American Growers Insurance Company v. Federal Crop Insurance Corporation, 07-1655.

• Decision Date: 15 July 2008
• Docket Number: No. 07-1749.,No. 07-1655.,07-1655.,07-1749.
• Citation: 532 F.3d 797
• Parties: AMERICAN GROWERS INSURANCE COMPANY, Plaintiff-Appellee/Cross-Appellant, v. 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 Agriculture, Defendants-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

532 F.3d 797

AMERICAN GROWERS INSURANCE COMPANY, Plaintiff-Appellee/Cross-Appellant, v. 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 Agriculture, Defendants-Appellants/Cross-Appellees.

No. 07-1655.

No. 07-1749.

United States Court of Appeals, Eighth Circuit.

Submitted: March 12, 2008.

Filed: July 15, 2008.

Jane Wallace Vanneman, argued, Kimberly E. Arrigo, on the brief, Washington, DC, for appellant.

Bruce B. Green, argued, Philip Wilson, on the brief Council Bluffs, IA, for appellee.

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 $950,025 in damages. Both sides appeal. We reverse.

I.

A.

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 companies.

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 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 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.

B.

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...