It should be axiomatic that an insurance agent should never assist a person to obtain insurance by fraud. In United States v. Hawley, No. 08-2992 (8th Cir. 08/23/2010), the Eighth Circuit Court of Appeals pointed out the danger such actions place on the financial well-being of an insurance agent who helped some crooked farmers obtain a crop insurance policy to which they were not eligible because they had no interest in the crop. The farmers went to jail for their fraud and the insurance agent who obtained the policy for them was sued by the government for three times the amount it paid. The agent obtained a summary judgment from the district court only to have the summary judgment reversed and sent back to the trial court.

Read Barry Zalma's previous column, “Contracts are sacrosanct.”

The U.S. brought a civil action against insurance agent Russell T. Hawley and his insurance agency, Hawley Insurance Inc. (collectively “Hawley”), alleging violations of the False Claims Act amended by the Fraud Enforcement and Recovery Act of 2009, and fraud under Iowa common law. The government stated that Hawley caused ineligible farmers to make claims against insurance policies that were issued by a private insurance company and reinsured by a government corporation. The district court granted summary judgment in favor of Hawley on all claims, and the government appealed. The Eighth Circuit Court reversed because the insurance agent was experienced and knowledgeable about crop insurance and should have known that the government would be damaged if the fraudulently obtained policy resulted in a claim.

In 1938, Congress enacted the Federal Crop Insurance Act (the “Act to improv[e] the economic stability of agriculture”) by establishing a federal crop insurance program. To implement the program, Congress created theFederal Crop Insurance Corp. (FCIC), a wholly owned government corporation within the U.S. Dept. of Agriculture. In 1996, Congress created the Risk Management Agency, which administers the federal crop insurance program on behalf of the FCIC.

The FCIC contracts with approved private insurance companies to offer crop insurance policies to eligible farmers. Under the program, farmers purchase policies from the designated private insurance companies and insurance agents receive commissions for the policies they write for those companies. Those companies are in turn reinsured by the FCIC in accordance with the terms of a standard reinsurance agreement (SRA). Thus, when a farmer incurs a loss to an insured crop, the farmer files a claim with the private insurance company. The insurance company assesses the amount of the loss, pays the farmer's claim for damage, and then seeks reimbursement from the FCIC. The FCIC reimburses the company for all or part of the amount paid to the farmer, depending on the particular arrangement set forth in the SRA. The FCIC also subsidizes a portion of the premiums paid by the insured farmers.

The approved private insurance company in this case was North Central Crop Insurance, Inc. (NCCI). Russell Hawley worked as a private insurance agent for NCCI. Hawley had experience in the crop insurance industry, having previously worked as a crop insurance adjuster for NCCI and another crop insurance company before starting his own crop insurance agency, Hawley Insurance Inc., in 1994. As NCCI's agent, Hawley sold multi-peril crop insurance (MPCI) policies to various individuals, receiving commissions from NCCI on those policies. MPCI policies are reinsured by the FCIC and offer coverage for crop losses. To obtain MPCI, the farmer must have a bona fide interest, or “insurable interest,” in the crop at the time coverage begins and must submit an application for insurance through an insurance agent. Once the insurance company accepts the application and issues an insurance policy to the farmer, the farmer must report and certify each year to the insurance company that he has an interest in the insured crop.

In February 2000, Hawley signed and submitted to NCCI a crop insurance application in the names of brothers Sydney and Stanley Windquist for crops in South Dakota. The Windquists, however, were ineligible to receive FCIC-reinsured coverage because they had no insurable interest in the crops. The Windquists certified that they had an interest in the crops, and in June 2000, Hawley signed and submitted their acreage reports to NCCI. Subsequently, the Windquists filed claims with NCCI for losses to the insured crops, and NCCI paid the Windquists for those losses. The FCIC ultimately reimbursed NCCI for those payments and for premium subsidies on the Windquist policy, in the amount of $145,540. The government prosecuted the Windquists for federal crop insurance fraud, and the case was resolved when the Windquists admitted that they did not have an insurable interest in the crops and entered into pretrial diversion agreements.

The government learned of Hawley's actions and in October 2006, brought a civil action against him in the district court. The complaint alleged that Hawley knowingly caused ineligible farmers to obtain MPCI coverage and to receive payments from NCCI, payments which the FCIC reimbursed. The government sought treble damages and civil penalties under three subsections of the FCA that renders liable any person who “knowingly presents, or causes to be presented, to an officer or employee of the United States Government . . . a false or fraudulent claim for payment or approval.” The statutes impose liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.” Another section makes liable any person who “conspires to defraud the Government by
getting a false or fraudulent claim allowed or paid.” The government also asserted an Iowa common-law claim of fraud.

Calvin Brewer, a USDA official, testified in his deposition about the reimbursement system between private insurance companies and the FCIC. Brewer explained that after the insurance company assesses the loss to the insured crops, the company writes a check to the farmer for a certain amount. The check is tied to a “loss clearing account” in the company's name. The company then submits data regarding the loss amount to the FCIC through an electronic “data acceptance system.” The Eighth Circuit Court also concluded that the evidence testified to by the government employee creates a genuine issue of material fact regarding whether Hawley caused NCCI to present claims for reimbursement to the FCIC.

Applying the reasoning of the U.S. Supreme Court, the Eighth Circuit Court concluded that the government made a sufficient showing of intent under ? 3729(a)(2) to survive summary judgment because Hawley had extensive experience in the crop insurance industry. He worked as a crop insurance adjuster for NCCI and another insurance agency before starting his own crop insurance agency in 1994. From 1994 to 2001, he worked as a private crop insurance agent for NCCI, selling federally reinsured crop insurance policies. He also worked occasionally as a teacher for NCCI, instructing insurance agents about insurance coverage. In his sworn affidavit, he averred that “[m]y familiarity is with crop insurance.”

The Eighth Circuit Court concluded that a reasonable jury could find that Hawley intended, based on his experience selling federally reinsured crop insurance for NCCI, that NCCI would transmit a farmer's claim to the FCIC for reimbursement, and the FCIC would rely on that claim as a condition of payment.

Under Iowa law, the elements of fraud are: (1) a material misrepresentation (2) made knowingly (3) with intent to induce the plaintiff to act or refrain from acting (4) upon which the plaintiff justifiably relies (5) with damages.

The district court concluded that the government could not satisfy the fourth element of the cause of action because the government could not show that Hawley intended or had reason to expect that the false statements would be communicated to the FCIC, or that those statements would influence the FCIC's decision to reimburse NCCI. The Eighth Circuit concluded that Hawley had reason to expect, based on his experience, that a consequence of his conduct was that NCCI would seek reimbursement from the FCIC, and that NCCI would necessarily represent to the FCIC that the underlying insurance policies were valid.

Even though the false insurance applications and acreage reports were not themselves forwarded to the FCIC, a jury could find that Hawley had reason to expect that the representations included in those documents–namely, that the farmers were eligible for insurance–would be passed on to the FCIC by NCCI. On the same basis, it is reasonable to infer that Hawley had reason to expect that the FCIC would rely on the farmers' purported eligibility in deciding to reimburse NCCI.

This case teaches that an insurance agent or broker should never use his or her expertise in the business to obtain insurance for someone who is ineligible by misrepresenting or concealing material facts. If the insurer learns of the deceit, the agent or broker will find him or herself paying damages that will exceed the commissions earned and probably more than the amounts the insurer must pay in claims. It also destroys their credibility in the business.

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