Farm Business Insurance
The business of insurance is the business of transferring risk. The amount and type of insurance you need is largely based on your attitude towards risk and your financial strength to cover the loss. The more risk of financial loss you transfer to the insurance company, the higher your premium will be. Recent events like floods and ice storms have shown that the farm businesses are never covered for every eventuality. While major natural disasters may trigger government programs and charitable donations, recovering from events that only affect your businesses is likely to depend upon you and your insurance company.
This Factsheet outlines the types of insurance available and provides a guide to help you work with your insurance agent, broker or company to determine whether you have the necessary insurance to protect your business. This Factsheet is only useful if you use it to review your coverage before you need it. Reading your policy after an unfortunate event has occurred will confirm the coverage you have - but it will be too late to make changes.
Insuring the physical assets the business owns and uses, and insuring the people whom own, manage and work on the farm business, is discussed here. Both aspects are equally important.
Finally, this Factsheet is intended to be a guide that will allow you to ask your insurance agent, broker or company the right questions. Make sure you have confidence in your insurance provider, as you will be relying on that person, and the company they represent, if and when you ever need to trigger your coverage.
A farm insurance policy can provide coverage for dwellings and personal property, farm buildings, produce, livestock, machinery and equipment, and liability. Boats and recreational vehicles are likely to require special coverage. Coverage for motor vehicles that are required to be registered is provided under an Automobile Insurance policy.
Companies offer two basic insurance options (levels of protection): Named Perils and Broad Form. It is possible to have one level of coverage for one type of property and another on another type of property.
Endorsements for Added Coverage
Sometimes you may be concerned about a risk that is not protected on the standard policy contract. There may be a peril you want coverage for or you may have a piece of property that does not fall into the standard definitions on the policy contract. In these cases you may be able to purchase coverage with an endorsement. An example is building collapse from snow or ice. If the building is built and maintained to current standards, then many companies offer collapse endorsement. Older buildings generally do not qualify for such an endorsement.
Other examples of added endorsements include income replacement, power interruption, pollution, clean up on own farm, custom work, high value livestock and consequential loss.
Your insurance company will rely on you to determine what values you insure for. They have charts and other tools to help you determine your needs. In some areas of coverage (see paragraph on Coinsurance) you will be required to insure a minimum percentage of actual value. In determining the amount of insurance you wish to purchase, you are determining the amount of financial risk you want to transfer to the insurance. The more risk you transfer, the higher the insurance premium.
Property is insured on either an Actual Cash Value or Replacement Cost basis. If it is insured on an Actual Cash Value basis any settlement at the time of the loss is going to be based on the depreciated value of the property. If it is insured on a Replacement Cost basis any settlement at the time of loss will look to repair the item and if that is not possible to replace it with a new article of similar quality and ability. If you insure on a Replacement Cost basis your values or amounts of insurance will be higher and so you will pay more premium than if your insured the same property on an Actual Cash Value basis.
Ask your agent or broker about the effect of inflation factors.
Another option is guaranteed replacement cost coverage. This option was developed as a result of the 1986 tornado in Ontario. It provides that as long as your buildings are insured to 100% of the calculated cost to replace them, when you renew your policy, you will not be restricted to the limit on your policy if the cost of labour and materials rises dramatically because of a natural disaster. Not all buildings qualify for this protection.
Most sections of a farm business insurance policy have deductible amounts - the portion the insured has to pay before insurance benefits are provided. The strategy is to get catastrophic coverage at reasonable rates while taking the risk for more minor claims yourself. The trend with buildings is to increase the deductible and maximize coverage. It is becoming common to have $1,000 to $2,500 or higher deductible levels on farm buildings.
Different levels of deductible can apply to each type of asset: probably less on a house, perhaps one animal's value for livestock, $500 for machinery. It is a matter of trying to get adequate coverage at reasonable costs without a lot of minor or nuisance claims. Your risk management strategy will come into play. This applies to both the levels of deductible you can afford and the settlement values you need.
If you fail to keep your values current, you may be subject to a coinsurance penalty when you have a loss.
Your farm insurance policy probably carries a coinsurance clause. This clause states that if you fail to carry an amount of insurance on the insured property (buildings, livestock, machinery, produce etc.) that equals a stated percentage (typically 80%, 90% or 100%) of the true cost to replace the item, you will have to bear part of a claim for that item. For example if the cost to replace your herd is $100,000 an 80% coinsurance clause requires that your insurance limit for that herd be at least $80,000. If you choose to insure the herd for $60,000 (75% or the required minimum of $80,000) you will receive only 75% of the value that the destroyed animal is worth.
The decision to insure at a limit less than the maximum possible loss (in the above example $100,000) is your own risk management decision. In any circumstance the amount on the Declaration Page is the most the insurance company is contractually obligated to pay up to.
There are many variations available as to settlement options and perils covered. Generally the broader the coverage the better. In addition to the typical named perils for farm buildings, most policies also cover: water escape within the dwelling from heating or plumbing systems; theft, and may include building collapse. Various items of personal property are also insured, including contents and other personal property that you own, use or wear.
Limits are generally placed on items such as jewelry and furs, collections, securities, money and garden equipment unless specifically listed. Many policies also cover theft and forgery of credit and debit cards.
The farm manager and the insurance agent/broker have to agree on appropriate coverage, which is generally the level of insurance needed to survive a major loss. Named Perils is the most common coverage for farm buildings.
The following is a typical list of named perils:
Subject to certain exclusions and limitations within the peril description, the insurer will pay for physical loss or damage to the building caused by one of these events, according to the values used in the settlement option.
Note that disasters like flood, earthquakes and collapse from snow and ice are not included in the list above. Flood coverage is not readily available for buildings. Coverage for loss or damage caused by earthquakes or collapse caused by weight of snow or ice may be added by endorsement, if the buildings are eligible.
Check the Definition of Farm Building
Stabling, heating and ventilating equipment are generally part of the building and their value should be included in the calculation of the building value. Stable cleaners, milking equipment and coolers, silos and silo unloaders are not considered to be part of the building and need to be specifically insured.
Most policies contain rebuilding clauses. Usually the building must be rebuilt within 100 m (300 ft) of the insured building. Rebuilding at a distance greater than 100 m (300 ft) may be allowed at less than full settlement, e.g. at a 75% level. If legislation exists prohibiting rebuilding on the same site, some companies allow rebuilding further away without imposing a penalty. If, when you insure, it is obvious that it is impractical to rebuild on the same property, some companies will agree, at that time, to rebuilding on another property you own, within distance limits. Discuss the impact of this clause on your business with your insurance agent or broker.
Contents, as specified on your declaration page, are covered. Contents can include tenants' improvements, livestock, machinery and equipment, and produce. Tenants' improvements means improvements made to a rented building that are not covered under any other policy and would have to be specifically insured.
Produce includes farm inputs like commercial feeds, fertilizers and pesticides, and harvested farm products like milk, eggs and various products of the soil.
Produce is covered for more causes of loss (perils) than buildings. Named perils that apply to produce only include:
If your produce is refrigerated be sure that you have coverage for the loss or damage that may occur if the refrigeration units fail.
Remember to insure the value of your harvested produce. A coinsurance clause will apply generally at the 80% level.
The declaration page of your insurance policy will show the "classes" of livestock you are insuring (cattle, horses, swine, poultry, sheep, rabbits, deer, ostrich etc) separately. If you will be buying and selling animals during the term of your policy be sure that your agent or broker has explained the notification requirements.
Market or cash value is normally used to determine the value of dead livestock at the time of a loss. The policy contract will have an upper limit, such as $4,000 for an individual animal. Individual animals with a higher value should be identified and listed separately on the livestock schedule.
The named perils list is much longer. In addition to those listed above for buildings and produce, livestock is also covered for:
Consult your agent or broker if you have a concern about a particular cause of loss (peril) causing death or destruction of your livestock. Some endorsements offer coverage for such perils as ingestion of hardware, power interruption and heat prostration.
The coinsurance clause will usually apply to livestock. If the value of your livestock varies constantly over your policy term ask your agent or broker about a "stock reporting option".
Any compensation by government for livestock loss will be deducted from the settlement.
Machinery and Equipment
Machinery and equipment includes any piece of machinery or equipment that is used in your farm operation. The contract definition excludes such items as aircraft, vehicles subject to registration according to the Highway Traffic Act, Off Road Vehicle Act or Snow Vehicle Act and equipment used in lumbering activities. Check with your agent or broker is you are unsure about the status of any piece of equipment you have. If you will be buying or selling machinery or equipment during the term of your policy ask your agent or broker to explain the notification requirements. You should also make sure that coverage is in place for non-owned equipment, whether borrowed or rented.|
The machinery and equipment can be listed, or scheduled in the insurance policy, or covered on a blanket basis by class. Because of the huge investment many farmers make in machinery and equipment, you should carefully review your coverage.
Older equipment is usually covered for actual cash value while newer items may be insured for replacement cost.
Farm machinery and equipment coverage may be either broad form or named perils.
A loss of use endorsement may be available to cover renting a replacement unit until the damaged or destroyed unit was repaired or replaced. You likely need to request this as an additional endorsement. Those running a large cash crop operation should investigate this endorsement.
Recent weather extremes are a reason to consider special endorsements for such things as power interruption, business disruption and poultry heat prostration.
Power interruption insurance is becoming common on specialized poultry and swine farms. The birds and animals are insured against death and destruction from lack of heat or ventilation due to power interruption. It is normal for the insurance company to request a standby generator and alarm system that is tested on a monthly basis.
Heat prostration for poultry coverage is becoming more common. It only applies when ventilation is working and stocking rates are not excessive. The insurance company will need proof of cause of death and may apply fairly high deductibles.
While business interruption/loss of income endorsements are added on a minority of farm insurance policies, its use is on the rise. You need to consider the ability of your business to survive if the cash flow is interrupted because of an insured loss.
The purpose of this endorsement is to replace the income that the farm business would have made if the insured property had not been damaged or destroyed by an insured peril (cause of loss). Expenses that do not continue after the property loss would be deducted from the calculation. Expenses that are incurred to allow the farm operation to continue immediately following the damage or destruction of insured property would be included in the calculation of the loss.
Some forms of this endorsement respond only if the building is
damaged or destroyed, some if only the livestock is destroyed and
some if either event happens. The benefit will only be provided
for a reasonable amount of time to repair or replace the property,
usually subject to a maximum time period of up to 12 months.
Industry representatives have noticed cash flow problems on farms because of the lack of income during the restoration period. As the trend to larger, more specialized farms increases, it is suggested this endorsement be carefully considered.
Power Surge endorsement is offered by some companies. It is available for residence and farm buildings.
Crop insurance is a federal-provincial-producer funded program which provides a guarantee against loss of crop yield caused by natural hazards. A producer's individual average farm yield and claim history determine coverage and premium levels. The decision of whether to use crop insurance will be influenced by many factors including historic yield experience on the farm and the farmer's financial position and ability to self-insure. Producers of edible horticulture crops should consider the Self Directed Risk Management option under the NISA program as an alternative. Crop insurance is an area of rapidly evolving products and coverage. In Ontario, Crop Insurance is available from AGRICORP. For full details call them at 1-888-247-4999 or visit their web site
In addition, private insurance is available at higher levels of coverage for hail and wind damage on tobacco.|
It is imperative that you have a full and frank discussion with your insurance agent or broker about your farm liability coverage. The agent or broker should be advised of all activities that the farm operation participates in. The insurance company calls these activities "exposures". The agent or broker needs to know what exposures you have to be sure that you are adequately protected against the possibility of a significant financial burden.
Today's farm business is no longer isolated from the public, both from the view of visitors to the farm, the products you produce and activities you undertake away from the farm. Any of these activities may result in a "third party" (someone outside of the contract between your farm operation and the insurance company) alleging that through your negligence you have caused them to suffer Bodily Injury or Property Damage. Claims of this sort are on the rise in Ontario. Hence liability insurance is extremely important.
It is common for the liability policy to cover the farm operator, spouse, their children (while living in their household) and employees (while doing the farm business' work).
Coverage is normally provided for your legal liability for:
Typical sections of coverage in a Farm Liability wording include:
The insuring company will defend the insured against civil actions and assumes the right to make negotiations and settlements, as it deems expedient.
A number of activities that some might consider normal farm business activities such as regular custom work, custom spraying, pick your own activities or horse riding lessons may require a special endorsement.
Here are some areas of coverage that may be excluded. You will need to review the exclusions with your insurance agent or broker:
Umbrella Liability Insurance