Insurance
Yes, you read it right: our roundup of agricultural law questions includes a question on popcorn--not one we often hear. Below is our answer to it and several other legal questions we’ve recently received in the Farm Office.
A farm lease landlord didn’t notify a tenant of the intent to terminate a verbal farm lease before the new September 1 deadline. What are the consequences if the landlord now tries to enter into a new lease agreement with another tenant operator?
Ohio’s new “statutory termination law” requires a landlord to provide written notice of termination of a verbal farmland lease by September 1 of the year the lease is effective. The law is designed to prevent a tenant from losing land late in the leasing cycle, after the tenant has made commitments and investment in the land. The new law now establishes September 1 as the deadline for a valid termination, unless a lease provides otherwise. If a landowner terminates after September 1, the consequences are that a tenant could either try to force continuation of the lease for another lease period or seek damages for the late termination. Those damages could include reimbursement for work already completed, such as fall tillage, nutrient applications, and cover crops; reimbursement for input costs such as seed and fertilizer that tenant cannot use or return; and lost profits from the tenant's loss of the crop. Find our law bulletin on the new statutory termination date for farm leases on the Farm Office website.
A farmer plans to build a barn and grain bins close to the property line of a neighbor. Does the neighbor have a legal right to stop the farmer from building so close to the boundary?
No, probably not. Because the neighbor lives in a rural area, Ohio’s “agricultural exemption” from local zoning regulations applies to the situation. The agricultural exemption law states that except in limited circumstances, agricultural land uses and structures used for agriculture, like barns, are not subject to township or county zoning regulations and building permit requirements. If this township has building setback requirements in its zoning resolution, for instance, the farmer is not subject to the regulations and can build the barn closer to the property line than the setback provisions require and farmer is not required to obtain a zoning or building permit for the barn. One exception is that if the farmer’s land is less than five acres and is one of at least 15 lots that are next to or across from one another, the agricultural exemption would not apply to the farmer's land. Find the agricultural exemption from zoning in Ohio Revised Code 519.21.
In replacing a line fence, a landowner entered a neighbor’s property and cleared 10 feet from the fence of all brush and trees, even though the neighbor warned the landowner not to do so. Did the landowner have a right to cut and remove the neighbor’s trees and vegetation?
No. Ohio law in Ohio Revised Code 971.08 does allow a person to enter up to 10 feet of an adjacent neighbor’s property for the purpose of building or maintaining a line fence, but it is only a right of entry for the purpose of working on the fence. It allows a person to access the neighbor's property without fear of legal action for trespass. But the law does not allow a person to remove trees or vegetation within the 15 foot area. In fact, the law specifically states that a person will be liable for any damages caused by the entry onto the neighbor’s property, including damages to crops. Additionally, since the neighbor stated that the trees should not be removed and the landowner removed them anyway, the landowner could be subject to another Ohio law for “reckless destruction” of trees and vegetation. That law could make the landowner liable for three times the value of the trees that were removed against the neighbor’s wishes. Find the reckless destruction of vegetation law in Ohio Revised Code 901.51.
Would a milk contamination provision in an insurance policy address milk that could be contaminated as a result of the East Palestine train derailment?
Probably not. Milk contamination coverage provisions in a dairy's insurance policies typically only apply to two situations: unintentional milk contamination by the dairy operator and intentional contamination by a party other than the dairy operator. Contamination resulting from an unintentional pollution incident by a party other than the dairy operator would not fit into either of these situations. But insurance policies vary, so confirming a farm’s actual policy provisions is important when determining insurance coverage.
A grower of popcorn wants to process, bag, and ship popcorn. Does the grower need any type of food license?
No. Popcorn falls under Ohio’s “cottage food law.” Popcorn is on the list of “cottage foods” identified by the Ohio Department of Agriculture (ODA) as having lower food safety risk than "potentially hazardous foods." A producer can process and sell a cottage food without obtaining a food license from the ODA or the local health department. However, the producer may only sell the food within Ohio and must properly label the food. Labeling requirements include:
- Name of the food product
- Name and address of the business of the cottage food production operation
- Ingredients of the food product, in descending order of predominance by weight
- Net weight and volume of the food product
- The following statement in ten-point type: "This product is home produced."
Read our law bulletin on Ohio’s Cottage Food Law on the Farm Office website.
Tags: farm lease, statutory termination, line fences, trees, Zoning, agricultural exemption, dairy, Insurance, popcorn, cottage foods
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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.
It’s time to round up a sampling of legal questions we’ve received the past month or so. The questions effectively illustrate the breadth of “agricultural law,” and we’re happy to help Ohioans understand its many parts. Here’s a look at the inquiries that have come our way,
I’m considering a carbon credit agreement. What should I look for? Several types of carbon credit agreements are now available to Ohio farmers, and they differ from one another so it’s good to review them closely and with the assistance of an attorney and an agronomist. For starters, take time to understand the terminology, make sure you can meet the initial eligibility criteria, review payment and penalty terms, know what types of practices are acceptable, determine “additionality” requirements for creating completing new carbon reductions, know the required length of participation and how long the carbon reductions must remain in place, understand how carbon reductions will be verified and certified, be aware of data ownership rights, and review legal remedy provisions. That’s a lot! Read more about each of these recommendations in our blog post on “Considering Carbon Farming?”
I want to replace an old line fence. Can I remove trees along the fence when I build the new fence? No, unless they are completely on your side of the boundary line. Both you and your neighbor co-own the boundary trees, so you’ll need the neighbor’s permission to remove them. You could be liable to the neighbor for the value of the trees if you remove them without the neighbor’s approval, and Ohio law allows triple that value if you remove them against the neighbor’s wishes or recklessly harm the trees in the process of building the fence. You can, however, trim back the neighbor’s tree branches to the property line as long as you don’t harm the tree. Also, Ohio’s line fence law in ORC 971.08 allows you to access up to 10 feet of the neighbor’s property to build the fence, although you can be liable if you damage the property in doing so.
I want to sell grow annuals and sell the cut flowers. Do I need a nursery license? No. Ohio’s nursery dealer license requirement applies to those who sell or distribute “nursery stock,” which the law defines as any “hardy” tree, shrub, plant, bulb, cutting, graft, or bud, excluding turf grass. A “hardy” plant is one that is capable of surviving winter temperatures. Note that the definition of nursery stock also includes some non-hardy plants sold out of the state. Because annual flowers and cuttings from those flowers don’t fall into the definition of “nursery stock,” a seller need not obtain the nursery dealer license.
Must I collect sales tax on cut flowers that I sell? Yes. In agriculture, we’re accustomed to many items being exempt from Ohio’s sales tax. That’s not the case when selling flowers and plants directly to customers, which is a retail sale that is subject to the sales tax. The seller must obtain a vendor’s license from the Ohio Department of Taxation, then collect and submit the taxes regularly. Read more about vendor’s licenses and sales taxes in our law bulletin at this link.
I’m an absentee landowner who rents my farmland to a tenant operator. Should I have liability insurance on the land? Yes. A general liability policy with a farm insurer should be affordable and worth the liability risk reduction. But a few other steps can further minimize risk. Require your tenant operator to have liability insurance that adequately covers the tenant’s operations, and include indemnification provisions in your farm lease that shift liability to the tenant during the lease period. Also consider requiring your tenant or hiring someone to do routine property inspections, monitor trespass issues, and ensure that the property is in a safe condition.
My neighbor and I both own up to the shoreline on either side of a small lake--do I have the right to use the whole lake? It depends on where the property lines lay and whether the lake is connected to other waters. If the lake is completely surrounded by private property and not connected to other “navigable” waters, such as a stream that feeds into it, the lake is most likely a private water body. Both of you could limit access to your side of the property line as it runs through the lake. You also have the legal right to make a “reasonable use” of the water in the lake from your land, referred to as “riparian rights.” You could withdraw it to water your livestock, for example; but you cannot “unreasonably” interfere with your neighbor’s right to reasonably use the water. The law changes if the lake is part of a “navigable” waterway. It is then a “water of the state” that is subject to the public right of navigation. Others could float on and otherwise navigate the water, and you could navigate over to your neighbor’s side. Public users would not have the riparian rights that would allow them to withdraw and use the water, however, and would be trespassing if they go onto the private land along the shore.
If I start an agritourism activity on my farm, will I lose my CAUV status? No, not if your activities fit within the legal definition of “agritourism.” Ohio law states in ORC 5713.30(A)(5) that “agritourism” activities do not disqualify a parcel from Ohio’s Current Agricultural Use Valuation (CAUV) program. “Agritourism,” according to the definition in ORC 901.80, is any agriculturally related educational, entertainment, historical, cultural, or recreational activity on a “farm” that allows or invites members of the general public to observe, participate in, or enjoy that activity. The definition of a “farm” is the same as the CAUV eligibility—a parcel devoted to commercial agricultural production that is either 10 acres or more or, if under 10 acres, grosses $2500 annually from agricultural production. This means that land that is enrolled in the CAUV program qualifies as a “farm” and can add agritourism activities without becoming ineligible for CAUV.
Send your questions to aglaw@osu.edu and we’ll do our best to provide an answer. Also be sure to check out our law bulletins and the Ag Law Library on https://farmoffice.osu.edu, which explain many of Ohio’s vast assortment of agricultural laws.
Tags: carbon agreements, line fence law, trees, cut flowers, sales tax, Insurance, riparian rights, water rights, agritourism, cauv
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Did you know that a male moose loses its antlers every year? Moose usually lose their antlers every winter and grow new ones in the spring. Additionally, because of the lack of antlers during the winter months, a moose’s first line of defense is its sharp hooves, which can mortally wound a wolf or bear. This edition of the Ag Law Harvest kicks around a few USDA announcements and FDA rule proposals and sheds some light on overtime compensation for California’s agricultural workers.
USDA announces new micro-farm insurance policy. The U.S. Department of Agriculture’s (“USDA”) Risk Management Agency (“RMA”) announced that the USDA has developed a new micro farm insurance policy for agricultural producers with small-scale farms who sell locally. The new insurance policy seeks to simplify recordkeeping and introduces insurance coverage for post-production costs and value-added products. Farm operations that earn an average allowable revenue of $100,000 or less, or for carryover insureds, that earn an average allowable revenue of $125,000 or less are eligible for the policy. The new insurance policy will be available for the 2022 crop year. Crop insurance is sold and delivered sole through private crop insurance agents, a list of which can be found at the RMA Agent Locator.
USDA accepting applications to help rural communities get access to internet. The USDA announced that it has begun accepting applications for up to $1.15 billion in loans and grants to help rural communities gain access to high-speed internet. The announcement follows the recently enacted infrastructure bill, which provides another $2 billion in additional funding for USDA’s ReConnect Program. According to the USDA, the funding will be available for projects that serve rural areas where at least 90% of the households lack broadband service at speeds of 100 megabits per second (Mbps) (download) and 20 Mbps (upload). The USDA will give funding priority to projects that will serve people in low-density rural areas and areas lacking internet service speeds of at least 25 Mbps (download) and 3 Mbps (upload). In making the funding decisions, the USDA will consider the economic needs of the community to be served and the extent to which a provider will offer affordable service options to the community.
FDA proposing changes to testing requirements of pre-harvest agricultural water. The Food and Drug Administration (“FDA”) published a proposed rule that would change some provisions of the FDA’s Produce Safety Rule. The proposed rule seeks to replace the microbial criteria and testing requirements for pre-harvest agricultural water for covered produce other than sprouts. Some of the proposed changes include:
- Replacing the microbial quality criteria and testing requirements with new provisions for conducting pre-harvest agricultural water assessments for hazard identification and risk management purposes;
- A new testing option for certain covered farms that elect to test their pre-harvest agricultural water for generic Escherichia coli (“E. coli”);
- Providing additional flexibility in responding to findings from pre-harvest agricultural water assessments;
- Expedited implementation of mitigation measures for known or reasonably foreseeable hazards related to certain adjacent and nearby land uses; and
- Required management review of pre-harvest agricultural water assessments.
The FDA is accepting comments on the proposed rule until April 5, 2022.
California’s overtime compensation for agricultural workers. In 2016, California passed Assembly Bill No. 1066 that slowly implemented overtime wages for California’s agricultural workers. Beginning in 2022, agricultural employees are entitled to one-half times their regular rate of pay for all hours worked over eight hours in any workday or over 40 hours in any workweek. However, the law only affects agricultural employers with 26 or more employees. Agricultural employers with 25 or fewer employees will be required to follow the same overtime compensation structure beginning in 2025. California will also begin to require that any work performed by an agricultural employee in excess of 12 hours in any workday be paid twice their regular rate of pay. Again, this provision only effects agricultural employers with 26 or more employees but will go into effect for all agricultural employers in 2025.
Tags: ag law harvest, small farms, Insurance, USDA, FDA, overtime, Rural Broadband
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Pesticide drift is a risk many farmers face. Pesticides in the wrong place can injure unintended targets such as crops, trees and other vegetation, animals, and people, and can raise questions of liability for the misapplication. What should you do if you suspect pesticide drift? Whether you’re on the sending or the receiving side of it, here’s a summary of what could happen after an incident of pesticide drift.
Documentation. Many pieces of information are necessary to analyzing whether and why pesticide drift occurred and can be helpful to determining liability. Documentation of an incident should include:
- Date, time, and location of the potential drift occurrence.
- Weather conditions at the time of the occurrence, including temperature, wind speed, and wind direction.
- Photographs of the site at the time of the possible drift.
- Date, time, and description of any damages that become noticeable after the pesticide application. Note that damage symptoms may not be visible for at least 7 days.
- Photographs of damages. A series of photographs taken over several weeks can help document damages as they develop, and a phone or time stamp will ascertain the date and time of each photograph.
- Identify of the applicator.
- Notes of conversations between neighbors, investigators, the applicator, and others.
Ohio Department of Agriculture (ODA) investigation. A person who believes drift occurred can file a pesticide complaint with the Pesticide Regulation Section of ODA, which has the authority to investigate an alleged pesticide drift situation and assess potential risks to human health, damages to crops and vegetation, and whether the applicator violated Ohio pesticide laws.
If someone files a pesticide complaint, ODA’s investigation could include reviewing maps of the properties, visiting the site, talking with the person who filed the complaint, taking photographs, and collecting samples. The agency might also seek a written statement from the complaining party and others aware of the occurrence. The inspector next meets with the pesticide applicator to gather information about the application, such as pesticide applied, pesticide labels, mixing and spraying practices, and weather conditions.
After reviewing a case, ODA submits an investigation report to the complaining party. If a violation occurred, the agency takes enforcement action against the applicator in the form of a warning, civil penalty, license restriction, or criminal prosecution. It could take months for ODA to complete the investigation and make an enforcement decision. Note that an ODA investigation and decision does not address compensation to any harmed parties—that must come through other mechanisms.
Settlement. It’s not uncommon for parties to agree between themselves on how to handle harm from a pesticide misapplication, especially if the damages are minor. Settlement might include a direct payment for estimated losses of crops or other goods, replacement of vegetation, or remediation of the damaged area. A well written settlement agreement can clarify the terms and prevent future liability issues from arising.
Insurance coverage. An insurance policy can provide compensation for pesticide drift damages, but it’s important to ascertain whose insurance applies to the situation and whether there is coverage for the particular incident. Many policies provide coverage for losses resulting from negligence or unintentional behaviors, such as drift resulting from an unexpected gust or an equipment malfunction. Liability insurance held by the landowner, a tenant operator, or a custom applicator could cover the damages resulting from negligence.
Some insurance policies will not cover certain intentional actions that could cause pesticide drift. Failing to follow the label or applicable laws and regulations could lead to a loss of coverage, for example. Additionally, a policy might contain a “pollution exclusion” that would deem pesticides and herbicides as “pollution” that is not covered by the policy. Note that federal crop insurance policies typically are not applicable, as they do not cover crop losses resulting from pesticide drift.
Civil litigation. Sometimes a pesticide drift situation can end in civil litigation between the applicator and those who claim harm from the application. The most common legal claims for pesticide drift in Ohio are a negligence cause of action claiming that the applicator failed to use the required standard of care when applying the pesticides and a “negligence per se” action claiming that the applicator’s violation of pesticide laws caused the harm. The harmed party might sue everyone involved with the land where the application took place, including a landowner, tenant operator, and custom applicator, leaving the parties to fight among themselves about who is liable. Claimed damages might include compensation for lost crops, costs of restoration, differences in property value before and after the harm, and expenses for medical treatment. If insurance hasn’t already been considered, it could arise in the litigation setting.
Pesticide drift is a risk that we hope won’t become a reality. Many management strategies can reduce that risk--education, following label instructions, selecting the right nozzle for the job, calibrating spray equipment, spraying in appropriate weather conditions, adapting buffers for sensitive crops and animals on nearby properties, and more. If the risk does become reality, both the applicator and the harmed party should be aware and prepared for what might happen next.
Tags: pesticides, pesticide drift, drift liability, Insurance
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Update: Mengel Dairy Farms appealed the federal district court's decision regarding loss of business income (discussed below) to the 6th Circuit Court of Appeals. On July 16, 2021, the 6th Circuit Court of Appeals issued an opinion agreeing with the district court's decision. The 6th Circuit concluded that in order for Mengel Dairy Farms to receive insurance proceeds for loss of business income, Mengel Dairy Farms had to completely shut down its dairy farm. The 6th Circuit found that a reduction in business is simply not enough.
When was the last time you read your farm business insurance policy? Under your policy, do you know when coverage is triggered for loss of business profits and loss of assets? In the case below, you will learn about a dairy farm that recently dealt with the issue of stray voltage causing dairy cattle to unexpectedly pass away. Even though the farm had insurance, the farm continued to operate, albeit at a reduced capacity, while it dealt with the silent killer. The farm continued to operate under the assumption that any loss of business income and the loss of its primary assets would be covered under its insurance policy.
Mengel Dairy Farms
Mengel Dairy Farms (“Mengel”) could not begin to fathom why its dairy cattle were unexpectedly dying off. Beyond its loss of livestock, Mengel also suffered loss of milk production and business profits. The farm eventually hired an expert to help it determine the cause of death of its cattle. The expert determined that a stray electrical current was present on the property, causing the dairy cattle to die.
Mengel then proceeded to file an insurance claim with its insurance provider, Hastings Mutual Insurance Company (“Hastings”), hoping to receive insurance benefits for the lost cattle, cost of the investigation into the death of the cattle, the subsequent repairs to correct the stray electrical current, and for its lost business profits.
Hastings, however, sent out its own expert to help determine the cause of death of the cattle. Hastings’ expert could not find any stray voltage on the property but did believe that electrocution may have caused Mengel’s cattle to stop eating and ultimately die.
After its investigation, Hastings paid Mengel for the death of its cattle and the cost of the investigation into the deaths of the livestock, but Hastings rejected coverage for the loss of business income. Hastings then filed an action in the Federal District Court, asking the court to determine that there was no coverage for Mengel’s lost business income as a result of the electrocuted dairy cattle.
After Hastings filed its action, Mengel submitted a second insurance claim to Hastings for the death of additional livestock, costs of additional investigation and repair, and additional lost profits. Hastings did not provide any coverage, this time, to Mengel for its second insurance claim and instead issued a reservation of rights letter to Mengel stating that coverage for Mengel’s second claim may be subject to exclusions under Mengel’s insurance policy. Hastings then asked the court to also determine whether Hastings was required to pay for the loss of the additional dairy cattle and additional lost profits.
Coverage for Electrocuted Dairy Cattle
In its arguement to the court, Hastings claimed that under the dairy farm’s insurance policy, Hastings was not required to pay any insurance benefits for the additional dairy cattle that passed away from the stray electrical current. Hastings argued that even though death or destruction of livestock by electrocution is a covered peril under Mengel’s insurance policy, the term electrocution means instant death, and because Mengel’s cattle did not die instantly, Mengel was not entitled to insurance benefits for the cattle.
The Court disagreed. The court found that the term “electrocution” was an ambiguous term within the insurance policy because it was not expressly defined. Additionally, the court went on to analyze that coverage existed for both the death or destruction of livestock. The court determined that the term destruction encompasses more than just death. Reading the terms destruction and electrocution together, the court held that electrocution can consist of an event that does not necessarily result in instantaneous death but may still cause irreparable harm.
Therefore, the electrocution causing Mengel’s cattle to stop eating and ultimately die could be considered “destruction of livestock” which would be covered under the farm’s insurance policy.
Coverage for Lost Business Income
Since discovering the cause of death to its dairy cattle, Mengel reduced its farming operations to deal with the stray electrical current. Under Mengel’s insurance policy, coverage existed for lost business income “due to the necessary suspension” of operations. The insurance policy also indicated that the necessary suspension of farm operations must have been caused or resulted from an insured peril. Mengel thought that because it reduced operations for a covered peril (the electrocution of its livestock), it was entitled to coverage for its lost business income. Hastings disagreed and claimed that coverage did not exist for Mengel because the farm did not shut down its farming operations completely, it only reduced operations.
The court sided with Hastings. The court found that “necessary suspension” means a complete shutdown of operations, even if temporary. The court noted that a slowing down of business is not covered under the insurance policy. Therefore, Mengel’s claim for lost profits is not covered under the policy because it continued to operate at a reduced capacity.
Other Claims
Mengel filed its own claims against its insurer for bad faith and breach of contract. However, after the court’s determination that coverage existed for electrocuted cattle that did not die instantly and the court’s conclusion that Mengel was not owed any insurance benefits for lost profits, the parties settled their dispute out of court.
Conclusion
It may not be as easy as you think to determine what is covered (and what should be covered) under your insurance policy. Insurance companies do their best to draft insurance policies to be as precise as possible. Certain pre-requisites must be met in order for coverage to exist for a farmer and their business. It is vital that you understand what is covered (and not covered) under your insurance policy. You may be taking steps to remediate any issues with the assumption that insurance will cover any expenses or lost revenue you may endure, but as the above case demonstrates, this is not always true.
Tags: dairy, Insurance, livestock, stray voltage
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Food is likely on the minds of many people as we head into the holiday season. Being an agricultural attorney, it’s hard to think about food without also worrying about food product liability. Whether growing turkey or romaine lettuce, producing food for human consumption is a risk-laden endeavor that can lead to legal liability for a farmer. That’s why knowing and following Good Agricultural Practices (GAPs) is imperative for farmers who raise produce, eggs, meats, and other foods for direct human consumption. Employing those production practices is critical to producing a safe food product. But what if a food isn’t safe and causes illness or death?
No one wants to believe their food product would harm someone or that their customers would sue them for such harm. But it’s a reality that food producers must face. I’ve recently had the pleasure of working with farmers in OSU’s Urban Master Farmers Program and OEFFA’s Begin Farming Program who are taking these risks to heart and learning not only about GAPs, but also about other tools that address food product liability risk. Teaching these producers has reminded me of how important it is to remind all producers about these tools. So here’s a rundown on four important food product liability tools:
- Management practices. In addition to using production practices such as GAPs, a producer’s management practices can also manage food liability risk. Thorough employee training, for instance, ensures that everyone is following GAPs and other risk management procedures. Documentation of production procedures can be useful evidence when determining liability for a food product. Keeping records of such documentation along with other records such as sales and training records can help inform what caused the incident and whether it can be traced to a producer’s product. Regulatory compliance, such as following Ohio’s Uniform Food Safety Code, might also be necessary, depending upon the food product. Each of these management practices feed into a solid risk management plan. This requires a producer to engage in continuing education.
- Insurance. An insurance policy can be an excellent way to manage food safety liability risk. But to obtain adequate insurance coverage, a producer should review all food products and food sales activities with an insurance professional. A farm’s standard liability policy might offer adequate coverage for the foods and food sales activities. Alternatively, a producer may need to add an endorsement or “rider” or obtain a separate commercial food product liability policy. The goal is to ensure coverage for medical and related costs if someone contracts a food borne illness from a particular food product sold in a particular way. It’s also important to revisit the insurance coverage when taking on a new activity or creating a new food product. Doing so will ensure maximum protection and reduce the possibility that an incident is not covered.
- Recall insurance and planning. A producer who sells a sizeable quantity of food products through a number of sources or a food broker may need to consider recall insurance. This type of policy will kick in when a food product must be recalled because it has been identified as a food safety risk. It can help cover the costs of notifying the public about the product and removing the product from stores, institutions and consumers. Likewise, having a detailed recall plan can minimize such costs by ensuring that the recall process is responsive, efficient and effective.
- Business entity formation. “Do I need an LLC?” is a common question we receive, and the answer is usually “it depends.” Organizing as a Limited Liability Company (LLC) or Corporation won’t prevent a producer’s liability, but it can limit the liability to the assets of the business. An LLC, for example, contains a producer’s business assets and separates them from the producer’s personal assets, such as a home. If there is a legal liability incident, the LLC assets would be subject to that liability. It would be difficult for someone to get beyond the LLC and into the producer's personal assets. The LLC doesn't relieve the producer from liability, but it can safeguard those personal assets.
Talking about legal liability has a way of ruining one’s appetite, but hopefully that won’t stop food producers from thinking seriously about food product liability risk. The good news is that like most liability exposure areas, tools can help minimize liability risks for our food producers. Using those tools might just help settle our worries about food product liability.
Tags: Food Safety, liability, food safety liability, product liability, Insurance, business entities, LLC
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Written by Chris Hogan, Law Fellow, OSU Agricultural & Resource Law Program
The Agricultural and Food Law Consortium is holding a webinar regarding Using LLCs in Agriculture: Beyond Liability Protection this Wednesday, August 16th at 12:00 (EST).
The Limited Liability Company (LLC) is a relatively new type of business entity. The first LLC statute passed in Wyoming in 1977. Since then, all fifty states passed legislation permitting LLCs as an operating entity. Many Ohio farmers use the LLC as their preferred operating entity.
In Ohio, an LLC is a legal entity created by Ohio statute. An LLC is considered to be separate and distinct from its owners. An LLC may have a single owner in Ohio, or it may have numerous owners. LLCs combine the best attributes of a corporation and a partnership. Individuals, corporations, other LLCs, trusts, and estates may be members in a single LLC. There is no limit on maximum members.
The Importance of an Operating Agreement
When an agricultural operation chooses to operate as an LLC, that operation must consider drafting an operating agreement. An operating agreement specifies the financial responsibilities of the parties, how profits and losses are shared among members within the LLC, limitations on transfers of membership, and other basic principles of operation.
If an LLC does not choose to draft an operating agreement, Ohio’s default rules apply. Ohio law prescribes default rules of operation for LLCs in R.C. Chapter 1705. However, LLC members often wish to modify state rules to tailor an LLC to their business. Ideally, agricultural operators should draft an operating agreement with the assistance of an attorney.
Single Member LLCs
Every state in the Midwest permits single-member Limited Liability Companies (SMLLCs). A single member LLC is an LLC which has one member or manager; that means that there are no other owners or managers of that LLC. In 2016, Ohio enacted R.C. 1705.031 which states that Ohio LLC laws apply to all LLCs, including those with only one member. Therefore, small agribusinesses that have only one member are not prevented from forming an LLC.
Will a Personal Guaranty on a Loan Affect Limited Liability Protection?
Ohio farmers operating as an LLC enjoy the benefits of limited liability protection. Usually, that means that the debts and obligations of a farm LLC operation are solely those of the LLC. That means that a farmer is not personally liable for any debts or obligations incurred by the LLC.
However, lenders, implement dealers, financial institutions, and others are finding ways around an LLC’s personal liability protection. Those parties are increasingly requiring that the members and managers of LLCs provide personal guarantees. That is, a member or manager of an LLC agrees to be personally liable for a debt or obligation, if an LLC is not able to pay.
A full discussion of personal guarantees and LLCs in an earlier blog post is here.
LLCs are not Invincible
Limited Liability Companies are extremely popular among Ohio farmers. However, LLCs merely limit liability. LLCs don’t create a perfect liability shield, they are subject to a concept known as “veil piercing” where the owners of a company are held personally liable for the actions of the company.
Generally, a person cannot use a corporation to commit fraud on others or to use a corporation as an alter ego for a member’s own personal gain. Plainly speaking, Ohio courts may hold an owner of an LLC liable in certain cases of fraud committed by the LLC or where an LLC is undercapitalized and is not treated as a separate entity from a member (i.e. the LLC is used as an “alter ego”). While this is not a common scenario among farm business LLCs, LLC members should be aware that a business’s status as an LLC will not shield it from liability in all instances.
Carrying Liability Insurance
Many LLC owners consider the protections under Ohio’s LLC laws to be sufficient. Some LLC members are satisfied that their personal assets are sufficiently protected and separated from LLC assets and LLC liabilities. However, every business should have liability insurance. Liability insurance is a relatively inexpensive means of managing liability exposure for injuries and physical damage to a third party. While insurance doesn’t lower liability, it gives the business a way to pay for damages in the event of an incident.
The question of “how much liability insurance should a farm operation have?” is a difficult one. The amount of insurance that a farm should have must be determined on a case-by-case basis. Factors such as farm size, type of operation, location, and other factors impact the insurance needs of a farm operation.
More information on LLCs and other alternative business organizations through the National Agricultural Law Center is here.
