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Published March 05, 2012, 10:12 AM

David versus Goliath

COGSWELL, N.D. — Some farmers in southeast North Dakota were shocked in 2009 when Rural Community Insurance Services hit them with a surprise — denying prevent-plant insurance indemnities on some of their acres.

By: Mikkel Pates, Agweek

COGSWELL, N.D. — Some farmers in southeast North Dakota were shocked in 2009 when Rural Community Insurance Services hit them with a surprise — denying prevent-plant insurance indemnities on some of their acres.

The company’s rationale was that some of the acres hadn’t been successfully planted in their entirety in the past four years. It was a case of simple math. For example, if no more than 120 acres had been planted in a 160-acre parcel in the past four years, 40 acres could be determined unavailable for planting in normal weather, and could not be covered by prevent-plant insurance in 2009.

Farmers like Paul Mathews and Todd Stein of Cogswell, N.D., disagreed.

After failing in appeals to the company, a half-dozen farmers banded together and hired a law firm to help them discover their rights. They challenged RCIS in separate, formal arbitrations, resulting in compensation of more than $400,000. The claims among the six ranged from $30,000 to $110,000.

Their policies involved three separate selling agencies, including Ag Country Farm Credit Services at Lisbon, N.D., Moen Crop Insurance Agency, Inc., of LaMoure, N.D., and Sargent County Insurance offered through the Sargent County Bank of Forman, N.D.

Mathews and Stein wonder if they’re just the tip of the iceberg when considering how many dollars the RCIS policy change may have cost their community in 2009. They think the new “worksheet” policy that was wrong in 2009 was probably wrong in 2010 and 2011. It could have affected payments involving hundreds of farmers in a four-county area.

“I can think that $3 million to $4 million were taken out of my community,” Mathews says. “I was on the school board, and at that time I was trying to encourage my community to build an elementary school. I was thinking the losses this community took with RCIS — all by themselves — would have built that school.”

Unilateral deviation

Mathews grew up at Cogswell, in central Sargent County, got his bachelor’s degree in accounting at the University of North Dakota in 1978 and worked for four years as a certified public accountant in Fargo, N.D., before going back home to farm. His wife, Tammy, is from Fargo, and had a career in banking before they were married. They have one teenage son.

Paul and Tammy started farming full time in 1982. Today, they raise corn and soybeans on 1,950 acres and have been implementing no-till since 1989. In addition to farming, Paul works seasonally as a tax accountant.

It’s no news that farmers in the region have been battling wet conditions for several years. The 2009 crop year was especially bad in southeast North Dakota, and prevent-plant insurance was heavily used.

According to documents connected to the case, Mathews signed up for a Revenue Assurance Insurance Policy before March 15, 2008 for the 2009 crop year. He bought the policy from Deborah Moen, president of Moen Crop Insurance Inc., at Lamoure, N.D. He’d bought RCIS insurance through the agency since 2000 and never had a coverage dispute. The 2009 policy allows a “prevented planting” claim provision. When he signed up in 2008, Moen told him there were “no changes related to prevented planting” from previous years, he says. RCIS, based in Anoka, Minn., is a wholly owned subsidiary of Wells Fargo Bank. It does business in all 50 states and has more than 5,000 agents.

Heavy rains fell in the 2008 crop year that delayed harvest, followed by heavy winter snows. The spring of 2009 was excessively wet. On June 15, 2009, Mathews filed a prevent-plant claim on nearly 527 acres.

“I think Gerry Bosse, my brother-in-law, was first to call me in 2009 and say, ‘Have you seen your crop adjuster yet?’” Bosse’s agent had told him RCIS had changed its adjustment methods, denying coverage on some acres that it had routinely covered. If a parcel hadn’t been completely seeded in one of the past four years, there would be an adjustment. Mathews contacted Scott Stofferahn, a state staff director for U.S. Sen. Kent Conrad, D-N.D. Stofferahn, who is a Cogswell native and an ag policy specialist, called Risk Management Agency and RCIS to find out why different companies adjusted things differently, but Stofferahn determined there was little the Senate office could do.

On Sept. 9, 2009, Mathews had a bad feeling when RCIS adjuster Bruce Altman and his supervisor, Tom Becker came to his farm.

Becker showed Mathews a new “worksheet” calculation, in which 305 acres were removed from his claim. Mathews says they told him RCIS had now “deviated” from its previous way of accepting acres as insurable. Starting in 2009, RCIS would pay on a simple equation: the highest number of acres planted in any of the previous four years (2008, the driest spring among them), minus the number planted in 2009.

On Mathews’ farm, the 305 unpaid acres would be roughly 7$180 an acre, or a total of $55,000, plus interest. When Mathews balked at the methodology, he says Becker implied that it could be worse.

“Maybe we did it wrong in the past,” Mathews remembers Becker saying. The implication was that maybe the figures should be recalculated

for those earlier years. “You start to wonder if you’re going to put your family through the turmoil of possibly refunding money that you’ve already committed to other things,” he says.

When Becker left the Mathews farm, Altman remained. Mathews says the adjuster strongly urged him to sign off on the settlement.

Sign here, please

“I asked him how they could change the method of how they apply their rules, mid-stream,” Mathews recalls. “I told him you should have told us before we signed for the policy, so we’d have an opportunity to go to different companies or risk planting them after the deadline. By the end of August, your alternatives were exhausted.”

Altman offered Mathews the opportunity to turn in a “contro” (short for controversial) claim, which is an appeal to the company. In early December 2009, Mathews received an answer from RCIS, denying it.

Failing that, Mathews then asked the North Dakota Mediation Service, a program with the North Dakota Department of Agriculture, if it would help settle the dispute. Mediation costs little for the farmer, but isn’t available if one party denies it. On Dec. 7, 2009, Angie Carr an RCIS quality assurance analyst, in Sioux Falls, S.D., denied the mediation option.

Her letter also referred to “arbitration.” Mathews says he came to know of some 20 farmers who thought RCIS was wrong and would pursue their rights in arbitration.

“Four of us put our heads together and thought, if we were out $15,000 to $20,000 (in legal fees), it was to the point that we’d rather give money to attorneys to have the satisfaction that we were right.” Others in various partnerships and entities included Bosse, Joel Anderson of Forman; Ed Erickson, Jr., of Milnor, and Bernie Vculek of Oakes, N.D.

Cold calculation?

Besides objecting to what RCIS attempted to do, Mathews had problems with how they were doing it. For example, on one of Mathews’ quarters of land, the adjuster said that for the past four years Mathews had claimed 40 acres prevent-plant because it was wet. There was no attempt to identify which of those acres were wet, Mathews says. There was no indication that the acres had perennial grasses or cattails that could indicate they were permanently unplantable.

“Our low grounds, if you want to call them that, would shrink and grow,” Mathews says. “It would be different depending on if you were following corn or soybeans. RCIS was saying 40 acres were deemed wet under normal weather conditions, and only available for planting under abnormally dry conditions.”

Mathews contends that wet acres in a field are “mobile” — moving from various points in a field in a given year. “Maybe, out of 40 acres, 10 or 15 might be the same” as previous years, Mathews says. The farmers in these cases weren’t warned to make GPS maps of these spots or try to establish exactly which acres were unplantable or unharvestable in any of the relevant four years.

“Farming has the technology to record these acres every year, by GPS, but we weren’t told to save this information,” Mathews says. RCIS didn’t identify the particular acres that were unplanted. “The obligation is back on us to prove it,” Mathews says.

He thinks some farmers were misinformed or allowed to worry that if they joined Mathews in challenging RCIS determinations that the company may withhold all of their payments for 2009 — even nondisputed payments — until disputed payments were settled. That turned out to be false, but possibly discouraged some producers who felt they had losses.

“A lot of the farmers couldn’t weather a two-year wait on the undisputed amount,” Mathews says.

Arbitration court

In January 2010, the six farmers, acting as a group, contacted what was then the Sarah Vogel Law office in Bismarck, N.D., now called Baumstarck Braaten P.C. Lawyers involved in the case included Beth Baumstarck, Derrick Braaten and Vogel.

In December 2010, the six individuals filed an arbitration case against RCIS. This process isn’t a court of law, but it seems like it, Mathews says. Cases are heard by judges or attorneys who are members of the American Arbitration Board. Certain ones on the list said they have had experience with crop insurance issues.

After months of discovery, the arbitration hearing was held from Aug. 30 to Sept. 1 in Bismarck. Individuals from both sides were sworn in under oath. RCIS was represented by Daniel N. Rosenstein of Rockville, Md. Arbitrator George A. Beck, a retired administrative law judge from the Minneapolis area, warned participants about perjury.

“This becomes like a lawsuit. It’s important to note that this wasn’t a class-action case,” Mathews says. The crop insurance contracts that the farmers sign specifically require that mediation and arbitration are their only recourses to resolve a dispute.

“All of the legal costs are borne by you, up-front,” Mathews says. (Stein says his claim was for $42,000 and his share of the legal fees was nearly $17,000.)

For his case, Mathews testified he’d done residue management in the fall of 2008. He sprayed glyphosate and used a disk on areas where he’d not been able to plant the prior year. He was planning to plant it, he says.

An unusual spring

The spring of 2009 was cool and wet, with record flooding in southeast North Dakota. The final plant date for corn in Sargent County was May 31 and June 10 for soybeans. The policy allowed another 25 days in a “late planting period.” Farmers can (but don’t have to) plant during this period. They pay the same premium but absorb a 1 percent reduction in their revenue guarantee for every day planting is delayed during that period.

Mathews testified he has a long-standing policy not to plant during this “late period” out of concern that he’d face an early freeze. Besides, crops planted after that date have a reduced yield potential, which can affect the “actual production history” (APH) for the next 10 years. This can affect crop insurance coverage in future years.

John J. Mewes, an associate professor in atmospheric sciences at the University of North Dakota in Grand Forks testified for the farmers. He noted that the fall of 2008 was the wettest in history for the area, and that frost penetrated to create a “concrete frost.”

This was followed by record-setting rainfalls in late March 2009. He said excessive precipitation in the past 10 years “does not provide a new normal” and that insurance periods 2005 to 2009 all were excessively wet.

On Oct. 20, 2011, Beck issued a memorandum — a decision, finding in favor of Mathews. The other five farmers got similar results.

Among other things, Beck said that by paying for a portion of the prevented planting claims, RCIS proved it was not questioning that the weather conditions in the area support a prevent-plant claim for Mathews.

Beck said RCIS had “arbitrarily redefined ‘normal’ weather and precipitation based on an abbreviated and excessively wet time. It did so despite no change in the governing standards. And it did so to the detriment of the producers, who first learned of the new method after their 2009 planting and, therefore were unable to adjust their planting to the new policy.”

He said RCIS was “trying to limit the amount it was paying out on prevented planting claims, which it believed was the message it was receiving from RMA.”

Capping the payout?

In his memo, Beck quoted Kathy Gilbertson, a senior risk management specialist in RMA’s regional office in Billings, Mont., who had testified in the cases. Gilbertson had acknowledged her agency was “concerned” about paying excessive prevent-plant claims. She testified that a task force had come up with recommended “worksheet” changes and was publicizing them for the 2012 crop year.

That would be fine, Beck said, but RCIS could not “arbitrarily redefine normal” and change the rules before they became official. Gilbertson had testified that RCIS was “appropriate” in requiring Mathews to “show the last time the acres denied were planted to prove that they are ‘available for planting’ in a normal year.” Beck said there seemed to be no written authority to that effect.

In 2010, Vogel had asked the agency for a Final Agency Determination (FAD-119), to clear up the rules without going through an arbitration process. In his decision, Beck quoted the FAD-119, written by Barbara Leach, RMA’s national associate director. Beck said Leach determined it as inappropriate for the agency to decide which acres are “unavailable for planting” based solely on whether they received prevented-planting payments for a set number of years.

Beck said RCIS had not identified which acres were unavailable for planting, so it was “unreasonable to expect” Mathews to “show the last year those specific acres were planted.” He said fall preparation didn’t in itself prove the acreage was available for planting, but it showed “some evidence” of his expectation that the land would be planted.

The paid us but . . .

So RCIS paid Mathews and the others in the related cases. “That’s the end of our story, particularly,” Mathews says. But it’s not the end of the questions.

The arbitration case involved only 2009 payments. Once a farmer signs off on their adjuster’s report, the options to appeal a case are probably closed.

The Mathews farm contracted with a different company in 2010 and 2011. That company figured the payments based on what RCIS had done for years, identifying some acres as “old water,” that wouldn’t be covered, and then covering the rest.

Mathews says he read articles in Agweek and elsewhere, quoting university experts and others saying the rule is starting to go into effect in 2011, which seems to be contradicted by the arbitration cases that show the federal rule wouldn’t change until 2012.

Mathews understands why the rules are changing: RMA is trying to make sure that crop insurance is not abused. “The taxpayer shouldn’t be continually in the position to ensure acres, year after year, when they can’t be planted,” Mathews says.

“What rubbed me the wrong way is that the insurance company, for the past three years, made up its own rule and applied it without any justification. I think that’s what our case showed.”

Attorney Braaten says RCIS isn’t the only company making the premature policy changes. “I know for a fact there are other farmers, other insurance companies using similar practices to what the arbitrator found improper,” he says. Based on the $400,000 payout for six farmers in the Cogswell case, Braaten thinks the total amount improperly withheld “could get into the millions pretty quick.” He says RCIS told one of the Cogswell clients that years prior to 2009 might have to be reviewed for over-payments, but he doubts that will happen now.

Stein thinks any acres that are not covered by crop insurance in 2009, 2010 and 2011 will lose value, if the farmer wanted to sell it, or to take out a loan against it. With the dry fall, he thinks 80 percent of the acres in his area that were prevent-planted those years now have been clipped, burned or worked, in anticipation of planting in 2012.

Mathews and Stein wonder whether RCIS employed the rule the same in North Dakota as in other states, such as Nebraska. “I think we were the ‘test case,’ just being tested in southeast North Dakota,” Mathews says.

Mathews still buys his insurance through agent Moen. She declines to comment much beyond her testimony in the arbitration, where she said she had no knowledge of the adjustment change when she sold the policies, and that some 95 percent of her customers with RCIS in 2009 were affected by it. She says most of her clients subsequently have left RCIS.

Mike Bares, communications director for RCIS, said his company offers no public comment on arbitration rulings. He referred Agweek to Laurie Lanstraat of the National Crop Insurance Services, to speak on behalf of the industry. Lanstraat, however, said she is unfamiliar with the case and couldn’t comment either.

Stein, who has farmed since about 1980, says he’s happy to have prevailed in his arbitration case, but he also notes that it was only a partial victory. “In my case, I had some other land I could have had in the arbitration case, but I chose to keep it out because I didn’t want to involve a landlord,” he says. Some landlords may be elderly, or on crop shares, and may not have a stomach for such a dispute, he says.

In some of Stein’s share-rented parcels, each party’s share was covered by a different crop insurance company that handled it differently. The landlord got paid but Stein, with RCIS, did not.

Stein worries about retribution. “You’re looking back, in our minds, about previous years,” he says. “I don’t think there’s anything I need to worry about, but you wonder.” He says he recently brought a son into his operation. The son had been an electrical lineman for 10 years. “This is a hell-of-an education, getting used to insurance companies,” Stein says.

Mathews says he knows more about crop insurance rights at this point than he did three years ago, but isn’t happy about it. “It took three years of expansive education to get to that point,” he says.