Farm Insurance Policies Part #1 - Understanding the Policy

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.