Insurance

Spraying applying pesticides to farm field
By: Peggy Kirk Hall, Wednesday, May 12th, 2021

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.

Dairy Cows in Pasture
By: Jeffrey K. Lewis, Friday, February 26th, 2021

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. 

To learn more, visit the Federal Court’s opinion on Hastings Mutual Insurance Company v. Mengel Dairy Farm, LLC.  

 

USDA National Agricultural Library and National Agricultural Law Center

By: Peggy Kirk Hall, Wednesday, November 27th, 2019

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:

  1. 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.
  2. 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. 
  3. 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.
  4. 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.

By: Peggy Kirk Hall, Monday, August 14th, 2017

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.

 

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