Congress Could Disrupt The Relative Calm In Crop Insurance

This article was originally published in the Policyholder Advisor, Volume 25, Issue 1 (January/February 2016)

Farmers and other agribusinesses holding crop insurance policies have long been relatively sheltered from coverage disputes by federal subsidies that cover as much as 70% of farmers' premiums. At present, these valuable subsidies mean that crop insurers stand to gain by keeping policyholders happy, as opposed to strategically denying large claims and risking loss of customers. Based in large part on this dynamic, crop insurance companies generally pay claims more readily than insurance companies selling other types of coverage.

Nonetheless, crop insurance policyholders should not be complacent. Congress could alter the subsidies at any time — and a change in federal subsidies could lead to a significant rise in denied claims.

At present there is significant pressure on Congress, including from the Obama administration, to pare back crop insurance subsidies. If subsidies are reduced, however, crop insurers would face pressure to lower premiums from farmers suddenly faced with a tighter insurance budget. If premiums drop even slightly, the insurance companies may be incentivized to deny more claims to hold their bottom line. As a result, the crop insurance market would grow significantly more competitive.

Thus, while the relationship between farmers and crop insurance companies is largely copacetic at present, it is in the best interests of farmers and other agricultural companies to understand what could happen if reduced subsidies sour that relationship. Many crop insurance companies are large, nationwide entities whose claims handlers are accustomed to strategically denying claims made under other types of coverage. For example, among the 17 federally approved crop insurers (and reinsurers) for 2016 are ACE American Insurance Company and Farmers Mutual, both among the 20 biggest commercial insurance companies in the United States.

Moreover, independent of the subsidies issue, litigation over crop insurance claims is far from unheard-of. In one recent decision, a federal district judge in Iowa rejected a soybean farming venture's allegation that his crop insurer had adjusted a 5,000-acre hail damage claim in violation of his crop policy. Bruhn Farms J.V. v. Fireman's Fund Ins. Co., 2015 U.S. Dist. LEXIS 60320 (N.D. Iowa May 8, 2015). Contrary to the farmer's contention, the court held that the insurance company followed the...