Conrad v. Ace Property ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
RICHARD C. CONRAD, 
Plaintiff-Appellant,
v. No. 06-35539
ACE PROPERTY & CASUALTY
INSURANCE COMPANY, a  D.C. No.
CV 05-5117 FVS
Pennsylvania corporation;
OPINION
RAIN AND HAIL LLC, an Iowa
limited liability corporation,
Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Washington
Fred L. Van Sickle, District Judge, Presiding
Argued and Submitted
January 8, 2008—Seattle, Washington
Filed July 14, 2008
Before: Andrew J. Kleinfeld, A. Wallace Tashima, and
Richard C. Tallman, Circuit Judges.
Opinion by Judge Tashima
8703
CONRAD v. ACE PROPERTY & CASUALTY 8705
COUNSEL
Nicholas P. Gellert, Perkins Coie, Seattle, Washington, for the
plaintiff-appellant.
Sean P. Boutz, Evans, Craven & Lackie, Spokane, Washing-
ton, for the defendants-appellees.
8706 CONRAD v. ACE PROPERTY & CASUALTY
OPINION
TASHIMA, Circuit Judge:
We consider whether the standard Adjusted Gross Revenue
Insurance Policy, a policy which provides crop revenue insur-
ance pursuant to the Federal Crop Insurance Act, incorporates
and mandates the claim adjustment procedures set forth in the
Federal Crop Insurance Corporation’s Adjusted Gross Reve-
nue Standards Handbook. We hold that it does.
JURISDICTION
The district court had jurisdiction under 28 U.S.C.
§ 1332(a) based on the complete diversity of citizenship
between defendants, Ace Property & Casualty Insurance Co.,
a Pennsylvania corporation, and Rain & Hail, LLC, an Iowa
limited liability corporation, both of whose principal places of
business are outside of the State of Washington, and Richard
Conrad, a citizen of Washington.1 We have jurisdiction on
appeal from the final judgment under 28 U.S.C. § 1291.
BACKGROUND
Enacted in 1938, the Federal Crop Insurance Act (“Act” or
“FCIA”), 7 U.S.C. § 1501 et seq., is designed to “promote the
national welfare by improving the economic stability of agri-
culture through a sound system of crop insurance and provid-
ing the means for the research and experience helpful in
devising and establishing such insurance,” id. § 1502(a). To
administer the Act, Congress created the Federal Crop Insur-
ance Corporation (“FCIC”), a government-owned corporation
which acts as an “agency of and within the Department” of
Agriculture (“USDA”). Id. § 1503; see also Fed. Crop Ins.
1
Because the district court had subject matter jurisdiction under § 1332,
we need not inquire whether it also had federal question jurisdiction under
28 U.S.C. § 1331.
CONRAD v. ACE PROPERTY & CASUALTY 8707
Corp. v. Merrill, 332 U.S. 380, 381 (1947). The FCIC is, in
turn, regulated by the USDA’s Risk Management Agency
(“RMA”). See Barnhill v. Veneman (In re Peanut Crop Ins.
Litig.), 524 F.3d 458, 462 (4th Cir. 2008); Tex. Peanut Farm-
ers v. United States, 409 F.3d 1370, 1372 (Fed. Cir. 2005); 7
C.F.R. § 400.701. The RMA’s function is to supervise the
FCIC and administer all programs authorized under the FCIA.
7 U.S.C. § 6933(a), (b)(1)-(3); Acceptance Ins. Cos. Inc. v.
United States, 503 F.3d 1328, 1330 (Fed. Cir. 2007). The
FCIA empowers the FCIC to provide crop insurance directly
to farmers or provide reinsurance to private insurance provid-
ers who then provide crop insurance to farmers. See 7 U.S.C.
§ 1508(a)(1); Alliance Ins. Co. v. Wilson, 384 F.3d 547, 549-
50 (8th Cir. 2004). Indeed, Congress has directed the FCIC to
provide reinsurance to insurers “to the maximum extent prac-
ticable.” 7 U.S.C. § 1508(k).
One of the types of federal crop insurance is adjusted gross
revenue (“AGR”) insurance, which “insures the revenue of
the entire farm, not just the revenue derived from individual
crops, by guaranteeing a percentage of the farm’s average
gross revenue.” Christopher R. Kelley, The Agricultural Risk
Protection Act of 2000: Federal Crop Insurance, the Non-
insured Crop Disaster Assistance Program, and the Domestic
Commodity and Other Farm Programs, 6 Drake J. Agric. L.
141, 144 (2001); see also 7 U.S.C. § 1523(e). See general-
ly U.S. Gen. Accounting Office, GAO-04-517, Crop Insur-
ance: USDA Needs to Improve Oversight of Insurance
Companies and Develop a Policy to Address Any Future
Insolvencies 7 (2004) (“Revenue insurance, a newer crop
insurance product, provides protection against losses in reve-
nue associated with low crop market prices in addition to pro-
tecting against crop loss.”). Under the AGR pilot program,
AGR insurance is offered through reinsurance arrangements
with private insurances companies, which in turn provide
AGR insurance to farmers. See 7 U.S.C. § 1523(e). RMA has
jurisdiction over pilot programs involving revenue insurance.
7 U.S.C. § 6933(b)(3).
8708 CONRAD v. ACE PROPERTY & CASUALTY
Richard C. Conrad owns and operates a fruit orchard in
Franklin County, Washington. In order to protect his future
revenue, Conrad purchased an AGR Policy (“Policy”) from
Ace Property & Casualty Insurance Company (“Ace”). Rain
& Hail, LLC (hereinafter referred to together with Ace as
“Rain & Hail”) acted as Ace’s agent for the issuance and ser-
vice of the policy. The Policy, a form policy issued by the
USDA,2 makes plain that it was issued pursuant to the FCIC’s
reinsurance program and that the Policy should be read in
light of the federal crop insurance program. The Policy pro-
vides:
This insurance policy is reinsured by the Federal
Crop Insurance Corporation (FCIC) under the provi-
sions of the Federal Crop Insurance Act (7 U.S.C.
1501 et seq.) (Act). All provisions of the policy and
rights and responsibilities of the parties are specifi-
cally subject to the Act. The provisions of the policy
may not be waived or varied in any way by the crop
insurance agent or any other agent or employee of
FCIC or the company. In the event we cannot pay
your loss, your claim will be settled in accordance
with the provisions of this policy and paid by FCIC.
The Policy also defines “Policy” as “[t]he agreement between
[the farmer] and [the insurance company] consisting of the
accepted application, these provisions, Special Provisions,
actuarial documents, and the applicable regulations published
in 7 C.F.R. chapter IV.” Policy § 1.
The Policy, while perpetual in duration, provides different
coverage amounts in different years. In other words, the reve-
2
The form policy is available on the RMA’s website at http://
rma.usda.gov/ftp/policies/2001/agr/pdf/2001-AGR.pdf. The form policy is
posted on the website along with the Adjusted Gross Revenue Standards
Handbook. See Risk Mgmt. Agency, U.S. Dep’t of Agric., Adjusted Gross
Revenue (AGR), http://www.rma.usda.gov/Policies/agr.html#2004.
CONRAD v. ACE PROPERTY & CASUALTY 8709
nue protection in one year could be higher or lower than the
year before. The key to the amount of coverage provided in
a given year is what is called the “Approved AGR.” From
this, the amount of coverage and, in turn, the annual premi-
ums are determined. See Policy § 6. The Approved AGR also
serves as the base number from which the amount of indem-
nity owed is determined in the event of a loss. See Policy
§ 11. The central dispute in this case concerns how the
Approved AGR should have been determined for Conrad’s
AGR Policy.
Because younger trees planted to replace damaged trees
and out-of-date varietals would be reaching maturity in 2004,
Conrad anticipated that his orchard would produce signifi-
cantly higher revenue in 2004 than it had in previous years.
Indeed, Conrad expected total revenue from 2004 to reach
$2,341,360, whereas his orchard’s revenue over the previous
five years had ranged from $1,474,377 to $1,836,600, averag-
ing $1,620,644 per year. Anticipating this growth, Conrad
requested higher AGR coverage—up to $2,341,360—in order
to reflect the expected increase in revenue. Conrad argued that
the definition of Approved AGR in the Policy demands that
an adjustment must reflect any expected increase in allowable
income. The Policy defines “Approved AGR” as:
The simple average of the AGR income history you3
included on your farm report, adjusted to reflect any
expected increase or reduction in allowable income
for the insurance year (see section 5).
Policy § 1. To Conrad, this means that the Approved AGR
should be adjusted to match exactly his expected revenue.
Rain & Hail informed Conrad that he could obtain cover-
3
“Throughout this policy, ‘you’ and ‘your’ refer to the named insured
shown on the accepted application and ‘we,’ ‘us,’ and ‘our’ refer to the
insurance company providing insurance.” Policy at 1.
8710 CONRAD v. ACE PROPERTY & CASUALTY
age based only on an Approved AGR of $1,640,092. Rain &
Hail told Conrad that this lower figure was based on the
indexing provisions of the 2004 Adjusted Gross Revenue
Standards Handbook (“Handbook”), which is published by
the FCIC. See FCIC, USDA, Adjusted Gross Revenue Stan-
dards Handbook § 19, at 44-49 (Dec. 2003) (providing formu-
las to calculate the Approved AGR), available at
http://www.rma.usda.gov/ftp/publications/directives/18000/
pdf/04_18050.pdf.
Conrad’s position was and is that the Policy itself contains
a definition of Approved AGR different from the Handbook,
a definition much more favorable to Conrad, and that the
Handbook should not be consulted to determine the Approved
AGR. On the other hand, Rain & Hail’s position was and is
that the definition of Approved AGR found in the Policy—
“[t]he simple average of the AGR income history you
included on your farm report, adjusted to reflect any expected
increase or reduction in allowable income for the insurance
year (see section 5)”—should be read in conjunction with
§ 10 of the Policy which states, that “[w]e recognize and
apply the claim adjustment and other procedures established
or approved by FCIC,” and in light of the crop reinsurance
program and the relevant regulations. In other words, Rain &
Hail contends that the Policy provides that an Approved AGR
may be set higher than the five-year average when the insured
proves that revenue will be higher than the average, but that
it will be set pursuant to the “procedures established or
approved by FCIC,” specifically, by using the formulas found
in the Handbook.
Despite Conrad’s heightened expectations for 2004, harsh
weather conditions caused a lower than expected yield, result-
ing in much lower than anticipated revenue.4 After suffering
the loss, Conrad submitted a claim for $1,021,591, which was
calculated based on an Approved AGR of $2,341,360, i.e., his
4
Rain & Hail does not dispute that Conrad suffered a 2004 crop loss.
CONRAD v. ACE PROPERTY & CASUALTY 8711
entire expected revenue, and factored in the higher premium
that he would have had to pay for that level of coverage (the
additional premium would be $18,904). Rain & Hail repeated
its earlier position that the Approved AGR was determined by
referring to the procedures in the Handbook, which limited
the coverage to $516,686. Conrad accepted the lower payment
under protest, reserving his right to seek additional amounts
based on his theory of the Policy.
Conrad filed an action for contract damages in Washington
state superior court, which Rain & Hail timely removed to the
federal district court. Because the case presented a pure issue
of law, i.e., the proper interpretation of the Policy, the parties
filed cross-motions for summary judgment. The district court
granted defendants’ cross-motion for summary judgment, rea-
soning that the Policy is not ambiguous:
Although Section 10 of the Policy does not specifi-
cally identify which claim adjustment procedures
may be applied, Section 10 does state that the insurer
will recognize and apply those claim adjustment pro-
cedures “established or approved by FCIC.” Here,
Plaintiff does not dispute that the Handbook was
established and approved by the FCIC. Although
Plaintiff argues Section 10 is only applicable to loss
claims, and not the determination of an insured’s
Approved AGR, Plaintiff acknowledges that the
Approved AGR is crucial in determining each and
every loss claim. Thus, when the Court reads the
Policy as a “whole”, Section 10 is certainly applica-
ble to determining the Approved AGR when calcu-
lating a claim for loss or damage.
Conrad v. Ace Prop. & Cas. Ins. Co., No. CV 05-5117 FVS,
2006 WL 1582376, at *4 (E.D. Wash. June 5, 2006). Conrad
timely appealed.
8712 CONRAD v. ACE PROPERTY & CASUALTY
STANDARD OF REVIEW
The district court’s grant of summary judgment on a con-
tract claim is reviewed de novo, see S. Cal. Painters & Allied
Trade Dist. Council No. 36 v. Best Interiors, 359 F.3d 1127,
1130 (9th Cir. 2004), as is its interpretation and meaning of
contract provisions, see United States v. 1.377 Acres of Land,
352 F.3d 1259, 1264 (9th Cir. 2003).
ANALYSIS
[1] Because federal jurisdiction in this case is based on
diversity of citizenship, we apply the substantive law of the
state of Washington. Erie R.R. v. Tompkins, 304 U.S. 64, 78
(1938). Moreover, in construing FCIA contracts,5 state law
applies except when the contract provides that state law does
not apply or when state law conflicts with the contract provi-
sions or FCIC regulations. See 7 U.S.C. § 1506(l); Kroeplin
Farms Gen. P’ship v. Heartland Crop Ins., Inc., 430 F.3d
906, 910 (8th Cir. 2005). Neither exception applies in this
case.
Under Washington law, the rules for interpreting an insur-
ance contract are well-settled. See Quadrant Corp. v. Am.
States Ins. Co., 110 P.3d 733, 737 (Wash. 2005). Interpreta-
tion of an insurance contract is a question of law and the “pol-
icy is construed as a whole with the court giving force and
effect to each clause in the policy.” Am. Star Ins. Co. v. Grice,
854 P.2d 622, 625 (Wash. 1993). The court should “give it a
fair, reasonable, and sensible construction as would be given
to the contract by the average person purchasing insurance.”
Quadrant Corp., 110 P.3d at 737 (internal quotation marks
5
As noted, the Policy specifically provides that “[t]his insurance policy
is reinsured by the Federal Crop Insurance Corporation (FCIC) under the
provisions of the Federal Crop Insurance Act . . . . All provisions of the
policy and rights and responsibilities of the parties are specifically subject
to the Act.”
CONRAD v. ACE PROPERTY & CASUALTY 8713
omitted). If the language is clear and unambiguous, the court
will enforce the contract as written and may not create
ambiguity where none exists. Am. Nat’l Fire Ins. Co. v. B&L
Trucking & Constr. Co., 951 P.2d 250, 256 (Wash. 1998).
If, on the other hand, the clause is ambiguous, meaning that
“on its face, it is fairly susceptible to two different interpreta-
tions, both of which are reasonable,” the court may rely upon
extrinsic evidence of the intent of the parties to resolve the
ambiguity. Id. Ambiguities which remain after a consideration
of extrinsic evidence are resolved against the insurer-drafter
and in favor of the insured. Quadrant Corp., 110 P.3d at 737.
But, while ambiguities should be construed against the
drafter, “a strict application should not trump the plain, clear
language . . . such that a strained or forced construction
results.” Id. “Finally, in Washington[,] the expectations of the
insured cannot override the plain language of the contract.”
Id.
Conrad contends that the Policy demands that the
Approved AGR reflect the entire expected increase:
Conrad should have been allowed to obtain coverage
adjusted to his actual expected revenue for the 2004
crop year. That is what the AGR Policy promised by
stating that Approved AGR would be “adjusted to
reflect any expected increase or reduction in allow-
able income.”
Appellant’s Brief at 13; see also id. at 15 (“The AGR Policy
clearly and unambiguously requires that the Approved AGR
be established to reflect all increases or decreases from the
five-year average.”
[2] Conrad’s theory of the contract fails because the defini-
tion of Approved AGR and the provisions of the Policy do not
support his reading. The definition of Approved AGR pro-
vides, in its entirety:
8714 CONRAD v. ACE PROPERTY & CASUALTY
The simple average of the AGR income history you
included on your farm report, adjusted to reflect any
expected increase or reduction in allowable income
for the insurance year (see section 5).
Policy § 1. The relevant provision in § 5 of the Policy states
that if the farmer “can prove that your allowable income for
the insurance year will be higher than the average of your
AGR income history, [the insurance company] may establish
[the farmer’s] approved AGR at a greater amount than the
average.” Policy § 5(e)(3). Those two provisions when read
together establish that the insurance company “may” establish
an AGR above the income history average, but fail to articu-
late exactly how the average is to be established or adjusted.
Nothing in §§ 1 and 5 suggests that the Approved AGR will
constitute the entire expected increase.
Indeed, under the least charitable reading to Conrad, we
would conclude only that the insurance company “may”
adjust the average. That is, any adjustments are optional and
done at the insurer’s discretion. See, e.g., City of Imperial
Beach v. Escott, 171 Cal. Rptr. 197, 200 (Ct. App. 1981)
(finding the use of “may” in an ordinance to be permissive
and not mandatory). Nevertheless, even if we assume that
“may” means “must,” see, e.g., Black’s Law Dictionary 1000
(8th ed. 2004) (“[M]ay, . . . 3. Loosely, is required to; shall;
must . . . . In dozens of cases, courts have held may to be syn-
onymous with shall or must, usu. in an effort to effectuate leg-
islative intent.”), we are left only with the conclusion that the
definitions of Approved AGR in §§ 1 and 5 provide that the
Approved AGR must be adjusted upward when the insured
demonstrates that revenue will be greater than the five-year
average, but that those sections are silent as to how the adjust-
ment to the Approved AGR is calculated. From this, Conrad
would have us conclude that the contract is ambiguous, and
as such, he argues, we should resolve the ambiguity against
Rain & Hail and in favor of Conrad. See Quadrant Corp., 110
P.3d at 737.
CONRAD v. ACE PROPERTY & CASUALTY 8715
[3] The district court and Rain & Hail offer a better reading
of the Policy. Rain & Hail accepts that it was obligated to
adjust the Approved AGR upward; it argues, however, that
the Approved AGR should be adjusted by using the indexing
formulas derived from the Handbook. Rain & Hail argues that
the policy is not silent as to how the Approved AGR is deter-
mined. Instead, it argues that the duties set forth under § 10
of the Policy, which mandates that Rain & Hail “recognize
and apply the claim adjustment and other procedures estab-
lished or approved by FCIC,” include the use of the Hand-
book’s claim handling procedures. Rain & Hail argues that
when the “[P]olicy is construed as a whole with the court giv-
ing force and effect to each clause in the policy,” Am. Star
Ins., 854 P.2d at 625, we should give effect to § 1’s definition
of Approved AGR, the language in § 5(e), and the language
in § 10(b)(3). Section 10(b)(3) provides:
(b) Our DUTIES —
...
(3) We recognize and apply the claim
adjustment and other procedures estab-
lished or approved by FCIC.
Conrad does not dispute that the Handbook provides “claim
adjustment and other procedures established or approved by
FCIC”; instead, he argues that § 10(b)(3) acts only as a limita-
tion on the insurer in its relationship with the FCIC. Conrad’s
position, however, is untenable because § 10(b) pertains to
Rain & Hail’s duties with respect to how and when Conrad
would be paid for a loss. None of the provisions of § 10(b)
discusses Rain & Hail’s relationship to the FCIC outside of
that context.6
6
Section 10(b) of the Policy provides, in its entirety:
(b) Our DUTIES —
8716 CONRAD v. ACE PROPERTY & CASUALTY
[4] Moreover, the limitations by which the insurer must
abide are specifically incorporated into the Policy’s definition
of “Policy.” That is, the Policy itself incorporates the regula-
tions published in 7 C.F.R. ch. IV, by defining “Policy” as
“[t]he agreement between you and us consisting of the
accepted application, these provisions, Special Provisions,
actuarial documents, and the applicable regulations published
in 7 C.F.R. chapter IV.” And, 7 C.F.R. § 400.168(d) specifi-
cally requires reinsurance companies to “utilize only loss
adjustment procedures and methods that are approved by the
[FCIC].” The Handbook contains the loss adjustment proce-
dures and methods approved by the FCIC. Indeed, the Hand-
book explicitly states, in bold type:
HANDBOOK FCIC-18050 (12-2003) CONTAINS
THE OFFICIAL FCIC-APPROVED UNDER-
WRITING, ADMINISTRATION, AND LOSS
ADJUSTMENT STANDARDS FOR AGR FOR
2004 AND SUCCEEDING INSURANCE
YEARS. IN THE ABSENCE OF INDUSTRY-
DEVELOPED, FCIC-APPROVED PROCE-
DURE FOR AGR FOR 2004 AND SUCCEED-
ING INSURANCE YEARS, ALL REINSURED
COMPANIES WILL UTILIZE THESE STAN-
(1) If you have complied with all the policy provisions, we
will pay your loss within 30 days after:
(i) We reach agreement with you;
(ii) Completion of arbitration or appeal proceedings; or
(iii) The entry of a final judgment by a court of compe-
tent jurisdiction.
(2) In no event can a claim be settled until farm tax forms
for the insurance year are filed with the IRS (see section
11(d)).
(3) We recognize and apply the claim adjustment and other
procedures established or approved by FCIC.
CONRAD v. ACE PROPERTY & CASUALTY 8717
DARDS FOR UNDERWRITING, LOSS
ADJUSTMENT, AND FOR LOSS TRAINING.
Handbook at SC 1. Thus, the definition of “Policy,” by incor-
porating the parties’ obligation to “utilize only loss adjust-
ment procedures and methods that are approved by the
[FCIC],” requires that the Handbook be used to determine the
Approved AGR.
[5] The Policy’s language which provides that the reinsur-
ance company will “recognize and apply the claim adjustment
and other procedures established or approved by FCIC,” see
Policy § 10, coupled with the regulations requiring reinsur-
ance companies to “utilize only loss adjustment procedures
and methods that are approved by the [FCIC],” 7 C.F.R.
§ 400.168(d), makes plain that Conrad’s Approved AGR must
be adjusted in light of his expected increase in revenue, but
that the adjustment must be done pursuant to the procedures
outlined in the Handbook. This is so regardless of Conrad’s
expectations. See Quadrant Corp., 110 P.3d at 737 (“[T]he
expectations of the insured cannot override the plain language
of the contract.”).
CONCLUSION
[6] When all the provisions are read as a whole, the district
court’s interpretation provides the only reasonable interpreta-
tion of the Policy: Conrad was entitled to an adjustment of his
five-year average and Rain & Hail was obligated to “apply the
claim adjustment and other procedures established or
approved by FCIC.” That is exactly what happened. The judg-
ment of the district court is
AFFIRMED.