Federal crop insurance is supposed to be a safety net for farmers, but an ongoing Central Kentucky investigation suggests that a few are defrauding the system to harvest thousands and even millions of dollars.
The investigation focuses on growers who were paid twice: once by claiming losses on a tobacco crop and then receiving an insurance payment, and then receiving another payment when they sold the supposedly damaged burley to tobacco companies.
In papers filed in U.S. District Court in Lexington, investigators say they think several people have filed fictitious insurance claims and committed conspiracy, mail fraud, wire fraud and money laundering.
In one case, a Nicholas County farmer was paid $1.5 million for his alleged tobacco losses from 1994 to 2014, according to records filed in court. In 17 of those 20 years, he received insurance payments for crop losses. That’s an incredible string of bad luck that investigators find suspicious.
That same farmer, whom the Herald-Leader is not naming because he has not been charged or indicted, was known as “an insurance farmer,” that is, “someone who farms land just to claim insurance on crops,” according to court records.
For example, this farmer in 2011 claimed to have harvested just 11,221 pounds of tobacco from his fields even though he was able to nearly fulfill his contract with Philip Morris International tobacco company for 100,000 pounds. The farmer claimed an insurance loss and received an indemnity payment of $141,186 that year.
The next year, the same farmer claimed to have harvested 15,144 pounds of tobacco but was able to nearly fulfill his Philip Morris contract for 150,000 pounds. The farmer claimed an insurance loss and received an indemnity payment of $98,713.
This particular farmer also was suspected of claiming losses on fields that were never planted in crops, as well as planting a crop with the intention of allowing it to fail. In one case, he claimed a loss on a field that investigators said was too steep and too shaded by forest to grow burley or anything else.
If true, that’s a troubling discovery because a claims adjuster is supposed to go out to a field to determine whether a loss actually happened. This and the alleged fraud that went undetected for 20 years raise questions about oversight of the crop insurance program.
It’s this kind of alleged abuse that makes honest farmers angry — and happy that the FBI, Internal Revenue Service and U.S. Department of Agriculture are looking into the situation, said Hampton “Hoppy” Henton, a Woodford County farmer and former USDA official.
“There was a general ‘Hurray!’ from growers that I know” after federal authorities searched tobacco warehouses and an insurance agent’s office in Mount Sterling on Dec. 9, Henton said. “There was a clapping of hands by most every tobacco grower that I know and in my circle of friends.”
Rumors of fraud
There have been rumors about fraud in the area “for quite some time,” said Steve Pratt, general manager of the Burley Tobacco Growers Cooperative Association in Lexington.
But Pratt added: “There is abuse in homeowner’s insurance, in car owner’s insurance. There’s abuse in all insurance programs.”
John Shea, director of public affairs for USDA’s Risk Management Agency, or RMA, which regulates crop insurance, said in a statement: “RMA has taken actions to improve the tobacco crop insurance. As recently as one month ago RMA made changes to the tobacco program that directly address excessive losses due to quality issues. RMA has also conducted tobacco monitoring programs in North Carolina that have improved program integrity and ... we intend to evaluate the need for similar monitoring programs in other tobacco growing regions.”
Crop insurance is a public-private partnership in which farmers buy policies with their own money, and the policies are sold and serviced by participating insurance companies and local agents.
The government, through the Risk Management Agency, subsidizes those premiums. Of total premiums, taxpayers pay 60 percent, on average, and farmers pay 40 percent, according to the Congressional Budget Office.
The federal government not only reimburses insurance companies for their administrative costs, but reinsures those companies by agreeing to cover some of the losses when total payouts exceed total premiums.
Historically, the federal crop insurance program has needed large amounts of tax dollars to provide these services and to pay the losses incurred by policyholders. Indemnities or claim payments totaled nearly $17 billion in 2012, a year of bad drought, but that was offset partially by more than $11 billion in premiums paid by farmers for catastrophic and regular coverage. The government’s coverage subsidy came to $6.9 billion, according to the Insurance Information Institute.
So while it is true that farmers have substantial “skin in the game” to fund their own safety net, it’s also true thar abuse of the system by some farmers makes the crop insurance program an easy mark for critics who portray it as another federal handout and for those in Congress who seek to reduce its cost.
“The accountability is on the growers themselves,” Henton said. He fears the abuse puts the entire program at risk.
“The system over time will make the rates so high and the indemnities so low, and what happens is, the good guys get punished,” he said. “They’ll raise the rates on everybody because one guy cheats.”
Under current regulations, RMA neither pays nor insures farmers directly. Instead, the private insurance companies sell and service the individual crop policies through local agents. Those agents and adjusters work as contract middlemen between the companies and the farmers.
Crop insurance policies protect farmers against crop losses due to naturally occurring events such as drought, wind and excessive moisture. These so-called “multiperil” policies exclude losses that result from failure to employ good farming practices and other manmade acts that affect the yield, quality or price of the insured crop.
If the insured crop is damaged during the growing season, the farmer notifies his agent of the damage. An adjuster is assigned to contact that farmer and assess the loss. If the crop is destroyed, the farmer is paid for the loss at that time.
If the crop was not totally destroyed, the farmer could elect to carry the crop to harvest. After the harvest, the crop is assessed and theharvest is deducted from the total liability of the policy. Insurance pays the difference to the farmer.
RMA, the government agency, reimburses the approved insurance provider for 100 percent of the indemnity paid to the farmer at the time of loss.
RMA and others sources insist that fraud is not prevalent in the crop insurance program and that most farmers are honest, hard-working men and women. Nevertheless, some have found ways to defraud the system.
One way is for the insured farmer to produce a good crop and then hide it, move it or commingle the crop from one farm with the crop from another.
Under this scenario, the farmer falsely claims that the crop was damaged or lost due to an insurable cause
To accomplish this kind of fraud, the insured farmer often sells a portion of his crop in his own name and sells the remainder in the name of another person or a business name.
Once the crop has been hidden, an insurance claim is filed claiming the crop produced less than what the farmer’s crop insurance policy guaranteed, and an indemnity is paid based on the belief that the hidden crop wasn’t produced. RMA reimburses the insurance company for the loss paid.
Sometimes, if a farmer can obtain insurance in someone else’s name – often referred to as a “straw farmer” – he or she will get more coverage and lower premiums.
A farmer will also use hidden crop proceeds to pay his credit accounts at banks or agricultural supply stores so that the income does not enter his personal account.
Little incentive to monitor
Such schemes often involve multiple people, according to Jeffrey Monnin, the investigator who is looking into Central Kentucky fraud.
“Based on my training and experience, I know agents or adjusters have minimal financial incentive to report or scrutinize questionable claims,” Monnin wrote in his application for a search warrant. “Insurance agents earn commissions based on their book of business — the more acres planted and insured by the producer, the higher the liability, the premium and the commission potential for the insurance agent.”
Henton asserts that insurance companies have little incentive to monitor fraud because the government covers their losses.
Meanwhile, insurance adjusters are often independent contractors who earn fees based on the number of claims they work. There have been cases in which adjusters, insurance agents and farmers conspire to defraud the government, Monnin wrote. Sometimes tobacco warehouse operators are included in the conspiracy.
That was the case in North Carolina, where from 2009 to 2013 the feds prosecuted cases in which 41 farmers, insurance agents and claims adjusters defrauded nearly $100 million from the crop insurance program. It was the largest case of fraud since the crop insurance program began in the 1930s.
It appears the investigation in Mount Sterling is looking into a similar conspiracy, although it remains to be seen how many players are involved and how big the alleged fraud is.
Monnin wrote that he had been in contact with USDA special agents in North Carolina “who have recently completed multiple crop insurance schemes similar to this one” in Kentucky.
“These organized groups have proven to be the most damaging abusers of the crop insurance program,” Monnin wrote.
The ongoing Kentucky investigation is looking into whether the Nicholas County farmer, his daughter and others committed fraud with the help of an insurance agent and claims adjuster.
Insurance fraud is perpetrated in all kinds of commodities and crops, not just tobacco. In one infamous case, a Tennessee farmer staged a “hail storm” by directing a worker to beat the leaves off tomato plants with a stick and then had workers scatter ice cubes and mothballs among the plants. Photographs “documented” the damaged crop. That farmer, his wife, two workers, an insurance agent and a claims adjuster all pleaded guilty.
The government relies on technology to police the crop insurance program. “Data mining” through the more than 1.2 million crop-insurance policies sold can root out anomalies that might lead to suspected fraud.
Images from orbiting satellites can verify information and obtain evidence about whether a crop was even planted on a certain parcel of ground. Satellite imagery from “public and commercial sources” of suspect fields reported by burley growers in the Kentucky investigation found the same fields “were actually forested land or pasture,” according to court documents.
In another instance, growers reported they had planted 45.6 acres of tobacco, but the field size based on the measurement from satellite imagery was 34 acres.
Nevertheless, the Risk Management Agency “doesn’t have enough people to go out and police all this,” Pratt said. “So they work with the insurance agents, who hire the adjusters, to police it. Obviously, there have been cases where it hasn’t happened the way it’s supposed to work.”
The Risk Management Agency is taking some measures to reduce abuse of the system. For example, it set a final harvest date of Oct. 20 for next year’s tobacco crop. That is supposed to keep farmers from deliberately leaving tobacco in the field into late fall and then claiming damage by frost.
“If you can fabricate a loss because it was frozen in the field, then you don’t have to harvest it and you get paid insurance,” Henton said. “You can make more money doing that than harvesting it.”
Of course, a frost could occur before Oct. 20, but Henton said setting a final harvest date “is a move in the right direction.”
In addition, next year’s burley that is graded by government inspectors as being “nondescript” or in very poor condition will have to be destroyed in the presence of an adjuster. That’s being done to prevent that burley from being sold.
Meanwhile, Pratt welcomes the scrutiny that the federal investigation brings.
“If this is going to help bring integrity to the insurance program in general,” he said, “it should help the honest farmers that utilize it and use it the way it’s supposed to be used.”