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American Growers Ins. Co. v. Fed. Crop Ins. Corp.: AGRICULTURE | CROP INSURANCE - indemnification for when insurer sued by producer, not direct claims regarding premium mis-setting

United States Court of Appeals
No. 07-1655
No. 07-1749
American Growers Insurance Company, *
Plaintiff - Appellee/ *
Cross-Appellant, *
* Appeals from the United States
v. * District Court for the
* Southern District of Iowa.
Federal Crop Insurance Corporation, *
A corporation within the United States *
Department of Agriculture; Risk *
Management Agency, an agency of and *
within the United States Department of *
Agriculture, *
Defendants - Appellants/ *
Cross-Appellees. *
Submitted: March 12, 2008
Filed: July 15, 2008
Before MURPHY, ARNOLD, and BENTON, Circuit Judges.
MURPHY, Circuit Judge.
This action was brought by federal crop insurance provider American Growers
Insurance Company (Insurer), alleging that the Federal Crop Insurance Corporation
(FCIC) erred under 7 U.S.C. 1508(j)(3) by adding prevented planting coverage to
basic federal crop insurance policies without increasing the premium rate that the
insurance company could charge. Both sides filed motions for summary judgment.
The district court granted summary judgment in favor of the FCIC for crop year 1996
and in favor of Insurer for crop year 1997, awarding it 0,025 in damages. Both
sides appeal. We reverse.
In 1938 Congress passed The Federal Crop Insurance Act, 7 U.S.C. 1501 et
seq. The Act created the federal crop insurance program, which is administered and
regulated by the FCIC. The United States Department of Agriculture's Risk
Management Agency was created by Congress in 1996 to operate and manage the
FCIC; the two entities are referred to here jointly as the FCIC. The multiple peril crop
insurance (MPCI) policies offered under the Act cover numerous risks to crops
including fire, flood, drought, and other natural disasters. The FCIC directly provided
crop insurance policies to producers until 1980 when the Act was amended. The
FCIC then began to contract with approved private insurance companies to offer the
policies to producers. 7 U.S.C. 1507(c). Insurer is one of the approved insurance
The Act, and related regulations issued by the Secretary of Agriculture in 7
C.F.R. Part IV, give the FCIC significant control over all aspects of the federal crop
insurance program. One way in which it exerts this control is by executing a
cooperative financial assistance agreement called a standard reinsurance agreement
(SRA) with each approved insurance company. The SRA authorizes the insurer to sell
and service federal crop insurance policies and obligates the FCIC to reinsure the
policies, but only if they are "written on terms, including premium rates, approved by
[the FCIC]." 7 C.F.R. 400.166(a) (emphasis added). The FCIC and Insurer
1A crop year begins on July 1 and ends on June 30; thus crop year 1996 began
on July 1, 1995 and ended on June 30, 1996.
executed an SRA for the 1996 crop year1 and renewed it for all crop years at issue in
these appeals. Pursuant to the terms in Section III of the SRA, the FCIC subsidizes
the premiums paid to Insurer by producers, and under Section IV it compensates
Insurer for administrative and operating expenses, calculated as a percentage of the
premiums charged to producers. Insurer profits mainly from these administrative and
operating expense reimbursements, as well as from underwriting gains when
premiums exceed claims paid.
The FCIC develops the premium rates which insurers may charge on MPCI
policies. Rates are developed for each crop within a geographic area, usually a
county. The Act requires that the FCIC set premium rates at a level which it
determines to be "actuarially sufficient" to attain a given ratio of anticipated loss
claims to the premiums expected to be collected for the entire crop insurance program
each year. 7 U.S.C. 1508(d)(1). The FCIC is also required to "take such actions as
are necessary to improve the actuarial soundness of federal multiple peril crop
insurance." 1506(o).
The ratemaking process is complex, but it starts with the calculation of the
expected crop loss ratio, by crop and by county. That ratio represents the amount of
loss claims the FCIC predicts insurers will have to pay relative to their total potential
liability. To calculate this ratio, FCIC actuaries look at historical annual crop loss data
from each county. For each year of available data, total claims paid are divided by the
total potential liability to determine the historical annual loss cost ratio for each crop
in a county. For any year in which a crop was severely affected and loss claims in the
county were unusually high, the ratio is capped so as to minimize the impact of
unusual events on the overall expected ratio for that county (the "state excess"
described below). The expected loss cost ratio for a county is determined by
2Some of Insurer's original claims related to additional prevented planting
coverage. With such coverage a producer who is prevented from planting receives
from its insurer a lower rate of compensation than under basic prevented planting
coverage, but is allowed to plant a different crop in the same field for that same
growing season. Insurer appeals only issues related to basic prevented planting
averaging these adjusted annual loss cost ratios, and factoring in the average loss cost
ratios of the surrounding counties.
The expected loss cost ratio or loss cost rate is the major component of the
overall MPCI premium rate, but there are several others. Another component allows
for a reasonable reserve in the event of unusually high loss claims, calculated by
dividing the expected loss cost rate by a factor less than 1.0. Another is the state
excess premium rate, which represents the statewide aggregate of all historically
aberrant loss amounts distributed back to the counties to spread the impact of aberrant
losses. Yet another is the basic prevented planting premium rate at issue here. While
typical MPCI coverage applies to a crop which is planted but then destroyed by a
natural disaster, basic prevented planting coverage applies when a producer is
prevented from planting a crop by the end of the traditional planting period because
of a natural disaster such as flooding. The producer is reimbursed for a percentage of
the estimated crop yield value, but may not plant another crop in that field during the
same growing season.2
Prevented planting coverage was an optional coverage which producers could
purchase in addition to an MPCI policy until the 1994 crop year, when the FCIC
added it to every MPCI policy. Unlike expected loss cost ratios which are developed
at a county level, prevented planting rates are developed for two or three major
regions of the country, depending on the crop. Two memoranda authored by an FCIC
actuary show that in developing the prevented planting premium rates for the 1994
crop year, the FCIC considered data regarding prior prevented planting claims and
expectations for rainfall and relative humidity. For regions of the country where the
likelihood of natural disasters was high, the prevented planting premium rate was set
at 0.2 or 0.4 percent. In the arid Western region covering most states west of the
Mississippi, however, the FCIC assigned a 0.0 percent prevented planting premium
rate for the 1994 crop year. As a result, insurers issuing MPCI policies in the Western
region for 1994 were providing prevented planting coverage, but the overall premium
rate charged to producers was the same as if prevented planting coverage were not
included. The FCIC kept the prevented planting premium rate for the Western region
at 0.0 percent for crop year 1995.
During the spring of 1995 parts of several states in the Western region
experienced excessive rain and flooding which prevented producers from planting
insured crops by the final spring planting date. Data regarding claims for losses from
this flooding were not available to the FCIC at the time it set premium rates for crop
year 1996, and the FCIC kept the prevented planting premium rate at 0.0 percent.
The 1995 flood data was available before the 1997 premium rates were set, but
in April 1996 the FCIC decided to limit its 1997 premium rate reviews to the most
serious problem areas. It decided to direct most of its resources that year toward
reengineering its entire ratemaking process. That included improving the flow of
information between offices, increasing the accuracy of data utilized to make rates,
and reviewing certain of its ratemaking methodologies.
The prevented planting premium rates were deemed not to be a problem area
and therefore remained at 0.0 percent for crop year 1997. In 1998 the FCIC increased
the prevented planting premium rate for the Western region to 0.2 percent. The FCIC
said that this increase was based in part on quantitative historical information and also
on some qualitative changes in the coverage.
3In 2007 the USDA issued a final rule amending the regulations to reflect the
legal termination of the Agriculture Board of Contract Appeals and the creation of the
Civilian Board of Contract Appeals. Although the rule had no effect on this case, it
consolidated eight civilian boards of contract appeals into a single entity which now
has jurisdiction over administrative appeals arising under SRAs. See 72 Fed. Reg.
31437-01, 31437 (June 7, 2007).
Congress has waived sovereign immunity for suits against the FCIC under 7
U.S.C. 1506(d), which gives district courts original jurisdiction over actions
"brought by or against [the FCIC] subject to 7 U.S.C. 6912(e), a mandatory but
nonjurisdictional exhaustion requirement under which an insurer must exhaust all
administrative appeal procedures required by law or regulation before bringing a
district court action against the FCIC. See Ace Prop. & Cas. Ins. Co. v. FCIC, 440
F.3d 992, 999-1000 (8th Cir. 2006); Munsell v. Dep't of Ag., 509 F.3d 572, 581 (D.C.
Cir. 2007); McBride Cotton & Cattle Corp. v. Veneman, 290 F.3d 973, 980 (9th Cir.
2002); but see Bastek v. FCIC, 145 F.3d 90, 94-95 (2d Cir. 1998) ( 6912(e) is
mandatory jurisdictional exhaustion requirement).
One instance in which an insurer is required to exhaust administrative appeal
procedures is when it is claiming that the FCIC has not acted in accord with the
provisions of its SRA. In those circumstances the insurer must first seek an
administrative determination from the FCIC. 7 C.F.R. 400.169(a). It may then
appeal an adverse ruling by the FCIC to the United States Department of Agriculture
(USDA) Board of Contract Appeals (Board), which has jurisdiction to review
determinations by the FCIC. 7 C.F.R. 400.169(d), 24.4(b).3 The Board's decision
is the final administrative action, 7 C.F.R. 24.4.(b), which may be reviewed by the
district court if brought within six years of the final agency action, including any
decision on a motion for reconsideration, 5 U.S.C. 704 (right to judicial review of
final agency action); 28 U.S.C. 2401(a) (six year limitations period applies where
no other period enumerated in statute).
On June 10, 1998, Insurer submitted a claim to the FCIC seeking "indemnity
payments for fiscal year 1996. . .incurred in connection with 1996 prevented planting
changes." It maintained that the FCIC erred when it set the 1996 prevented planting
premium rate at 0.0 percent for the Western region and that this amounted to a
material breach of the SRA. The FCIC denied the claim, and Insurer appealed to the
Board. Insurer argued to the Board that the FCIC had breached the 1996 SRA by
"failing to adjust premium rates to reflect" the 1996 prevented planting changes, by
"failing to set actuarially sound premium [prevented planting] rates," and by
instituting the prevented planting changes for 1996 without providing Insurer with
"adequate compensation for assuming the increased risks associated with said
Following discovery, the Board panel on June 15, 2000 granted summary
judgment in favor of the FCIC in a divided decision. Although two administrative law
judges concurred in findings of fact and the judgment, they each wrote separately; the
third dissented. The majority agreed on two main points: 1) that Insurer had not
proven that Congress waived FCIC's sovereign immunity to permit a challenge to the
premium rates because 7 U.S.C. 1508(d)(1) "vests [the FCIC] with the discretion to
set rates and allocate risks" at a level that it determines to be actuarially sufficient to
attain certain expected loss ratios, and 2) that even if the statute allowed Insurer to
challenge the FCIC's ratesetting decisions, it did not require the FCIC "to establish
actuarially sufficient premium rates for a particular crop, county, or incidence (such
as prevented planting)." The majority concluded further that the statute does require
the FCIC to determine that the rates are actuarially sufficient to address "all the plans
of insurance" when analyzed in the aggregate and that Insurer had not presented any
evidence that the FCIC did not meet that requirement. This was the final agency
determination under 7 C.F.R. 24.4(b) regarding the 1996 crop year. On September
7, 2000 the panel denied Insurer's motion for reconsideration of that decision.
Insurer filed this action against the FCIC in federal district court on November
27, 2001, seeking damages for breach of contract and statutory violations. It amended
the complaint twice over the following 18 months until it included five counts. In
Count I, Insurer claimed that the FCIC's ratesetting for crop year 1996 breached the
SRA. The district court dismissed that count because it asserted breach of contract for
the 1996 crop year rather than seeking review of the decision already made on that
claim by the Board. The court also determined that Count III, a constitutional takings
claim, was premised on the same breach of contract claim pled in Count I and
dismissed it as well. Insurer has not appealed either dismissal.
In Counts II and V, Insurer sought indemnification from the FCIC under 7
U.S.C. 1508(j)(3). That statute requires the FCIC to provide "approved insurance
providers with indemnification, including costs and reasonable attorney fees incurred.
. .due to errors or omissions on the part of [the FCIC]." Insurer alleged that certain
decisions of the FCIC amounted to a compensable error or omission under
1508(j)(3) (assignment of a premium rate of 0.0 percent for 1996 and 1997, and 0.2
percent beginning in 1998 for the Western region prevented planting coverage). In
the event that original jurisdiction was found to be lacking over the 1508(j)(3)
claims, Count IV requested review of the Board's decision regarding crop year 1996.
The parties filed cross motions for summary judgment on Counts II and V. The
FCIC argued that to the extent that these claims arose from the same nucleus of
operative facts as Insurers appeal to the Board about the 1996 crop year, they were
barred by res judicata. As to the 1997 2001 claims, the FCIC said Insurer had failed
to exhaust its administrative remedies. The FCIC argued in the alternative that the
district court should grant summary judgment in its favor because 1508(j)(3) does
not provide for direct claims against it by an insurer but rather permits insurer to seek
indemnification from the FCIC for a loss claim made against them by a producer.
The district court acknowledged that for 1996 "the claims brought before the
[Board] and the present action both originate from defendants' conduct in revising its
prevented planting coverage policies." The court concluded, however, that neither res
judicata nor exhaustion requirements applied because the 1508(j)(3) claims fell
outside of the Board's jurisdiction, which it found was limited to the Contract Disputes
Act, 41 U.S.C. 601 et seq. Even if the Board had jurisdiction to hear the claims,
the court decided any resort to the Board would be futile because it had no authority
to award the money damages requested by Insurer. Finally, the district court pointed
out that 1508(j)(3) "contains no language limiting its application only to
indemnification for claims brought by insureds" and concluded that it covered
Insurer's claims regarding the FCIC's ratesetting decisions. Am. Growers v. FCIC,
2003 WL 1233073 **2-3 (March 3, 2003). Because it found that it had original
jurisdiction to review Insurer's 1508(j)(3) claims, the district court dismissed
Insurer's alternative request in Count IV for judicial review of the Board's decision
regarding the 1996 crop year. Insurer has not appealed that dismissal.
In addressing the merits of Insurer's claims under 7 U.S.C. 1508(j)(3) in
Counts II and V, the district court limited its review to the administrative record
developed before the Board. Employing an arbitrary and capricious standard, it
granted summary judgment in favor of the FCIC for crop year 1996. Because data
regarding claims for losses from the 1995 flooding had not been available when the
FCIC set the 1996 rates, the court concluded that the agency's decision to keep the
prevented planting premium load at 0.0 percent for 1996 did not violate 1508(j)(3).
The court also granted summary judgment in favor of the FCIC for crop years 1998
through 2001 because the FCIC had increased the prevented planting premium to 0.2
percent for those crop years and had not acted arbitrarily or capriciously.
With regard to the 1997 crop year, the district court found that the FCIC knew
at the time it was setting premiums that Insurer had been paying prevented planting
claims during the 1995 and 1996 crop years. The 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)." It
granted summary judgment in favor of Insurer for the 1997 crop year and eventually
awarded it damages of 0,025. The damages were based on the amount of
premiums and administrative and operating expense reimbursements Insurer would
have been entitled to if the FCIC had set the 1997 prevented planting premium load
at 0.2 percent, as it did in 1998.
The FCIC argues that the district court erred by 1) concluding that Insurer's
claims in Counts II and V fell within the "indemnification" provision of 1508(j)(3),
2) concluding that it had original jurisdiction over Insurer's 1508(j)(3) claims, 3)
concluding if it had jurisdiction, that the FCIC was wrong to set the premium load for
prevented planting coverage in 1997 at 0.0 percent, and 4) awarding damages for the
1997 crop year based on the premium rates ultimately adopted for 1998.
Insurer cross appeals, claiming that the district court erred regarding Counts II
and V by 1) limiting its review to the administrative record and employing an arbitrary
and capricious standard of review, 2) failing to indemnify it for every dollar paid out
on prevented planting claims as well as administrative and operating expense
reimbursements which should have been received from the FCIC, and 3) concluding
that the FCIC had not violated 1508(j)(3) in establishing prevented planting rates for
the 1996 crop year.
On its appeal the FCIC argues that the district court erred in concluding that the
"indemnification" provision in 1508(j)(3) applies to the claims Insurer attempts to
raise in Counts II and V. It contends that indemnification under this statute is limited
to situations in which the FCIC is required to indemnify insurers for successful claims
brought against them by producers. Insurer responds that the statutory language is
broad enough to permit direct claims by insurers for indemnification for any type of
errors by the FCIC. We review questions of statutory interpretation de novo. Wingert
& Assoc., Inc. v. Paramount Apparel Int'l, Inc., 458 F.3d 740, 743 (8th Cir. 2006).
The "long established plain language rule of statutory interpretation" requires
"examining the text of the statute as a whole by considering its context, object, and
policy." Harmon Indus., Inc. v. Browner, 191 F.3d 894, 899 (8th Cir. 1999) (internal
citations and quotations omitted).
Section 1508(j) is titled "Claims for losses," and its provisions outline the
FCIC's role in adjusting and paying producers' claims for losses and their options
when a claim for loss is denied:
(1) In generalUnder rules prescribed by the [FCIC], [FCIC] may
provide for adjustment and payment of claims for losses. The rules
prescribed by the [FCIC] shall establish standards to ensure that all
claims for losses are adjusted, to the extent practicable, in a uniform and
timely manner.
(2) Denial of claims
(A) In generalSubject to paragraph (B), if a claim for indemnity
is denied by the [FCIC] or an approved provider, an action on the
claim may be brought against the [FCIC]. . . .
(B) Statute of limitationsA suit on the claim may be brought not
later than 1 year after the date on which final notice of denial of
the claim is provided to the claimant.
(3) IndemnificationThe [FCIC] shall provide approved insurance
providers with indemnification, including costs and reasonable
attorney fees incurred by the approved insurance provider, due to
errors or omissions on the part of the [FCIC].
(Emphasis added.) According to the FCIC, a proper suit might be brought under this
section by an insurer seeking indemnity from the FCIC after being sued by a producer
for a mistaken statement in an agency bulletin about insurance coverage.
The parties apparently agreed with this interpretation when they amended their
SRA in 1995 to include an agreement mirroring the language of 1508(j)(3), stating
that "[the FCIC] will only provide indemnification, as authorized by the Act, including
costs and reasonable attorney fees incurred by [Insurer], that result solely from the
errors or omissions on the part of [the FCIC]," and only if Insurer has notified the
agency of the request and explained why indemnification would be in the best
interests of the agency, retained mutually acceptable legal counsel, presented legal
arguments on issues suggested by the agency, and the agency has agreed in writing
to be joined as a party. These provisions indicate that FCIC and Insurer 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, presumably a
Other courts have concluded that when read within its context, subsection (j)(3)
is limited to situations in which an insurer is sued by a producer on a claim for loss.
See Williams Farms of Homestead, Inc. v. Rain & Hail Ins. Servs., Inc., 121 F.3d 630,
635 (11th Cir. 1997) ( 1508(j)(3) "presume[s] an action against private insurance
companies"); Bullard v. Southwest Crop Ins. Agency, Inc., 984 F. Supp. 531, 536 n.3
(E.D. Tex. 1997) (" 1508(j)(3) presumes the existence of state law claims by
requiring the [FCIC] to provide indemnification to approved insurance providers").
An extensive search through the history of the Act has produced only one
instance in which language like that in 1508(j)(3) was discussed during the
legislative process. Prior to enactment of the Federal Crop Insurance Reform Act of
1994 which included 1508, the chairman of the American Association of Crop
Insurers testified to a House subcommittee that amendments were needed to improve
the FCIC's compliance program because its auditors at that time were pursuing loss
4Even if 1508(j)(3) were as broad as Insurer suggests, there would be an issue
whether FCIC's decision to assign a 0.0 percent premium rate for prevented planting
coverage for the Western region in the 1996 and 1997 crop years was an actionable
"error or omission." Other provisions give the FCIC wide discretion in its ratesetting
decisions. See 7 U.S.C. 1508(k)(2) (FCIC determines whether rates are consistent
with sound reinsurance principles); 1508(a) (FCIC determines whether it has
sufficient actuarial data to offer prevented planting coverage); 1508(d)(1) (FCIC
determines whether overall MPCI premiums are actuarially sufficient to attain an
expected loss ratio of not greater than 1.10 across all plans of insurance). See Am.
Growers Ins. Co. v. FCIC, AGBCA No. 98-200-F at 11, 24-25 (June 15, 2000).
claims which were five to ten years old, and private insurers were receiving "almost
no support from [the FCIC]" to defend against questionable or unfounded claims for
losses made by producers. To address these problems he proposed several
amendments, including a requirement that the FCIC provide "indemnification for
errors and omissions on the part of the government." Testimony of John H. Joyce,
Chairman on behalf of the American Association of Crop Insurers, Before the House
Agriculture Subcommittee on Environment, Credit and Rural Development and House
Agriculture Subcommittee on Specialty Crops and Natural Resources, 1994 WL
266205 (June 9, 1994). This testimony seeking changes in the statute supports the
FCIC's argument that the purpose for which Congress enacted 1508(j)(3) was to
permit indemnification for insurers on claims made against them by producers arising
from errors or omissions of the FCIC.
We conclude that the statutory language and context of 1508(j)(3), the
legislative history, and the parties' indemnification amendment to the 1995 SRA
provide persuasive evidence that the statute's indemnification requirement was
intended to apply only where an insurer has been sued by a producer to recover on a
claim for loss. We conclude therefore that 1508(j)(3) does not provide a cause of
action for the claims Insurer attempted to bring in Counts II and V and that these
claims should have been dismissed by the district court.4 Because of this decision we
need not reach other arguments raised by the parties.
Accordingly, we reverse the judgment of the district court based on 1508(j)(3)
(in favor of the FCIC for crop years 1996, 1998 2001 and in favor of Insurer for
crop year 1997) and remand Counts II and V for dismissal for failure to state a claim
upon which relief can be granted.


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