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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 combine.

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 50% 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 (50% 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.

Cell tower leases can be a great source of income for landowners.  The towers have a relatively small footprint on the land and can provide monthly income of $1,000 or more.  Additionally, and in some cases most importantly, having a cell tower can increase cell service quality and dependability.

Many landowners are eventually contacted by the cell tower company or another third-party company to purchase the lease rights.  The purchasing company offers a large, one-time payment to buy out the lease rather than continuing to receive monthly payments.  This buyout presents the landowner with an opportunity to generate a large, one-time payment rather than waiting on the monthly payments.  The issue for the landowner is whether the one-time payment is large enough to give up the future stream of payments.

When deciding if the one-time payment is enough to relinquish the monthly payments, the first course of action is to determine the Present Value of the lease.  Present Value calculates the current value of a future stream of income.  There are calculators available online to easily calculate the Present Value.  The offered payment should be something close to the Present Value.

Another factor to consider when analyzing the payment structure is the number of carriers on the tower.  Some cell tower leases pay additional rent when carriers are added to the tower.  Thus, the value of the lease many not be limited to just the Future Value of the current income stream but also the potential for increased revenue due to additional carriers added to the cell tower.  For leases with the opportunity to increase revenue with the addition of new carriers, this additional value should be factored into the one-time payment analysis.

Like most business transactions, taxes are an important factor in analyzing the favorability of the deal.  Cell lease buyouts are no different.  The buyout payment will likely be considered a capital gain.  Therefore, the gain will likely be taxed as capital gains rate rather than ordinary income.  Capital gains tax rates tend to be lower than ordinary income tax rates.

Taking the one-time payment has advantages.  The first, and most obvious advantage, is it creates a much larger and immediate payment than the monthly payments.  Additionally, the buy-out payment can usually be used in a like-kind exchange.  That is, if the sale proceeds are invested into other business real estate, the capital gains tax is deferred.  Lastly, the one-time payment is a guaranteed payment for a certain amount.  There is not the same certainty with the lease payments.  Cell leases typically allow the cell company to terminate the lease at any time.

The obvious disadvantage of taking the one-time payment is the loss of the monthly payments.  The payments are a nice supplemental income and are a dependable source of income.  Additionally, taking the one-time payment could cause the landowner to be pushed into the higher, 20% capital gains tax rate.

For those landowners who have cell leases and receive an offer to buy out the lease, seeking tax and legal advice is a good idea.  An accountant and/or attorney can provide valuable guidance and insight into analyzing the advantages and disadvantages of having the lease bought out. Working with an attorney who has experience with cell tower leases can have significant benefits.  The attorney can help advise as to how much the buyout payment should be, help negotiate better terms and, also help reinvest those funds into other real estate to defer capital gains.

On March 23, 2023, Ohio Senate Bill 210 will become law.  Prior to this new legislation, Ohio was one of only two states (Iowa) that did not allow for postnuptial agreements.  This new law will allow married couples to modify or terminate their existing prenuptial agreement or enter into a new postnuptial agreement.  This needed change to Ohio law will allow married couples to adapt to changes with their assets, families and goals.

Ohio prenuptial agreements have long been available to Ohio married couples.  A prenuptial agreement, in basic terms, identifies what assets are to be considered marital assets and which assets are non-marital assets.  In the event of divorce or death, the other spouse is not entitled to the non-marital assets.  Prenuptial agreements are entered into prior to marriage.

Prenuptial agreements can become outdated, especially when marriages last many years.  A married couple who enters into a prenuptial agreement when they are 25 may have very different assets and goals when they are 65.  Until now, married couples were stuck with their prenuptial agreement regardless of how unfair or obsolete the agreement had become.

A postnuptial agreement is similar to a prenuptial agreement in that it identifies which assets are to remain outside of the marriage and what assets are considered joint, marital assets.  A postnuptial agreement is signed sometime after marriage begins.  There are no term requirements for a postnuptial agreement – it can be entered into shortly after marriage or many years after marriage.

For a prenuptial agreement to be terminated or amended or for a postnuptial agreement to valid, the new law requires the following:

1. The agreement be in writing and signed by both spouses,
2. The agreement is entered into freely without fraud, duress, coercion or overreaching,
3. There was full disclosure, or full knowledge, and understanding of the nature, value and extent of the property of both spouses,
4. The terms do not promote or encourage divorce or profiteering from divorce.

Special notice should be given to the third requirement.  It is important for each spouse to fully declare the assets that they own and the value of those assets.  Failure to inform the other spouse of their assets and the extent of those assets is another way to invalidate a prenuptial or postnuptial agreement.  If one spouse is unaware of the extent of the other spouse’s assets and/or wealth, they may unknowingly enter into a prenuptial or postnuptial agreement that is unfair.  It is best to include an inventory of both spouses’ assets with values in the prenuptial or postnuptial agreement and clearly identify which assets are to be considered marital assets and which are to be non-martial assets.

This new legislation has ramifications for farm planning.  Before now, if a prenuptial was not already in place, there were risks to bringing in family members to the farming operation.  After someone comes into the farming operation, their ownership in the farming operation may become a marital asset subject to a divorce.  This concern sometimes causes parents or grandparents to be hesitant to bring a child/grandchild into the farming operation.

Now, the parents/grandparents can require a postnuptial agreement before admitting a family member into the farming operation.  While this requirement can cause friction with family relationships and may be an awkward issue to raise, it is something to consider.

Consider the following example:

Father would like to bring Daughter into Farming LLC.  Daughter is recently married but does not have a prenuptial agreement.  Father is considering gifting a 25% ownership interest in Farming LLC to Daughter valued at $500,000.  Father is concerned that if Daughter’s marriage fails, he may have to buy back some of the 25% ownership from Daughter’s ex-husband.

The first thing to consider in the example is the nature of gifted assets.  Under Ohio law, gifted assets are not marital assets.  However, appreciation in the value of the gifted asset can become a marital asset.  So, Father’s concern is justified.  On the day that Daughter receives the 25% ownership gift, her husband has no marital rights in the ownership.  However, after the ownership has appreciated in value, particularly if the appreciation can be attributed to Daughter’s labor or management, Daughter’s husband may have marital rights in some of the ownership.

With the new legislation, Father can require Daughter to enter into a postnuptial agreement making her ownership in Farming LLC, including future appreciation, a non-marital asset.  If Daughter and her husband divorce, Daughter’s ownership in the LLC will be protected.  Father is now more likely to bring Daughter into the farming operation due to the postnuptial agreement.

Like many farm transition legal issues, family dynamics are involved.  It may be difficult for Father to ask Daughter to enter into a postnuptial agreement or the request may upset Daughter.  Perhaps Daughter’s husband refuses to enter into a postnuptial agreement.   While a postnuptial agreement can help protect the financial viability of a farming operation, the toll it may take on family relationships must also be considered.

Senate Bill 210 is a positive change to Ohio law.  While postnuptial agreements are not a solution in all situations, it is another tool in the farm transition toolbox.  Like most legal agreements, an attorney should be consulted before entering into a postnuptial agreement and each spouse should have their own, independent legal counsel.

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.