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Final Agency Determination: FAD-175

FAD-175

Final Agency Determination: FAD-175

Subject: A joint request, dated October 9, 2012, was submitted by two parties, requesting a Final Agency Determination for the 2010 crop year. The request is regarding the interpretation of “disposed of” as used in section 12(f) of the Tobacco Crop Insurance Provisions published at 7 C.F.R. 457.136. Each party provided separate interpretations of this policy provision. This request is pursuant to 7 C.F.R. part 400, subpart X.

Background:

Section 12 of the Tobacco Crop Provisions, states in relevant part:

12. Settlement of Claim

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(f) Mature tobacco may be adjusted for quality deficiencies when production has been damaged by insurable causes.

(1) You must contact us before any tobacco is disposed of so we can inspect the tobacco to determine the extent of the damage.

(2) Our inspection will be used to determine whether the average value is reasonable. Based on the amount of damage determined during the inspection, if the average value is:

(i) Reasonable, such average value will be used to determine the quality adjustment in section 12(f)(5);

(ii) Unreasonable, we may adjust the average value used to calculate the quality adjustment in section 12(f)(5).

(3) If you dispose of any production without giving us the opportunity to have the tobacco inspected, you will not receive a quality adjustment for such tobacco, regardless of the average value of the production.

(4) Production to count will only be reduced if the average value for damaged tobacco is less than 75 percent of your tobacco price election. You must provide us with records that are acceptable to us which clearly shows the number of pounds, price per pound, and the quality of such tobacco.

(5) Any reduction in the production to count will be determined by:

(i) Dividing the average value per pound as determined by us in accordance with section 12(f)(2) of these Crop Provisions by your applicable price election; and

(ii) Multiplying this result by the number of pounds of damaged production.

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Item 1 (c) of the Risk Management Agency’s (RMA), Informational Memorandum PM-10-41 “Administering the Tobacco Crop Insurance Program for the 2010 Crop Year” states in part:

“Under section 12(f)(1), the insured MUST contact the Approved Insurance Provider (AIP) before any mature, cured tobacco is disposed of so the AIP can inspect the tobacco to determine the extent of damage. (Note: “Disposed of” means: Transfer of title of the tobacco by sale or transfer by any other means or destruction of the tobacco. . . . .”

Section 3 G (2) of the 2010 Tobacco Loss Adjustment Standards Handbook (LASH) states in part:

Section 3 G:

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(2) In accordance with section 12(f)(1) of the Tobacco Crop Provisions, the insured must contact the AIP before any mature, cured tobacco is disposed1/ of so the AIP can inspect the tobacco to determine the extent of the damage. In accordance with section 12(f)(3) of the Tobacco Crop Provisions, if the insured disposes of any tobacco before the AIP has the opportunity to inspect the tobacco, no quality adjustment for such production is allowed, regardless of the average value of the production. Also, see subsection (4) below.

Disposed of means: Transfer of title of the tobacco by sale or transfer by any other means, or destruction of the harvested production.

First Requestor’s Interpretation

The First Requestor interprets “disposed of”, to mean destroy or to lose location. If the tobacco crop was still viewable (with certainty as to origin) the First Requester contends that an adjustment can still be completed without compromise of the procedure.

The First Requester has found that the Second Requester has quoted the LASH and Informational Memorandums as though they are readily available to insureds. The policy itself is not clear as it relates to what “disposed of” means nor is it defined therein.

Second Requestor’s Interpretation

The Second Requester interprets section 12(f)(1) and (3), read together, to require a producer to contact the AIP and allow the AIP an opportunity to inspect the crop before selling it as a prerequisite for the producer receiving quality adjustment. FCIC has provided a clear definition of “disposed of” as used in those sections in both the Tobacco LASH and PM-10-41, which definition includes “transfer of title… by sale.” Section 12(f) does not allow an AIP to give quality adjustment based on the price or grades assigned to production by the purchaser when the producer has not given the AIP an opportunity to inspect the production.1 Therefore, if a producer does not contact the AIP regarding quality adjustment or give the AIP an opportunity to inspect the tobacco before the producer sells the tobacco, the AIP must reject a claim for quality adjustment.

The Second Requester also asserts that the definition of “disposed of” which FCIC explained in guidance documents comports with the common use of that phrase. The Oxford English Dictionary defines “disposed of” as “get rid of by throwing away or giving or selling to someone else,”2 (emphasis added).

Merriam Webster defines the phrase as “to transfer to the control of another,”3 and the Random House Dictionary provides, “a. to deal with conclusively; settle. b. to get rid of; discard. c. to transfer or give away, as by gift or sale. d. to do away with; destroy.”4 (emphasis added). Even absent FCIC’s definition in the LASH and Informational Memorandum, the common definition of the phrase “dispose of” clearly encompasses the act of transferring by sale.

For example, if a producer sold all of his tobacco production at a tobacco warehouse, where the purchaser assigned a quality grade to the production on October 1, but the producer did not submit a notice of loss or otherwise contact the AIP until October 2, the AIP must reject the claim for quality adjustment pursuant to section 2(f) because the AIP could not inspect the tobacco before the producer “disposed of” it. Even if the sold tobacco remained traceable and available for inspection at the warehouse or at a different site for some amount of time after the sale, the production would still be ineligible for quality adjustment under section 12(f) because the producer had already disposed of it through sale.

Final Agency Determination

The Federal Crop Insurance Corporation (FCIC) disagrees with the first requester’s interpretation that “disposed of” means “to destroy or to lose location.” In the absence of a definition of the word “disposed” in the regulations, the definition of “disposed” is determined from the common usage of the verb “disposed,” from the Oxford Dictionaries2 to mean “[no object] (dispose of) get rid of by throwing away or giving or selling to someone else:” This is also supported by additional dictionary definitions the second requester cited. Therefore, the policy section 12(f) does not allow quality adjustment of tobacco that has transferred title to a buyer even if the production could be viewed with any certainty because section 12(f)(3) clearly states if the tobacco is disposed of without giving the AIP the opportunity to inspect the tobacco no quality adjustment will be allowed for such tobacco, regardless of the value of the tobacco. There is no discretion in this provision because it would significantly impair program integrity to allow the purchaser of the tobacco to determine its grade for the purposes of insurance because an incentive exists to reduce the grade of the tobacco to shift greater cost of the tobacco to the crop insurance program by increasing indemnity payments beyond that which would otherwise be due under the terms of the Federal crop insurance policy. Furthermore, the use of FCIC issued procedures and bulletins in the settlement of a claim is stated in the Preamble of the Common Crop Insurance Policy, Basic Provisions, published at 7 C.F.R. 457.8, which states in part:

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We [AIP] will use the procedures (handbooks, manuals, memoranda and bulletins), as issued by FCIC and published on RMA’s Web site at http://www.rma.usda.gov/ or successor Web site, in the administration of this policy, including the adjustment of any loss or claim submitted hereunder.

Therefore, insureds are on notice that procedures issued by FCIC will be used in connection with the policy and where they can be found. In addition, any time a term is not defined in the policy, its common meaning is used and that is found in any standard dictionary. It is this common meaning that was used in the procedures so insureds could have determined the meaning of “disposed” as it relates to these provisions.

FCIC agrees with the second requester. Sections 12(f)(1) and (3) must be read together. When these two sections are read together, it requires the insured to contact the AIP to allow the AIP an opportunity to inspect the tobacco before selling it, and if the insured fails to do this, no quality adjustment can be allowed on such tobacco. FCIC also agrees in the absence of a definition of a word in the regulations, the definition is determined from the common dictionary usage of the word. As stated above, FCIC provided the common dictionary usage of the word “disposed of” in section 3 G(2) of the 2010 Tobacco LASH, and in item 1(c) of the Informational Memorandum, PM-10-41 for AIPs to use in the settlement of Tobacco claims.

In accordance with 7 C.F.R. 400.765(c), this constitutes the Final Agency Determination and is binding on all participants in the Federal crop insurance program for crop years the above stated provisions are in effect.

Date of Issue: Nov 13, 2012

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1See FCIC’s commentary accompanying the proposed rule which would become the 2010 Tobacco Crop Provisions, referring to the practice of basing quality adjustment on the purchaser’s grades: “This creates a serious program vulnerability because the person who would be grading and valuing the tobacco will be the same person who is purchasing it.” 72 Federal Register 28895, at 28898 (May 23, 2007).
2Oxford Dictionaries, "dispose," http://oxforddictionaries.com/definition/dispose
3Merriam-Webster Online Dictionary, "dispose," http://www.merriam-webster.com/dictionary/dispose
4Random House Unabridged Dictionary, "dispose," http://dictionary.infoplease.com/dispose