Arbitration in Federal Crop Insurance AIP-Farmer Disputes

This past year, USDA’s Risk Management Agency (RMA), which administers the Federal crop insurance program on behalf of USDA’s Federal Crop Insurance Corporation (FCIC), quietly issued three new regulatory interpretations with deep implications for the conduct of arbitration between FCIC farmer-customers and companies the sell them crop insurance (Approved Insurance Providers or AIPs).   The impact, for good or bad, is to insert RMA itself more deeply into these private dispute resolutions.

FCIC crop insurance policies, as a standard feature, require insured farmers to submit all disputes with their AIPs to arbitration under rules of the American Arbitration Association (AAA).   Arbitration normally is a fair and efficient way to settle arguments over claims, coverages, and similar issues, and both farmers and AIPs have grown comfortable with it over time.  

RMA is not a party to these private customer-AIP disputes, but often intervenes when it sees a regulatory interest at stake, such as by supplying expert witnesses to present its views in a case. In a 2004 update of its basic policy terms, however, RMA went further and began requiring litigants in any AIP-customer arbitration to obtain a formal RMA ruling whenever there arose a question on interpretation of FCIC rules, policy terms, or procedures. These RMA rulings (called FADs or Final Agency Determinations) would then become binding both on the specific case and system-wide on all program participants. For transparency, these FADs are published on RMA's website at http://www.rma.usda.gov/regs/533/.   (See Basic Provisions, section 20(a).)

To assure its own neutrality in specific cases, RMA has insisted that FADs be limited to legal or policy issues, not questions of fact or application of rules to particular settings.  Failure of the parties to obtain a required FAD, or failure by the arbitrator to abide by it, made any resulting arbitration award subject to nullification.

RMA’s purpose in creating this system was straightforward. It provided RMA, as the government regulator, a tool to control its program and prevent judges or arbitrators from applying crop insurance policy terms differently in different cases, thus avoiding disparate, unequal treatment of farmers or companies.   Federal courts too have come to respect this RMA FAD process and their duty to nullify arbitrator awards for lack of a required FAD.  See, for instance, discussions of the issue in

  • Curtis Davis v. Producers Agricultural Insurance Company (11th Cir. Aug. 6, 2014, No. 13-10648, 2014 WL 3844815), where the Court upheld an arbitration award only soliciting RMA’s opinion that an adequate RMA-issued FAD had already covered the issue, and
  • Garnett v. NAU Country Insurance Company, (Dist. Court, WD Kentucky 2009, Case No. 5:09-CV-00144-R.), where the Court in fact nullified an arbitration award because an earlier relied-on FAD was found to be inadequate.

On April 10, 2015, RMA expanded the process further by issuing three new interpretations (FADs# 230, 231, and 232) making explicit RMA’s power to impose new ruling even after an arbitration award has been issued. The effect was to make settlements or arbitration awards based on rulings in effect at the time subject to nullification.

The April 2015 FADs, among other things, addressed when happens in two instances:

  • When litigants fail to discover the existence of a legal issue – and thus the need to request a FAD - until after the arbitrator had formally ruled and stated the basis of his or her opinion. In this case, is a new FAD needed, and must the arbitrator’s ruling be set aside?
  • When RMA has already issued a binding FAD on a particular point that was in effect at the time of the incident under dispute, but then issued a second FAD on the same point changing their position. In this case, does the second FAD trump the first, forcing earlier decisions to be reversed?

RMA’s answer to all these questions was “yes.” In either case, the arbitration award must be re-opened and potentially nullified and re-written if inconsistent with the newer RMA interpretation.

RMA addressed the first point, on litigants discovering the existence of an issue after-the-fact, in FAD 230, as follows:

“FCIC agrees… that such a dispute may arise after the arbitration award has been rendered. In such case, either of the parties may seek a FAD for the provision at issue. Once the FAD is issued, the arbitration award must be reviewed to determine if it is consistent with the FAD. If it is not consistent, the arbitration award must be nullified if it is determined that the inconsistency materially affected the award. In that case a new award must be issued by the arbitrator applying the issued FAD.” http://www.rma.usda.gov/regs/533/2015/fad-230.html   

It addressed the second point, that of RMA changing its position on a key issue, in FAD 231:

“An FCIC interpretation is not required when FCIC has previously issued a FAD on the same issue….. [But] if FCIC has previously issued a FAD that was materially relied upon in the arbitration proceeding but the FAD was later revised, the arbitration award must be revisited to determine if the revision materially affected the award. If the arbitration award was materially affected by the application of a FAD that is subsequently revised, the arbitration award must be nullified and a new award must be issued by the arbitrator applying the revised FAD.” http://www.rma.usda.gov/regs/533/2015/fad-231.html

As a result of these interpretations, arbitration and/or mediation outcomes may now potentially be nullified because (a) a party failed to request a needed FAD, (b) a new issue emerged from the wording of the arbitrator’s award document, requiring a new after-the-fact FAD, or (c) RMA changed its position on a key issue, requiring reopening of the already-settled case.  

No doubt these new interpretations will add complexity and uncertainly to AIP-farmer arbitrations. And whether RMA’s stated requirements for reopening finalized awards or settlements based on after-the-fact interpretations will withstand legal challenges is unclear.   Tracking how the new interpretations work in practice will be a challenge.  Arbitration awards themselves are rarely published, and the FAD process has few procedures tailored to the arbitration setting to assure transparency among opposing parties.   It also falls outside the normal rule-making process of the Administrative Procedures Act.  As a result, there is no opportunity for public notice or comment on proposed FADs.  RMA itself published a proposed regulation in March 2015 to improve the system, but the rule was never finalized and the five public comments received on it have not been posted on Regulations.gov.  (See http://www.regulations.gov/#!documentDetail;D=FCIC-14-0001-0001)

All this raises the stakes for lawyers in FCIC arbitrations to understand the FAD process. Lawyers must be able to identify at an early point where FADs might be required and the best way to proceed with RMA.  Litigants must learn to apply the evolving FAD system in crop insurance arbitrations as one more tool for the effective representation of their clients.

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