Opinion ID: 3052335
Heading Depth: 1
Heading Rank: 4

Heading: analysis

Text: [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 provisions 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 insurance contract are well-settled. See Quadrant Corp. v. Am. States Ins. Co., 110 P.3d 733, 737 (Wash. 2005). Interpretation of an insurance contract is a question of law and the “policy 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 interpretations, 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 allowable 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 definition of Approved AGR and the provisions of the Policy do not support his reading. The definition of Approved AGR provides, 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 articulate 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 synonymous with shall or must, usu. in an effort to effectuate legislative 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 adjustment 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 determined. 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 established or approved by FCIC,” include the use of the Handbook’s claim handling procedures. Rain & Hail argues that when the “[P]olicy is construed as a whole with the court giving 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 limitation 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 regulations 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) specifically requires reinsurance companies to “utilize only loss adjustment procedures and methods that are approved by the [FCIC].” The Handbook contains the loss adjustment procedures and methods approved by the FCIC. Indeed, the Handbook 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 competent 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 incorporating the parties’ obligation to “utilize only loss adjustment 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 reinsurance company will “recognize and apply the claim adjustment and other procedures established or approved by FCIC,” see Policy § 10, coupled with the regulations requiring reinsurance 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.”).