Business and Financial

Happy last day of June! We close out the month with another Ag Law Harvest, which brings you two interesting court cases, one about an Ohio man asserting his right to give away free gravel, and another which could decide the constitutionality of “Ag-Gag” laws once and for all. We also provide a few federal policy updates and announcements. 

Ohio Department of Agriculture Prohibited from Fining a Landowner for Charging to Load Free Gravel.  In May of 2020, Paul Gross began selling gravel and topsoil (collectively “gravel”) that he had accumulated from excavating a pond on his property. Gross charged $5 per ton of gravel, which was weighed at a scale three miles from his property. After receiving a complaint of the gravel sales, the Madison County Auditor sent a Weights and Measures Inspector to investigate Gross’s gravel sales. The Inspector informed Gross that the gravel sales violated Ohio Administrative Code 901:6-7-03(BB) (the “Rule”) because the gravel was not being weighed at the loading site. Under the Rule, “[s]and, rock, gravel, stone, paving stone, and similar materials kept, offered, or exposed for sale in bulk must be sold . . . by cubic meter or cubic yard or by weight.” As explained by the Inspector, Gross’s problem was that he was selling gravel by inaccurate weight measurements because the trucks hauling the gravel lose fuel weight when traveling the three miles to the scale. 

Instead of installing scales on his property, Gross decided to start giving away the gravel for free. However, Gross did charge a flat rate fee of $50 to any customer that requested Gross’s help in loading the gravel. According to Gross, this $50 fee was to cover the cost of his equipment, employees, and other resources used to help customers load the gravel. Unsatisfied with the structure of this transaction, the Ohio Department of Agriculture (“ODA”) decided to investigate further and eventually determined that even though Gross was giving away the gravel for free, the flat fee for Gross’s services represented a commercial sale of the gravel and, therefore, Gross was in continued violation of the Rule. 

For the alleged violation, the ODA intended to impose a $500 civil penalty on Gross, who requested an administrative hearing. The hearing officer recommended imposing the penalty and the Franklin County Court of Common Pleas agreed. Gross appealed the decision to the Tenth District Court of Appeals, which found that Gross was not in violation of the Rule. 

The Tenth District reasoned that customers were paying for the service of moving the gravel, not for the gravel itself. The court explained that the purpose of the Rule is to protect consumers by ensuring transparent pricing of materials like gravel. Since Gross was not in the business of selling gravel and the transaction was primarily for services, the court concluded that the ODA’s fine was impermissible. 

North Carolina Asks U.S. Supreme Court to Review “Ag-Gag Law.”  In 2015, the North Carolina Legislature passed the North Carolina Property Protection Act, allowing employers to sue any employee who “without authorization records images or sound occurring within” nonpublic areas of the employer’s property “and uses the recording to breach the [employee’s] duty of loyalty to the employer.” After the act’s passage several food-safety and animal-welfare groups, including the People for the Ethical Treatment of Animals (“PETA”), challenged the Property Protection Act in an effort to prevent North Carolina from enforcing the law. 

A federal district court in North Carolina struck down the law, finding it to be a content-based restriction on speech in violation of the First Amendment of the United States Constitution. The 4th Circuit Court of Appeals upheld the district court’s ruling also reasoning that the law’s broad prohibitions restrict speech in a manner inconsistent with the First Amendment. Now, the North Carolina Attorney General, Josh Stein, has petitioned the Supreme Court of the United States (“SCOTUS”), asking the Court to reverse the 4th Circuit’s decision. If SCOTUS decides to hear the case, the justices will be tasked with determining “[w]hether the First Amendment prohibits applying state tort law against double-agent employees who gather information, including by secretly recording, in the nonpublic areas of an employer’s property and who use that information to breach their duty of loyalty to the employer.” 

We have reported on several Ag-Gag laws and the court challenges that have followed. If SCOTUS decides to take up the case, we may finally have a definitive answer as to whether Ag-Gag laws are constitutional or not. 

Lab-grown Chicken Given the Green Light by the USDA. The United States Department of Agriculture’s (“USDA”) Food Safety and Inspection Service granted its first approvals to produce and sell lab-grown chicken to consumers. Upside Foods and Good Meat, the two entities given the green light by the USDA, plan on initially providing their “cell-cultivated” or “cultured” chicken to patrons of restaurants in the San Francisco and Washington D.C. areas. However, the timeline for such products showing up in your local grocery store has yet to be determined.  

USDA Suspends Livestock Risk Protection 60-Day Ownership Requirement. The USDA’s Risk Management Agency issued a bulletin suspending the 60-day ownership requirement for the Livestock Risk Protection (“LRP”) program. Normally under the LRP, covered livestock must be owned by the producer within the last 60 days of the specified coverage endorsement period for coverage to apply. According to the bulletin, “[d]ue to the continuing severe drought conditions impacting many parts of the nation, producers are struggling to find adequate supplies of feed or forage, causing them to market their livestock sooner than anticipated.” In response, the USDA is allowing producers to apply to waive the 60-day ownership requirement, subject to verification of proof of ownership of the livestock. The USDA hopes this waiver will allow producers to market their livestock as necessary while dealing with the current drought effects. Producers will be able to apply for the waiver until December 31, 2024. 

USDA Announces Tool to Help Small Businesses and Individuals Identify Contracting Opportunities. Earlier this month, the USDA announced a new tool to assist industry and small entities in identifying potential opportunities for selling their products and services to USDA.  The Procurement Forecast tool lists potential contracting or subcontracting opportunities with the USDA. Until now, businesses could only access procurement opportunities through the federal-wide System for Award Management (“SAM”). The USDA hopes the Procurement Forecast tool will provide greater transparency and maximize opportunity for small and underserved businesses. 

The recent failures of three banks may have some farmers concerned about the security of their cash reserves.   Many farms hold large reserves of cash, the loss of which would be financially devastating.  The federal government does provide protection through the FDIC but not all financial institutions participate in FDIC, not all account types are covered and there are limits to the protection.  However, with a little bit of planning, even large amounts of cash can be fully protected from bank failures.

FDIC

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits and examines and supervises financial institutions for safety, soundness, and consumer protection.  FDIC deposit insurance coverage depends on two things: (1) whether your bank is FDIC-insured and (2) whether your chosen financial product is a deposit product.  If a bank fails, the FDIC will immediately ensure that holders of eligible accounts will receive their funds subject to coverage limits.  To determine if a specific financial institution participates in FDIC, the name of the bank can be searched in the following database:  https://banks.data.fdic.gov/bankfind-suite/bankfind.

Eligible Accounts

The following accounts are eligible for FDIC coverage:

• Checking accounts
• Savings accounts
• Money Market Deposit Accounts (MMDAs)
• Time deposits such as certificates of deposit (CDs)
• Cashier's checks, money orders, and other official items issued by a bank

Accounts that are not eligible for FDIC coverage are as follows:

• Stock investments
• Bond investments
• Mutual funds
• Crypto Assets
• Life insurance policies
• Annuities
• Municipal securities
• Safe deposit boxes or their contents
• U.S. Treasury bills, bonds or notes¹

Coverage Limits

FDIC coverage is not unlimited.  Generally, coverage is capped at $250,000 but can be more depending on the type of account and number of owners/beneficiaries.  The coverage limit for each type of account is as follows:

Single Accounts (Owned by One Person)                  $250,000

Joint Accounts (Owned by Two or More Persons)      $250,000 per co-owner

Corporation, Partnership Accounts                             $250,000

Revocable Trust Accounts                                          $250,000 per owner per unique beneficiary

Irrevocable Trust Accounts                                         $250,000 for each unique beneficiary

Government Accounts                                                $250,000

Strategies to Insure Large Reserves of Cash

The account restrictions and coverage limits can be problematic for many farms.  It is not uncommon for farms to hold more than $250,000 in a single account to buy inputs, buy the next farm or as a reserve for lean times.  Consider the following example:

Farmer has $1,000,000 in his individual savings account at Bank Co.  If Bank Co. were to fail, FDIC would only protect $250,000 of his $1,000,000, leaving $750,000 unprotected and at risk.

The following are a few strategies that can be used to insure large cash reserves:

Bank Networks.  Some banks are part of a network that allow eligible accounts to be set up at other, cooperating banks.  The primary bank establishes eligible accounts at other banks and then transfers up to $250,000 into each account.  Continuing the above example, Bank Co. establishes a savings account at three other banks – 1^st Bank Co., 2^nd Bank Co. and 3^rd Bank Co.  Bank Co. then transfers $250,000 to each bank.  Farmer now has fully protected accounts at four different banks and his entire $1,000,000 is shielded with FDIC protection.  Bank Co. took care of setting up the three additional accounts and transferring the funds.

Open Different Types of Eligible Accounts.  FDIC will cover different types of eligible accounts at the same bank.  So, multiple type accounts at the same bank can insure more than $250,000.  In this scenario, Farmer can change his individual account to a joint account by adding his spouse ($500,000 coverage), transfer $250,000 to an account held by his farm corporation and transfer $250,000 to an account owned by his trust.  By adding owners and establishing different types of eligible accounts, Farmer’s entire $1,000,000 can be covered by FDIC and remain at Bank Co.

Open Accounts at Multiple Banks.  This strategy is similar to using a Bank Network except that the account holder establishes the accounts.  The account holder may prefer to personally open accounts at multiple banks rather than allowing his bank to do so.  With this strategy,  Farmer opens savings accounts at 1^st Bank Co, 2^nd Bank Co. and 3^rd Bank Co. and transfers $250,000 to each new account.  Now, Farmer’s entire $1,000,000 is covered by FDIC but at four different banks. 

Conclusion

Producers holding funds in accounts not eligible for FDIC coverage or holding funds in excess of FDIC limits should consider implementing strategies to cover any unprotected money.  As the above examples illustrate, it is relatively easy to cause large cash reserves to be entirely insured by FDIC.  The producer’s banker or financial advisor should be consulted to determine the strategy that will work best to protect the maximum amount of funds. 

¹ These investments are backed by the full faith and credit of the U.S. government.

In the final installment of the farm insurance series, we look at unique activities and/or assets that may not be covered by a typical farm policy.  Most farm policies will automatically cover traditional farming activities and assets related to crop and livestock production.  However, many farming operations include assets or activities that may be non-traditional and thus not covered by the farm policy.

Below is a list of farm activities and farm assets that may not be covered by standard farm policies. Each of these activities and assets are a source of liability exposure. Farmers can review this list and identify any asset or activity that may apply to their farming operation.  Then, the list can be provided to their insurance agent to ensure that the farm has full liability protection.  Almost any asset or activity can be covered with the addition of an endorsement to the farm policy. 

• Agritourism
• Aircraft application of pesticide/fertilizer (own or custom)
• Aircraft for personal use
• ATV/side x side/recreational vehicle
• Barns and structures that are not currently being used
• Confined animals
• Custom application of pesticides or fertilizer
• Custom farm operations such as planting or harvesting
• Drones – scouting
• Drones – application of pesticides/seed
• Embryos stored or in recipient animal
• Exotic or non-domesticated animals
• Farm Markets
• FFA/4-H Projects
• Hauling crops, goods or cargo for others
• Holding products for customers after payment (seed, hay, inputs)
• Horse boarding, riding or training services
• Hunting leases or other paid recreational uses
• Leasing buildings or structures to others
• Non-owned livestock
• Off-premises use of ATV/recreational vehicles
• Oil/gas wells
• Ponds with docks, diving boards
• Pick-Your-Own
• Portable buildings or structures
• Pulling tractor/truck
• Purchased feed/seed/inputs purchased but not picked up/delivered
• Radio or TV Antennas
• Rental property
• Rental of grain bins
• Sale or production of food or other consumable goods
• Solar panels
• Swimming pool
• Tractor shows/parades
• Tours (paid or unpaid)
• Using borrowed equipment
• Using rented equipment
• Unoccupied houses
• Valuable refrigerated or frozen products
• Valuable or important information on computers
• Watercraft
• Wind turbines
• Website or online presence that collects money or stores customer information.
• Other____________________
• Other____________________
• Other____________________

The need for good farm insurance is well known and obvious to everyone in the farm community.  However, understanding how farm insurance works is not as universal.  Farmers know they need insurance and that the premiums must be paid but they may not be familiar with some of the key concepts of an insurance policy.  One such concept is co-insurance.

A farm insurance policy is a contract between the insured and the insurance carrier.  For the policy to be fair to both parties, the insured must provide an accurate inventory of the assets to be covered, including values.  The insurance carrier then uses the inventory of assets and values to calculate the premiums it must charge to carry the insurance. 

A policyholder may be tempted to suppress the values of the assets in an attempt to keep the premiums lower or, perhaps more likely, may not keep up with the replacement value of property.  In either case, whether intentional or not, the insurance carrier is put into an unfair arrangement as it calculates premiums based on undervalued assets.  Consider the following example:

Farmer bought a tractor five years ago for $80,000.  Farmer believes the tractor has declined in value and includes a $60,000 value on his insurance policy.  a similar tractor today would cost $100,000. Farmer’s insurance policy pays replacement value in the event of damage or loss.  The tractor is lost in a fire.  Farmer expects to be paid the replacement value of $100,000. 

In this scenario, Farmer may expect to be paid $100,000 to replace the tractor but he paid premiums based on a $60,000 value.  It would be unfair to make the insurance carrier pay $100,000 in replacement costs when it based its premiums on a $60,000 tractor.

To avoid the scenario in the above example, farm insurance policies include a co-insurance provision.  This concept is an agreement between the insured and the insurance carrier that a minimum amount of insurance must be purchased to replace property in the event of a loss.  If the policyholder purchases less than the specified percentage, the insurance carrier is not required to payout the full replacement value – making the policy holder a “co-insurer”.  The insurance policy usually requires the insured to purchase insurance on 80% - 100% of the value of property.  Co-insurance generally applies to outbuildings, dwellings, and blanket farm personal property.  Consider the following example:

Using the same example as above, Farmer’s co-insurance provision requires 80% coverage.  The tractor was only valued at 60% of the replacement value so the co-insurance provision in Farmer’s insurance policy is triggered.

The payout calculation for this loss is as follows:

                        Tractor Replacement Value =                        $100,000

                        Co-insurance requirement =                           80%

                        Required amount of insurance =                    $80,000 ($100,000 x 80%)

                        Actual amount of insurance purchased =       $60,000

                        Actual insurance/ required insurance =          75% ($60,000/$80,000)

                        Required payout¹ =                                        $75,000 (75% x $100,000)

As this example illustrates, Farmer did not meet his obligation to buy insurance on at least 80% of the value of the tractor.  Farmer reported a value of $60,000 or 75% of the value of the tractor.  By not meeting the 80% co-insurance requirement, Farmer triggered the co-insurance provision and is therefore partly responsible for the replacement cost.   Farmer becomes the co-insured for 25% of the replacement value, the proportion that Farmer undervalued the combine.  If Farmer had valued the tractor at $80,000 or higher, the insurance carrier would have been required to payout the full $100,000 for the loss.  By inadvertently undervaluing the combine, Farmer forfeited $25,000 of insurance payout.

Co-insurance is an important part of a farm policy insurance that most people have never heard of. The co-insurance provision should be reviewed with the insurance agent along with the value of assets to ensure that full payouts will occur in the event of a loss.  It does no good to discover that assets are valued too low after a claim is submitted, any adjustments in value to comply with the co-insurance requirement must be done before there is a loss.