Farm insurance fraud is cheating taxpayers out of millions

Reporting from Sacramento —  The federal investigator took the witness stand and described the crime scene: a sprawling field clogged with boulders, native grasses and knee-high sagebrush.

The defendant, a California farmer, had said the site was a 200-acre wheat field. But the investigator found no tilled soil, no tractors, no plows. In fact, she testified, she found no wheat.

The field was just a field — and a prime example, federal prosecutors allege, of a wave of agricultural insurance scams sprouting across the nation.

Such crimes are being perpetrated by farmers who fraudulently claim that weather or insects destroyed their crops to cash in on a government-backed insurance program. Some cheats never bother planting at all. Others sell their harvests in secret and then file claims for losses, collecting twice for the same crop.

One North Carolina tomato grower, armed with a camera and a party-size bag of ice cubes, created a mock hailstorm in his fields and swindled the federal government out of $9.2 million.

These growers — along with crooked insurance agents and claims adjusters — are using the program to bilk insurance firms and the U.S. government out of millions of dollars a year, according to prosecutors, industry officials and high-tech experts who review questionable claims for the U.S. Department of Agriculture.

Taxpayers are on the hook for many of those losses.

The federal government has been fighting back against such criminals, using satellite technology, advanced data-mining techniques and other tools to spot fraud. The penalties, too, have grown stiffer. These efforts have saved taxpayers at least $730 million over the last decade, by some estimates.

Critics, however, say that such high-tech oversight catches only the most egregious cases, and that insurance companies have little incentive to be more aggressive lest they lose lucrative federal subsidies to sell crop policies.

“Politically, it makes sense not to care too much, because otherwise the insurance companies get hauled up to Washington and read the riot act for not using taxpayer money efficiently to help out the poor farmer,” said Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University.

The vast majority of U.S. farmers follow the rules, insurers and federal officials said. Bert Little, director of the data-mining group Center for Agribusiness Excellence, said that less than one-half of 1% of the farmers who take part in the program cheat the system.

“But that less than 1% represents a pretty big chunk of money, between $100 million to $200 million a year,” said Little, whose Texas group is contracted by the federal government to analyze farm records in search of fraud clues.

By its very nature, farming is risky. The federal government created the Federal Crop Insurance Corp. and, in 1938, started selling policies to farmers to help them recover from the Great Depression. By the 1980s, the government was subsidizing farmer premiums to encourage participation, and Congress had voted to expand the program and turn it into a public-private partnership.

Washington handed over the selling and servicing of these rural policies to a tight-knit group of insurance companies, with some lucrative incentives. Lawmakers agreed the U.S. Treasury would still guarantee the riskiest policies. The government would also pay agents’ commissions, cover some of the insurers’ operating costs and continue to subsidize farmers’ annual premiums. Today, taxpayers cover about 60% of these premiums.

The program ballooned, thanks to insurance industry lobbying and federal rules that make it tough for farmers to go without coverage. Although the amount of acreage covered remained relatively stable, the value of insured crops climbed to $78 billion in 2010 from $36.7 billion in 2001. Premiums, tied to the volatility of the commodity futures market, jumped in price. Agents’ commissions, which are tied to crop prices and premiums, have tripled over the last decade.

The trouble, critics say, is that private insurers and their agents reap most of the benefits while the public still picks up the losses.

In 2009, taxpayers shelled out nearly $4 billion to the 16 insurers involved in the program, according to the USDA’s Risk Management Agency, which administers the program. Of that, $1.5 billion was paid in commissions to an estimated 15,000 insurance agents. Because there were more gains than losses, the USDA said it retained $1.4 billion, some of which came from farmers’ premiums.

Meanwhile, taxpayers paid $1.7 billion to subsidize farmers’ premiums.

“The net effect is that the industry keeps the most profitable customers and shifts the riskiest, least profitable customers to the taxpayers,” Iowa State’s Babcock said.

The insurance industry disputes the figures and argues that the government gets a good deal for its investment. Insurers said their profits are reasonable, given the expense and risk involved. Without them, industry officials said, the public would end up paying more.

“If a disaster struck, taxpayers would undoubtedly be called on to support agriculture,” said Tom Zacharias, president of the trade group National Crop Insurance Services.

USDA officials agree that the program plays a crucial part in the broader economic safety net for farmers. But in the face of ballooning federal deficits and complaints from farmers about agent commissions, the USDA pushed through a plan last year that cuts $6 billion over the next 10 years and caps how much of the insurers’ administrative costs the government will pay. More cuts to this and other farm subsidy programs, officials warn, could be coming.

“It’s on the table. No doubt about it, because everything is on the table,” said Risk Management Agency Administrator William J. Murphy.

Complaints about fraud and waste have fueled calls for changes to the program. In recent years, criminal investigators have unearthed fraud in potato fields in Michigan, cotton farms in Texas and sweet potato plantings in Louisiana. In eastern North Carolina, federal officials have uncovered one of the nation’s largest crop insurance scandals to date.

Twenty-two people so far have pleaded guilty in connection with a conspiracy to swindle at least $22 million by pretending foul weather had destroyed farmers’ tobacco fields. Prosecutors said growers secretly sold off their harvested tobacco for additional millions. The conspiracy involved at least 14 farmers, three warehouse workers, two rural check cashers, two insurance agents and an insurance adjuster. That investigation, dubbed Operation Under the Barn, is ongoing.

At the federal courthouse in Sacramento, Stockton-area wheat farmer Gregory P. Torlai Jr. is on trial, accused of defrauding the Federal Crop Insurance Corp. and a private insurer of at least $400,000. Prosecutors said he filed phony crop information and lied about how many acres of wheat he planted in Lassen, San Joaquin and Contra Costa counties. To get the payout, prosecutors alleged, Torlai submitted dummied-up store receipts for seeds he’d never bought and filed insurance claims for land he’d never owned.

Torlai, 49, pleaded not guilty to the 17 counts. He and his attorney declined to comment. In court documents, defense attorney Donald Heller argued that Torlai didn’t know he was making false statements in his insurance claims: He was simply following the instructions given to him by an independent insurance adjuster.

If found guilty on all charges, Torlai faces up to 30 years in prison and a $1-million fine.

Last month, as the trial progressed, prosecutors showed snapshots of Torlai’s farm in Lassen County, about 200 miles northeast of Sacramento. They had been taken by Marla Fricke, an investigator with USDA’s Office of the Inspector General. Torlai, a slender man with weathered skin, sat stone-faced, gripping his brass rodeo belt buckle, one leg bouncing nervously under the defense table.

Assistant U.S. Atty. Michael Anderson asked Fricke what she saw in the photographs.

“Native grasses, sagebrush and rocks,” Fricke said. “Pits. Garbage put into those big pits. Normally, in wheat fields, you don’t see garbage pits.”

p.j.huffstutter@latimes.com