protect their investments. Courts have long recognized the injustice in allowing insurance providers to collect insurance premiums for years from policyholder, only to have AIPs avoid payment based upon ambiguous provisions buried within a lengthy policy—provisions which are only fully explained to the policyholder after a disaster finally strikes. See e.g., Harr v. Allstate Ins. Co., 255 A.2d 208, 217-18 (N.J. 1969). As a result, courts consistently interpret ambiguous terms in insurance policies “against the party who caused the uncertainty to exist (i.e. the insurer) in order to protect the insured party’s reasonable expectation of coverage. Intel Corp. v. Am. Guarantee & Liab. Ins. Co., 51 A.3d 442, 447 (Del. 2012). In the case of the Basic Provisions, no reasonable layperson reading section 27 would interpret it so broadly as to allow FCIC to void their policy based upon a statement that, at the time, the policyholder honestly believed to be true and accurate. Fundamental fairness demands that section 27 of the Basic Provisions be limited to only intentional misrepresentations—situations where the speaker knows at the time he is being untruthful.
Final Agency Determination
FCIC agrees in part with the first requestor’s interpretation. The common meaning of “intentionally or intention” does not require the actor to possess an evil motive, rely on erroneous advice, or achieve the anticipated outcome when he or she plans to act.
Additionally, FCIC agrees in part with the second requestor. As provided in FAD-197 published on RMA’s website on November 26, 2013, the term “intentionally” modifies “concealed and “misrepresentation.” FCIC interpreted the provision in this manner to avoid conflicting provisions that allow inadvertent errors and to recognize that voidance of the policy is an extraordinary measure that should only be taken when wrongdoing can be established. Further, FCIC has previously and continues to interpret “intentional” as the person must (1) know that the representation is false or information has been concealed; and (2) make the representation anyway or does not disclose the information concealed. As stated by the requestor, this is generally the standard accepted by the courts with respect to the interpretation of “intentional” and one that has been applied by FCIC to its policy.
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: November 26, 2013