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OLD REPUBLIC INS. CO. v. FEDERAL CROP INS. CORP.

August 3, 1990

OLD REPUBLIC INSURANCE COMPANY and INTERNATIONAL BUSINESS & MERCANTILE REASSURANCE COMPANY, Plaintiffs,
v.
FEDERAL CROP INSURANCE CORPORATION, Defendant


Marvin E. Aspen, United States District Judge.


The opinion of the court was delivered by: ASPEN

MARVIN E. ASPEN, UNITED STATES DISTRICT JUDGE

 The plaintiffs Old Republic and International Business & Mercantile Reassurance Company ("Insurers") have brought this action against the Federal Crop Insurance Corporation ("FCIC") seeking a declaratory judgment that would prevent FCIC from recovering overpayments made to the Insurers. The Insurers have moved for judgment on the pleadings or, in the alternative, for summary judgment. The FCIC has filed a cross-motion for summary judgment on the same issues, seeking a judgment affirming the results of the informal administrative adjudication. *fn1" For the following reasons, we deny the Insurers' motions and we grant summary judgment in favor of the FCIC.

 Background

 The FCIC is a corporation owned by the United States and governed by the Federal Crop Insurance Act ("the Insurance Act"), 7 U.S.C. § 1506 et seq. Before 1980, the FCIC sold crop insurance to producers directly through its own agents. In 1980, Congress amended the Insurance Act to authorize the FCIC to enter into reinsurance agreements with private insurance companies.

 Beginning in 1986 and continuing into 1987, the General Accounting Office ("GAO"), the Office of the Inspector General ("OIG") and, subsequently, the Compliance Division of the FCIC began reviewing some of the claims paid by the FCIC to the Insurers. These audits produced initial determinations by the FCIC of alleged overpayments to the Insurers, although the various investigating bodies were not in agreement as to the precise amounts of the overpayments. Commencing in the fall of 1987 and continuing through the spring of 1988, FCIC sent the Insurers notices stating that claims adjusted by the Insurers had been overpaid. FCIC asserted a right to recover the overpayments directly from the Insurers and threatened to offset the amount from monies otherwise due to the Insurers from FCIC. The FCIC also advised the Insurers that they could appeal these determinations pursuant to an informal appeals process set forth in 7 C.F.R. § 400.80 (later amended and renumbered as 7 C.F.R. § 400.149).

 The Insurers appealed each of the FCIC's findings. Informal hearings were held in Washington, D.C. on April 25, 26 and 27, 1989, after which the FCIC made a final determination that, out of a total of 50 claims that it reviewed, overpayments had been made on fourteen in 1984, eighteen in 1985 and six in 1986. On July 5, 1989, the FCIC issued three separate letters to the Insurers requesting payment for the 1984, 1985 and 1986 years, respectively. These letters requested that the Insurers correct the applicable Crop Year Accounting Report for each policy listed or pay the amount due by check. Old Republic has done neither and instead has challenged both the authority of the FCIC to readjust claims and recover overpayments and the sufficiency of the procedures by which the FCIC makes its determinations regarding overpayments.

 Discussion

 A. FCIC's Right to Recover the Overpayments

 The Insurers claim that the FCIC possesses neither the statutory nor the contractual right to recover overpayments from the Insurers. On the issue of contractual authority, the FCIC points out that a clause in the SAR for 1984 and 1985 holds FCIC "harmless for any loss that FCIC may incur as a result of the [plaintiffs'] conduct in the investigation, negotiation, defense or handling of any claim, or suit or in any dealing with its policy holder." (Section XVII(D)) (Emphasis added.) Also, the 1986 agreement expressly contemplates payment by the Insurers to the FCIC "as a result of a claim by the [plaintiffs] that is subsequently found not to have been due." (Section V(H)). We find that this language, though not as explicit as it might be, adequately shows that the SARs contemplated the reconsideration of claims and the recovery of wrongfully paid monies from the Insurers. *fn2"

 In addition to its apparent contractual authority, the FCIC also points to statutory authority which further and independently establishes its right to recover wrongfully paid claims. It is well established that the government by appropriate action may recover funds "which its agents have wrongfully, erroneously or illegally paid." United States v. Wurts, 303 U.S. 414, 415, 58 S. Ct. 637, 638, 82 L. Ed. 932 (1938). The Federal Claims Collection Act of 1966, as amended by the Debt Collection Act of 1982, provides the statutory authority and initial mechanisms for heads of executive or legislative agencies to "try to collect a claim of the U.S. government for money or property arising out of the activities, or referred to, the agency." 31 U.S.C. § 3711(a)(1). Section 3716(a) of the Claims Collection Act further provides that, when other methods of trying to collect a claim from a person under section 3711(a) are unavailing, "the head of an . . . agency may collect the debt by administrative offset." 31 U.S.C. § 3716(a). In addition, the FCIC relies on 7 C.F.R. § 3.23(a), issued under the authority of the Federal Claims Collection Act of 1966, as amended by the Debts Collection Act of 1982, which states that "whenever feasible, each agency must use . . . administrative offset in accordance with 4 C.F.R. § 102.3 to collect debts due to the U.S." (Emphasis added.) This scheme shows that the government contemplates recovery of wrongful payments; clearly, the government would not make provisions for methods of recovery of debts if recovery itself was not contemplated.

 The only time a government agency is barred from exercising its right to recover overpayments is when Congress has clearly manifested its intention to raise a statutory barrier. Wurts, 303 U.S. at 415, 58 S. Ct. at 638. This exception provides the basis upon which the Insurers ultimately rely in support of their contention the cited statutory authority does not apply to their reinsurance agreements with the FCIC. According to the Insurers, the specific statutory language and the legislative intent of the Federal Crop Insurance Act of 1982 negate the FCIC's otherwise valid authority to recover overpayments. First, the Insurers argue that the FCIC's readjustment of these claims violates the commission's statutory mandate that it act in accordance with "sound reinsurance principles." 7 U.S.C. § 1508(e). The Insurers assert that "sound reinsurance principles" do not permit the readjustment of claims and the recovery of overpayments directly from a primary insurer after the claims have been paid to third parties. Yet, the Insurers offer no authority or any evidence of industry practice to support that assertion. Instead, the Insurers simply comment: "Although disputes between reinsured companies and their reinsurers may and do at times arise, and are customarily resolved in arbitration, reinsurance is designed and intended to minimize and eliminate disputes between the reinsured company and its reinsurer." Mem. at 8. This comment does little to clarify how the Insurers would have us interpret the phrase "sound reinsurance principles" to mean that reinsurers may never readjust and recover wrongfully paid claims. Certainly the goal of minimizing disputes does not require a reinsurer to fully abdicate any opportunity to recover money paid on wrongful claims. Indeed, the Insurers acknowledge that disputes concerning claims do arise and are typically resolved by less formal means of adjudication such as arbitration.

 The Insurers further maintain, however, that a decision allowing the FCIC to recover overpayments will defeat the Congressional purpose in enacting the Act, which was to encourage private sector involvement in the crop insurance business. Of course, if we grant the Insurers the blanket, unreviewable indemnity they seek with respect to all claims filed with the FCIC, we can imagine that private sector involvement in the crop insurance business might burgeon at an astronomical rate. Yet, it defies common sense to suppose, and the Insurers have offered no legislative history to suggest, that Congress intended to give a blank check to all private insurance companies in order to encourage participation in the program, regardless of whether claims are later discovered to have been paid based on wrongful or negligent adjustment by the reinsured companies. *fn3" The FCIC's actions will serve only to discourage such potentially wrongful or negligent adjustment practices by insurance companies participating in the federal program. This is a goal which the FCIC should pursue to efficiently ...


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