Appeal from United States District Court for the District of North Dakota - Fargo
The opinion of the court was delivered by: Melloy, Circuit Judge.
Before RILEY, Chief Judge, BYE and MELLOY, Circuit Judges.
Dawson Farms (Dawson) challenges the Risk Management Agency's ("the RMA") denial of its crop-insurance claim alleging loss due to rot in stored potatoes. The RMA is a federal agency that serves as the reinsurer of Dawson's insurance policy. A final agency review affirmed the RMA's denial of Dawson's claim, finding that the insurance adjuster's sampling of the stored potatoes followed adequate sample procedures. Dawson appealed the final agency decision to the district court,*fn1 which affirmed. We affirm the judgment of the district court.
Dawson is a commercial potato grower in North Dakota. In the fall of 2006, wet and rainy conditions endangered its potato harvest. Notwithstanding the poor conditions, Dawson was able to harvest 65,201.7 hundredweight of the potatoes and place them in storage.
On October 10, 2006, Dawson filed a notice of loss with its primary insurer, Rain & Hail, LLC, from which it purchased a multi-peril crop insurance policy. As reinsurer of this policy, RMA had the right to participate in the loss adjustment process for claims like Dawson's with the potential to exceed $500,000 in losses. Among other things, Dawson claimed a loss resulting from "tuber rot," which is a covered condition under the policy defined as "[a]ny soft, mushy, or leaky condition of potato tissue." The policy states that to trigger coverage, tuber rot must exist in 5% or more of Dawson's potato crop.*fn2 On October 11, Rain & Hail's adjusters visited the farm, but they did not take samples of the stored potatoes because they erroneously assumed any damage was from an earlier, uncovered frost. On October 16, the insurance adjusters returned with a supervisor and took samples of potatoes from unharvested fields, but again, they did not sample the stored potatoes.
On October 15, the insurance period for all perils ended. However, the agreement between Dawson and Rain & Hail included a Storage Coverage Endorsement, which extended coverage for some forms of not-immediately-apparent damage (including tuber rot) for sixty days after the insurance period. Under this clause, coverage for Dawson's claim of potato rot extended to December 9, 2006.
On December 5, John Bata, one of the Rain & Hail insurance adjusters, returned to sample stored potatoes. Bata began sampling immediately, even though Michael Stitzmann, a Dawson partner, had asked Bata to wait to begin sampling until Stitzmann arrived. In the presence of other Dawson employees, Bata collected 56.31 pounds of potatoes using the "zig-zag" method of sampling. Under this method, Bata zig-zagged across the stockpiled potatoes and collected a sample about every three paces. Bata later testified that the stockpiled potatoes were in piles about fifteen to twenty feet high and that he obtained his samples by reaching six or eight inches below the surface. After collecting his sample, Bata commented that he thought the potatoes looked good. Dawson claims that in response to this statement, Stitzmann disagreed, showed Bata potato juice flowing from culverts under the piles, characterized the flow as indicative of potato rot, and asked Bata to take another sample. RMA disputes that Stitzmann made this request for resampling, but in any event, resampling did not occur at that time.
The next day, December 6, Rain & Hail determined the results of its adjustment. Bata found 1.11 pounds, or 1.97% pink rot and 0.87 pounds or 1.55% "other soft rot," for a total rot of 3.52%. This percentage was below the 5% required to trigger insurance coverage under the policy, so Rain & Hail denied Dawson's claim. The insurance adjustment for Dawson's claim continued over the next several months, and on May 11, 2007, RMA issued a final denial. With regard to the stored potatoes, RMA found that there was no coverage because there was not a sufficient percentage of the potato crop affected by rot. Dawson requested administrative review of this decision.*fn3
In September and October of 2007, a National Appeals Division ("NAD") hearing officer conducted an evidentiary hearing on the insurance issues and found in favor of Dawson on all indemnity issues. The hearing officer found that the sample the adjuster took from the piles of stored potatoes was not representative, as required by the Northern Potato Loss Adjustment Standards Handbook. The hearing officer did not discuss Bata's sampling methodology, but rather based his conclusion largely on the testimony of Dr. Gary Secor, an expert in potato pathology and professor at North Dakota State University, who testified that "[a] substantial amount of soft rot had to occur in the storage facility to have potato juice running out of the culverts underneath the potato pile." The hearing officer also found that Stizmann had asked Bata to resample the potatoes, and that Bata had refused. On these facts the hearing officer concluded as follows:
If an adjuster saw these signs occurring in a storage bin, I believe it would have been prudent to go back and examine what is actually happening in the storage bin.
I believe this is where we can inject a little common sense to this case. Since the adjusters were already at Appellant's Warehouse when Partner 1 advised them of the problems with the potatoes in the south half of the Warehouse, the adjusters should have resampled the potatoes. Thus, the Insurance Adjusters erred in not resampling Appellant's potatoes on December 5, 2006.
Following this decision, RMA requested Director Review, pursuant to 7 C.F.R. § 11.9(a). After reviewing the record, the deputy director reversed the hearing officer's finding. The deputy director first noted that the adjuster testified that he used the zig-zag method of sampling. The deputy director then addressed the testimony of Dawson's expert, who ...