farm insurance
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.
1 Any deductible would also be deducted from the payout.
In the event of a property loss or a liability incident, the insured and the insurance carrier cooperate to determine the type of coverage and the extent of coverage required by the insurance policy. As a practical matter, an insured is well-advised to thoroughly document the loss event. This may include written notes, pictures and/or retained documents.
Notification
The insured should notify law enforcement if any laws were broken in causing the loss event. This notification should be promptly followed by notice to the insurance company and include a general description of the events and the property that is damaged. This notice does not usually need to be in great detail, but a simple explanation of how the damage occurred, when the damage occurred, and what property was damaged. Additionally, it is important for the insured to take reasonable steps to protect the property from further diminishing in value. Essentially, the insured should not allow the property to be completely destroyed if the insured party can salvage any of the value.
Accounting
After notification is provided, the duties and responsibilities of the insured are not over. For a property loss, the insured party should complete an accounting of the damaged property. The accounting may include quantities, costs, values, and the specific amount of loss claimed. An accounting serves multiple purposes. First, it causes the insured to identify all property subject to loss and the extent of the loss in an organized manner. An accounting also provides a summary to the insurance carrier so that the carrier may begin the claim process more expeditiously. The insurance provider will likely conduct an investigation into the claimed loss and an accounting will assist the carrier in its investigation. Last, in the event the insured disputes the insurance carrier’s determination related to the loss, the accounting will make the process of challenging the insurance carrier’s payout easier.
Payout Determinations
Obviously, insurance is obtained for the financial protection it provides to the insured in the event of a loss event. Thus, the amount one receives from their insurance carrier is likely one of the main considerations when reviewing or shopping for a new policy. Essentially, insurance payouts are calculated based on two different mechanisms, the replacement value or the actual cash value. These two payout methods create the basis for the amount of money an insured party will receive for their loss.
Replacement value, as the name suggests, means that an insured party will be paid the amount it will cost to replace the lost items and/or structures. Essentially, a policy utilizing replacement value will pay the smaller amount of restoring the items to their condition at the time of damage or the cost of replacing them with items of the same condition. This method can provide a more stable and higher amount of payout in certain circumstances.
The other means of determining an insurance payout is by using actual cash value. Generally, because most items depreciate over time, the amount paid under this method is commonly lower than the replacement value method. Under the actual cash value method, the insured will be paid the value of the item’s depreciated value rather than the amount it will cost to replace.
The difference between these two payout methods is an important consideration when analyaing insurance policies, especially with the recent rise of inflation. Consider the following example:
A new tractor was purchased in 2020 for $300,000. The tractor is now worth $200,000 due to depreciation caused by wear and tear. The same model tractor is selling new today for $350,000. In this situation, someone who has a replacement value insurance policy would receive the $350,000 necessary to repurchase the same/similar model. On the other hand, someone covered under the actual cash value method would only receive the $200,000 amount.
The above example is a simple explanation of the difference between replacement value and actual cash value payouts. Many smaller calculations can make the difference more nuanced. Be sure to work with your insurance agent to determine the payout for specific losses.
An insurance policy will typically include a limit on the payout. The insurance carrier includes the limit to protect itself from unusually large claims or unforeseen claims. For example, using the above scenario, the insurance carrier may have included a limit of $300,000 for the payout. In that event, the owner would have only received $300,000 for the payout rather than the $350,000 for the replacement value payout. Limits to payouts are an important term in insurance policies, be sure review the limits carefully to ensure adequate coverage for farm assets.
Appealing Coverage Determinations
After submitting a claim, the insurance carrier will typically send a letter stating the extent of the coverage or a denial of coverage. The letter will also include instructions on how to appeal the determination. If the insured does not believe the coverage or denial determination is correct, they can appeal the determination. The notice of appeal is sent to the insurance carrier and will initiate the appeal process. Be sure to meet all deadlines and follow the instructions for appealing carefully. A missed deadline or a misstep in filing the appeal can extinguish appeal rights. The matter must typically be appealed to the insurance carrier before taking the matter to arbitration or litigation.
If the insurance carrier denies the appeal, then litigation and/or arbitration may be the next step in obtaining the claim. At this point, hiring an attorney is often warranted. An attorney experienced in working with matters related to insurance and insurance carriers can provide valuable insight and counsel in an insurance claim appeal. Some policies may require arbitration to resolve a dispute. Arbitration is a private dispute resolution process where a person or persons hear arguments from both parties then issue a decision. Arbitration can be more expeditious and less costly than litigation. Matters taken to litigation are decided by a court. Litigation may take longer and be more expensive than arbitration but also may provide more appeal rights.
In addition to appeals to the insurance carrier, complaints about the conduct of insurance carriers can be submitted to the Ohio Department of Insurance. The complaint should explain the matter in some detail. Including photos or other supporting evidence with the complaint is often a good idea. The agency will review the complaint and, if warranted, conduct an investigation into the matters provided by the complaint. The agency may reach out to the carrier to encourage a resolution of the matter identified in the complaint. All insurance carriers conducting business in Ohio are subject to the rules and regulations of the Ohio Department of Insurance.
Choosing An Insurance Agent and Carrier
An insurance agent is an important person on a farmer’s management team. Selection of the agent is important to ensure the insurance policy meets the needs of the farm. The insurance agent should have a good understanding of agriculture and experience working with farms. Additionally, the agent should be able and willing to build a policy for each farm, not simply use the same template for every farm. Each farm is unique, and the farm insurance policy should be unique as well. When interviewing prospective agents, be sure to ask for their background and experience with farms and consider asking for referrals from other farms.
The insurance agent can only design an insurance policy to cover the farm activities and farm assets that they know about. It is the farm owner’s responsibility to inform the insurance agent of how the farm operates, who is involved with the farm, and the assets owned by the farm. Consider inviting the insurance agent to visit the farm to be sure they have a good and full understanding of the operations of the farm.
Each insurance agent works with one or more insurance carriers. Several services provide financial ratings of insurance carriers, and it is worthwhile to know the rating of the carrier you work with. The rating indicates the carrier’s ability pay claims, especially in times of large claims like a natural disaster. Understanding your carrier’s rating is important because the carrier has an ongoing financial obligation to you. If the carrier is unable to cover all claims in a natural disaster or otherwise fails to meet is coverage obligations, a farm covered by that carrier can be at risk. Ask the insurance agent for their carrier’s rating. Keep in mind that the same rating can mean different things depending on the service used. For example, an A+ score is the second to highest score for A. M. Best while an A+ is the fifth best rating for Moody’s.
Potential Reasons for Cancellation of Your Policy
Your farm insurance will include several reasons for cancellation. A farm insurance policy likely includes more intricate reasons for cancellation than a typical homeowner’s policy. When cancelling a policy, the insurance carrier will generally mail the notice of cancellation to the insured at least 30 days before the effective termination date. This notice period provides time for the insured to obtain another insurance policy or to correct errors to maintain the current insurance. When a policy is cancelled, a refund is usually issued to the insured for any amount that is already paid for a period that will not be covered under the cancelled policy.
Nonpayment of Premiums. The first reason for cancellation is the most obvious one, nonpayment of premiums. This is as simple as it sounds. The insured must make sure to make timely payments to continue to keep its insurance policy in place and at work. Insurance carriers are required to provide written notice to the insured that premiums are past due and that the policy will be cancelled if payment is not made.
Fraud and Reckless Omission. Other reasons that a policy might be cancelled are connected, (1) the discovery of fraud or material misrepresentations in the information given to obtain the policy and (2) a reckless omission of information given to obtain the insurance policy. These two provisions cover any incorrect information that may have been provided, intentionally or not, to the insurance agency when procuring the policy. An insurance company relies on the accuracy and validity of the information they are provided when deciding the appropriate methods of coverage. It is necessary to ensure that accurate information is transmitted to any insurance provider.
Risk Profile. A policy can be cancelled due to changes in an insured’s risk profile. The insurance carrier issues a policy based on the known risks attributable to the insured. If the insured increases their risk exposure, the insurance carrier may not be willing or able to cover the additional risk exposure and cancel the policy. An example provision in an insurance policy may be something like “a substantial change in the individual risk which increases the hazard potential to the insurer unless the change was reasonably foreseeable.” Similarly, a policy may include language such as “any determination that the insurer determines could create a condition that is hazardous to the public.”
Compliance. If the insured fails to maintain adequate compliance with the safety codes applicable to a building or structure the insured party risks losing their coverage for the building or structure.
Cancellation by Insured. An insured typically has the right to cancel their policy at any time, although some fees might apply. Generally, cancellation by the insured will require the individual to deliver notice to the insurance company.
Farms are subject to more risks than ever before. Whether it’s the liability exposure of driving equipment on roadways or the potential of property loss due to a barn roof collapse, every farm has multiple sources of risk. While farmers can reduce their risk exposure through good business practices and rigorous safety protocols, there is no way to entirely eliminate inherent risks. For this reason, insurance policies that adequately protect against the multiple risks present is a necessity for farm operations.
All farmers probably know the importance of insurance to protect their livelihood and their farm assets. However, few farmers take the time to read and understand their insurance policy. The failure to read policies is not a result of apathy but more likely due to the almost unreadable nature of an insurance policy. Reading and understanding an insurance policy is difficult for anyone other than those in the insurance industry.
While each policy is unique, most farm policies do share some common terms or characteristics. The following is a discussion explaining the more general parts of a farm insurance policy. Understanding the different parts of a policy and the concepts of the policy can help to better evaluate a policy to determine if it provides adequate coverage for a farm.
An Insurance Policy Is a Contract
An insurance policy is a legal contract between an insurance company (the “insurer”) and the person or business entity being insured (the “insured”). The policy holds the insurer responsible for paying the insured for eligible claims. Furthermore, the contract requires the insured to meet certain obligations such as the timely reporting of claims. Once the policy becomes active, both the insurer and the insured are legally bound to the terms of the policy. This legal obligation is present even if the insured is unaware of some or all of the terms of the policy. It is the obligation of the insured to understand the policy.
Structure of an Insurance Policy
Most insurance policies contain the following sections:
- Declaration Page - identifies the person/entity insured and details about the policy
- Insuring Agreement – summary of terms and conditions of the policy
- Exclusions - specifically identifies what the insurance policy does not cover
- Conditions - provisions that can limit an insurance company’s obligation to pay or perform
- Endorsements and Riders - provisions that add, subtract, or modify the original insurance policy
What Does a Typical Farm Insurance Policy Cover?
Areas of Protection. A typical farm policy includes the following areas of protection:
- Liability
- Home and contents
- Farm personal property
- Farm structures
- Other additional coverages
A farm insurance policy typically covers both farm assets and household personal property. Having all assets covered under one policy is usually less expensive than having one policy for the farm assets and another policy for non-farm coverage. Noticeably absent from the above list are vehicles. A separate policy may be issued for the coverage of vehicles for both liability and property loss.
Liability Coverage. Liability coverage protects against most risks associated with the farm operation such as bodily injury, medical expenses and property damages caused by accidents associated with the farming operation. Also, and sometimes just as importantly, the policy will cover attorney’s fees associated with defending the liability incidents.
Property Loss Coverage. A farm policy will provide coverage for the loss of farm assets due to a covered peril. Farm assets are typically divided into two categories within the policy: personal farm property (machinery, grain, livestock) and farm structures. In the event of damage or destruction of a farm asset due to a covered peril, the insurance company will pay at least some, but necessarily all, of the value of the covered asset to the farm operation.
Types Of Coverage
Basic Coverage. A policy that provides basic coverage is only going to cover the insured for named perils. If an event that is not named in the policy occurs, no coverage is provided. Common perils that are often included in basiccoverage are:
- Fire
- Lightning
- Windstorm or Hail
- Explosion
- Smoke
- Vandalism
- Aircraft or Vehicle Collision
- Riot or Civil Commotion
- Sinkhole Collapse
Each of these perils will also include exceptions to coverage. For example, the Vandalism coverage usually excludes any buildings that have been vacant for more than 30 days. Again, any perils that are not expressly provided for are not covered under a basic coverage policy.
Broad Coverage. Broad coverage is more expansive than basic coverage but is still limited to only the named perils. This type of coverage will include the perils identified in the basic coverage plus additional named perils. The additional perils covered by broad coverage often include the following:
- Burglary/Break-in damage
- Falling Objects (like tree limbs)
- Weight of Ice and Snow
- Freezing of Plumbing
- Accidental Water Damage
- Artificially Generated Electricity
- Accidental Tearing Apart
- Loading/Unloading Accidents
Like basic coverage, the broad coverage perils often include exceptions. An example of a broad coverage exception is freezing of plumbing may not be covered in a building which does not maintain heat.
Special Coverage. Special coverage is the most comprehensive coverage available. Unlike basic and broad coverage, special coverage includes everything except the identified exceptions. Instead of identifying the perils covered, special coverage applies coverage to everything except what is specifically identified as an exception. Special coverage provides more comprehensive coverage because everything is included unless excepted. Remember, basic and broad coverage only applies to those perils expressly identified.
Special coverage may include many exceptions. For example, special coverage will likely include an exception for vandalism in buildings that have been vacant for 30 days. It is important to know what exceptions are included with special coverage.
Incorporation of Basic, Broad, and Special Coverage in The Insurance Policy
A policy may include one or more of the different types of coverages. For example, a policy may include specialcoverage on all farm machinery but broad coverage on all other personal property. It is important to know what assets are covered under which type of coverage. Special coverage is best for the most comprehensive coverage, but specialcoverage is also more expensive than basic and broad coverage. Weighing the additional cost of special coverage versus the benefit of comprehensive coverage provided is an important analysis to be done for each insurance policy.
In Part #2, we will discuss obtaining, managing and maintaining a farm insurance policy.
