For Drought-Hit Farmers, USDA’s Federal Crop Insurance Can Help, But Only If You Understand the Rules

The severe drought that had plagued the American Southwest over the past three years - the worst in modern memory - has taken a toll on many local businesses, taxpayers, and homeowners, but among its worst casualties have been American farm producers.

USDA’s Federal crop insurance program, run by the Federal Crop Insurance Corporation (FCIC), was created by Congress during the 1930s dust bowl to help farmers in exactly this situation.  FCIC crop insurance pays farmers indemnities for drought-related losses in many forms, from direct crop damage to failure of irrigation systems to prevented planting, so long as the damage actually stems directly from the inadequate rainfall.

But FCIC coverage has limits, and it’s vital for farmers to know them in advance.  For instance, farmers using irrigation systems can qualify for better coverage than those who do not.  Irrigated farmers benefit from higher yields, and thus higher insurance yield guarantees based on their actual production history (APH).   Even here, though, there are limits.  FCIC rules require that, for a farmer to claim an irrigated “practice,” he must be able to prove a “reasonable expectation” of adequate irrigation water at the time he plants the crop.  If not, coverage can be denied, even if the problem is not discovered until after the fact.

Usually, this rule works smoothly.  It was designed to prevent farmers from planting a crop when they knew that their irrigation system would likely be turned off during the coming year – a situation that exists today in many Southwest states.  Most irrigation systems are fed by waters from melting snowpack or state-regulated aqueducts, so farmers can have plenty of advance notice if the system is likely to fail.

This is not always the case, though.  In Southwest Oklahoma, for instance, over 200 cotton farmers depend on annual irrigation water from Lake Altus, a lake fed by rainfall that historically comes during the growing season – not beforehand.  As a result, applying the rule to them can create confusion.  On one hand, these growers have 68 years of detailed historical records showing that annual post-planting rainfalls are consistent and reliable.  But, on the other, the technical FCIC rule itself appears to require virtual certainly.  It says: “If you know or had reason to know that your water may be reduced before coverage begins, no reasonable expectation exists.”

Can any farmer in this situation actually meet this test, regardless of how reliable his irrigation has been historically?  Can he flatly say at the time he plants a crop that there is no hypothetical “reason to know” that his irrigation water conceivably “may be reduced” at some point in the future?  No one can predict the weather with certainty.  This is why we have insurance.

As a result, in 2013, when these 200 cotton growers in Southwest Oklahoma suffered drought losses and filed claims with the four insurance companies that service their region for FCIC,  they were greeted with a range of responses.   Only two of the companies (those with the smallest number of policies) paid relatively quickly.  The company with the lion’s share of policies declined to pay at all, and the final company paid several months after the loss, and then only with a caveat that the indemnities might need to be returned.  (We represented the growers whose policies had been denied.)

Ultimately, FCIC took the view that each individual insurance company was responsible for determining for itself whether “reasonable expectation” of rainfall existed, and stated that it would support each company in its decision.  This allowed for claims to be settled, but the underlying issues remain open for 2014.

RMA has already indicated plans to clarify the “reasonable expectation” rule, and we strongly encourage it to do so.  But as drought continues to worsen in the Southwest through 2014, the principal duty is on farmers to understand the rules and follow them.

For questions about FCIC drought coverage, or crop insurance generally, please feel free to contact us here at OFW Law.

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