Further discussion of the supplemental coverage option
A previous post provided an initial look at the Supplemental Coverage Option (SCO) in the new farm bill (it can be found here). This post continues that discussion with further analysis of the statutory language authorizing the program and additional examples illustrating its expected operation. The examples in our earlier post on SCO assumed the example farm's crop insurance APH yield was the same as the expected county yield. The examples below illustrate how SCO could work for farms whose APH yields differ from the expected county yield.
A closer look at two key provisions from the Crop Insurance Act as amended by the farm bill help clarify how the program is expected to function for farmers. First, section 508(c)(3)(B), as amended by the 2014 Farm Bill, provides the authority for this new, supplemental coverage and it states that SCO is:
"based on an area yield or loss basis to cover a part of the deductible under the individual yield and loss policy." (emphasis added).
Similarly, section 508(c)(4)(C)(i), as amended by the farm bill, instructs the Federal Crop Insurance Corporation to:
"offer producers the opportunity to purchase coverage in combination with a policy or plan of insurance offered under this subtitle that would allow indemnities to be paid to a producer equal to a part of the deductible under the policy or plan of insurance." (emphasis added).
As discussed in the earlier post, SCO provides coverage which is based on an area yield or loss basis, implying county level coverage. Also as previously discussed, SCO is triggered when county losses exceed 14 percent of normal levels equating to an 86% coverage level. Finally, SCO's coverage is not to exceed the difference between 86 percent and the coverage level selected for the underlying, individual plan of insurance. Thus, SCO payments (and liability) are limited in that coverage is only for a portion of the producer's individual insurance deductible.
This makes SCO a rather unique plan of insurance. Indemnities are triggered based on county losses in excess of 14 percent of normal, which means the entire county must suffer at least a 14 percent loss in order for any individual's SCO policy to pay an indemnity. However, the actual indemnity received by any individual producer will be tied to their individual deductible value. Based on this interpretation of the farm bill language above, SCO essentially provides a county trigger on a limited range of individual liability coverage. Losses in excess of 14% at the county level are required to trigger an SCO payment. The size of the county level loss results in a payment factor which is applied to the individual producer's insurance deductible to determine the actual SCO indemnity payment.
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