AAIS COVERAGE PERSPECTIVE
Agriculture is big business!
By Robert J. Prahl, CPCU
Although the majority of American farms are still owned by individuals or families, the corporate farm has assumed a greater role in the agricultural landscape. Advances in the industrial and manufacturing sectors have greatly affected farming practices. Labor productivity has increased dramatically through the use of highly sophisticated machinery and equipment. More and more farms have consolidated to become larger operations, and production has been transformed to resemble a factory-like system. A large and growing segment of agricultural activity has become big business or "agribusiness."
What is agribusiness?
"Agribusiness" is a broad term that can encompass a wide range of activities in the agriculture sector. Put simply, it is the business of processing agricultural products. This can include activities from production through processing to wholesale distribution. Common examples of risks are feed manufacturers, fertilizer manufacturers, grain elevator operations, and seed processors.
To meet this need from an insurance standpoint, the American Association of Insurance Services (AAIS) developed a new product called the Agricultural Output Program (AgOP), which is modeled in part after its Commercial Output Program (COP). It is designed for insurance companies that specialize in insuring the business of processing agricultural products and serving the needs of growers. Although farms are not a primary target, the program may be appropriate for particularly large farming risks with processing operations.
What's covered in the AgOP policy?
The AgOP is intended to meet the property insurance needs of suppliers, cultivators and processors of American agriculture. Typical coverages required by these businesses include fire, additional or extended coverages, crime, inland marine, and business interruption. In addition, the AgOP offers the flexibility of blanket and scheduled coverage and a non-fragmented, streamlined approach to structuring insurance. The AgOP approach eliminates the potential for coverage gaps that exist when an insurer or broker tries to create an agribusiness package using a variety of forms that may not be compatible or designed specifically for agriculture.
The program, which is being filed countrywide, provides insurers with forms, manual classifications and rules for insuring property exposures for more than 80 classes of agricultural risks.
With the addition of the Agricultural Output (AgOP), AAIS offers the industry's most comprehensive lineup of agricultural insurance products, including the Farmowners, Farm Umbrella, monoline Farm Properties, and Personal and Premises Liability Programs.
NOTE: Two additional forms are planned for the AgOP:
* A commercial liability form specially designed for agribusinesses
* An equipment breakdown coverage part
What is the difference between agribusiness and farmowner risks?
Although there are similarities, farmowner risks tend to be owner-operated farms. Dwelling coverage is a key component, and personal lines-style manual rates predominate. Agribusiness addresses larger agricultural operations, or combinations of agricultural and commercial operations. Dwelling coverage is available but is a relatively minor consideration. Inland marine coverages are rolled in, higher limits are available, and rating is more judgment-oriented and flexible.
Features of the AAIS program
Aside from the broad protection provided by combining property and inland marine coverages in a single form, several other favorable features are found in the AgOP:
* Coverage for computers, mobile equipment, and other inland marine exposures applies to the fullest extent that is usually provided when written under stand-alone inland marine floaters, and includes coverage for loss caused by flood and earthquake. Earthquake and flood coverage for loss to building property, other personal property, and stock can be provided by endorsement.
* Many "optional" coverages are built into the policy as coverage extensions or as additional and supplemental coverages, eliminating the need to add multiple endorsements.
* A comprehensive, state-of-the-art crime coverages endorsement is available as an option. One or more of seven crime coverages may be included. They are:
-- Employee Fraud and Dishonesty
-- Computer and Telecommunications Fraud
-- Counterfeit Money
-- Forged Charge, Credit, or Debit Cards
-- Forged Checks, Drafts, or Promissory Notes
-- Money and Securities
-- Keytrol Fraud
* Companies can determine individual sub-limits for the additional, extended, and supplemental coverages simply by making entries on the declarations. By entering "0," a company can in effect exclude a coverage.
* Coinsurance requirements, value reporting provisions, and other loss settlement provisions are determined by making entries on the declarations.
* Insurers can choose between blanket or scheduled coverage, or offer a combination of the two by providing blanket coverage, and then excepting certain property and scheduling it. This latter approach allows the scheduled property to be written with different coinsurance, valuation, or deductible provisions.
* Loss of income, including rents and extra expense coverage, is automatically included, with limits and deductibles determined on the declarations (Income Coverage Supplement).
* The flexible, judgment-oriented deficiency point rating system is well suited for rating the unique combinations of exposures presented by agribusiness.
Basic coverage form. The Agricultural Output Program is comprised of a basic form, the Property and Income Coverage Part, and several optional endorsements that either broaden or exclude certain coverages, or change the deductibles for certain perils. The policy can be packaged with any standard commercial liability, workers compensation, or auto policy.
AgOP Property and Income Coverage Part. The Property and Income Coverage Part combines broad property and inland marine coverages, as well as loss of income and extra expense coverage, in a single form. Applicable coverages are indicated by appropriate entries on the declarations.
Coverage may be written on a blanket or scheduled basis. Covered property includes:
* Building property (including residences)
* Personal property (including household property)
* Computers
* Stock
* Mobile equipment
The form also includes basic builders risk coverage, that is, coverage for materials, equipment, supplies, and temporary structures used in construction, that are on or within 1,000 feet of a covered location. Builders risk coverage also may be written on a scheduled basis for contractors.
Items that are specifically scheduled are not subject to the Property Not Covered provision. So, for example, if the insured wished to provide coverage for field or pasture fences (property that is specifically identified as Property Not Covered), the fences could be specifically described and scheduled, and coverage would apply.
Aside from the core property coverage, the policy also provides Additional Coverages, Coverage Extensions, and Supplemental Coverages. These coverages are activated by entry on the declarations, and the level of protection offered can be controlled by indicating individual limits for them.
Inflation Protection coverage is activated by indicating an annual percentage on the declarations. If this coverage is selected, the limit for the described property will be increased automatically on a daily pro rata basis.
Twenty-four types of property are identified as not being covered, such as airborne or waterborne property, aircraft or watercraft, animals, vehicles, growing crops, exports and imports, jewelry, furs, and so on. However, coverage for several of these items is provided either by a Supplemental Coverage, Coverage Extension, endorsement, or another provision in the policy, or by specifically scheduling it.
Additional, coverage extensions, and supplemental
Additional Coverages include consequential loss, debris removal, emergency removal expense, fire department service charge, inventory and appraisals expense, and pollutant cleanup and removal.
Some of the Coverage Extensions included are fraud or deceit (aka trick or device), newly acquired computers and mobile equipment, newly acquired or constructed buildings, personal effects, property away from premises, etc.
Among the 19 Supplemental Coverages included are accounts receivable, brands or labels expense, motor carrier liability, fine arts, loss of use of dwellings, overseas transit and location, transit, property on exhibition, sewer backup, spoilage, tank leakage, and wrongful delivery of liquid property.
Income coverage
Four Income Coverage options are available:
* Earnings, rents, and extra expense
* Earnings and extra expense
* Rents and extra expense
* Extra expense only
Coverage can be provided by making an entry on the declarations to specify the applicable income coverage option and limit. Coverage is provided during the restoration period when the insured's normal business activities are interrupted by direct physical loss to property as a result of a covered peril.
Perils and exclusions
Coverage is provided on an open perils or risks not excluded basis. The policy covers risks of direct physical loss unless the loss is limited or caused by a peril that is excluded.
Situations typically excluded in commercial property and inland marine forms are excluded in the AAIS form as well. Many of the exclusions contain exceptions, however, which means that limited coverage applies, while others except certain types of property from the exclusion.
Computers, mobile equipment, and various supplementary coverages are not subject to some of the exclusions.
Other coverages
1. Collapse--includes a provision with a definition of "collapse" that clarifies the meaning of the term. Covered causes of collapse are identified, and other provisions that qualify coverage are included.
2. Computer Disturbance--refers to electrical or magnetic damage, disturbance or erasure of electronic recordings, power supply distur-bance, power surge, blackout, or brownout.
3. Electrical Breakdown--refers to damage to electric motors, generators, or transformers that are described on the declarations when damage is caused by accidental failure of the wiring, winding, or switches. Coverage applies only when it is indicated by an entry on the declarations.
4. Ordinance or Law - Undamaged Parts of a Building--pays for the value of undamaged parts of the covered building or structure that is required to be demolished as a result of the enforcement of an ordinance or law. This in effect permits the building to be declared a total loss. Coverage applies only when it is indicated by an entry on the declarations.
5. Tearing Out and Replacing--pays the cost of tearing out and replacing any part of a covered building or structure to repair damage to the system or appliance from which water or other substance escapes.
6. Theft Damage - Non-owned Property--pays for damage
caused by theft or attempted theft to a non-owned building containing the insured's personal property or stock. It also covers non-owned personal property used to service a building, structure, or premises at a covered location. Coverage applies only when the insured is a tenant and the lease makes the insured responsible for the damage.
The remaining sections of the policy include the following provisions:
* What Must Be Done In Case Of Loss
* Valuation
* How Much We Pay
* Loss Payment
* Other Conditions
Free training materials are available to companies affiliated for this line.
The table below compares the key exposures and perils for the AAIS Farmowners, Agricultural Output, and Commercial Output Programs.
For more information about AAIS programs, contact Robert Schnoll, AAIS Marketing Manager, at (800) 564-2247, extension 222; by e-mail at bobs@aaisonline.com or visit the AAIS Web site (www.aaisonline.com). *
The author
Robert J. Prahl, CPCU, is director of education for the American Association of Insurance Services.
| Exposure | AAIS Farmowners | AAIS Agricultural Output Program | AAIS Commercial Output Policy (COP) |
| Building Property | |||
| Dwelling | Cov. A - Residence | Covered as Building Property | Not Covered |
| Loss of use of dwelling | Cov. D - Add'l Living Costs & Loss of Rent | Supplemental Cov. - Loss of Use of Dwellings (additional living expenses) | Loss of earnings, rents, and/or extra expense avail. through optional coverage part |
| Non-farm, non-business structures related to the dwelling | Cov. B - Related Private Structures | Covered as Building Property | Covered as Building Property |
| Farm buildings | Form FO-6 | Covered as Building Property | Building Property - unless more specifically covered by other ins. |
| Other business structures | Not covered, unless the structure is rented to a tenant of the residence and not used for business, or used solely for private garage purposes | Covered as Building Property | Covered as Building Property |
| New acquired/constructed buildings | New construction on insured premises covered under FO-6 up to $50,000 per occurrence | Cov. Extension, Newly Acquired or Constructed Bldgs. Base limit is $250,000, which can be increased | Covered as Building Property on blanket basis. When scheduled, Supplemental Cov., Newly Acquired Bldgs covers up to $500,000 per occ. |
| Builders risk | Limited cov. in FO-3, Cov. A & B, and in FO-6 | Covered as Building Property; more specific cov. avail. by entry on dec. | Covered as Building Property |
| Personal Property Coverage | |||
| Personal non-farm, non-business property | Covered under Cov. C; household contents covered under FO-6. Coverage is worldwide since there is no territorial limitation | Covered as Personal Property at a "covered location," defined as any location or premises described on declarations. Per. prop. and stock may be covered away from a cov. loc., subject to territorial limits provision. Per. effects may be covered at a cov. loc.; and at a foreign loc. via Overseas Transit & Loc. coverage | Only business per. prop. covered, but personal effects of insured, officers, partners, and employees covered up to $10,000 at each loc. |
| Personal property of others | At insured's option, per. prop. owned by guest or domestic employee is covered while in part of residence occupied by an insured. In FO-6, cov. for rented/borrowed equip.can be scheduled. Cov. for bus. Prop. is limited to $2,500 | Per. Prop. of others in care, custody, or control of insured. Prop. sold under an installation agree. where insd. is responsible until prop. accepted by buyer, is covered as except. to Property You Have Sold exclusion | Per. prop. of others in care, custody, or control of insured, incl. prop. sold under an installation agreement where insd. is responsible until accepted by buyer |
| Computers | Covered if considered per. property; $2,500 limit on business property. FO-6 covers computers if limit shown on dec. Also avail. by endorsement | Can be covered on a blanket or scheduled basis. When blanket shown on dec., property within computer definition also covered | Covered if not covered by other insurance |
| Mobile equipment | Mobile farm machinery covered in FO-6 | Can be covered on blanket or scheduled basis. When blanket limit shown on dec., property within def. of mob. equip. also covered | Covered if not covered by other insurance |
| Stock | In FO-6, specifically scheduled livestock covered; poultry & grain covered when limit shown on dec. | Covered on blanket or scheduled basis | Covered as business personal property |
| Overseas transit coverage | Covered, since no territory limit | Overseas transit and location cov. | Not covered |
| Property at acquired locations | Per. prop. at newly acquired principal residence covered for 30 days | Coverage Extension - Personal Property -- Acquired Locations | Blanket cov., but if scheduled basis, Per. Prop.- Acquired Loc. coverage |
| Property in transit | See Prop. away from insured locations below. No specific exclusion in FO-3. | Supplemental Coverage - Property in Transit | Supplemental Marine Coverages - Property in Transit for $50,000 |
| Property away from insured locations | 10% of Cov. C limit if in residence other than insd. premises in FO-3; mach., rented equip., livestock, grain, seeds, hay, etc. covered while away from premises in FO-6 | Coverage Extension, Per. Prop., incl. stock, away from a covered location | Blanket coverage |
| Income Coverage | |||
| Income coverage options | Farm Earnings & Extra Expense, and Farm Rents coverage avail. by endorsement | Earnings, Rents, & Extra Expense; Earnings & Extra Expense; Rents & Extra Expense; and Extra Expense Only coverage can be covered by entry with limit on dec. | Earnings, Rents, & Extra Exp.; Earnings & Extra Exp.; and Rents & Extra Expense; Also, an Extra Expense Cov. Part avail. |
| Income coverage extensions | Add'l Coverages provided for: Interruption by Civil Authority; and Period of Loss Extension | Add'l Coverages provided for: newly acquired locations, earnings and extra expense; and newly acquired locations, extra expense only. Supplemental Coverages include: Interruption by civil authority; Period of loss extension; Grain storage income; Seasonal coverage | Add'l Coverages for: alterations and new buildings; interruption by civil authority; newly acquired locations; and period of loss extension |
| Supplemental income coverage | None | Public health shutdown; dependent locs.; utility service interruption; contract penalty; prop. in transit, on exhibition, or in custody/ sales reps. Only contract penalty is automatic; others require add'l premium | None |
| Perils Covered | Choice of named or open perils coverage for dwelling and related private structures, depending on for. Named perils coverage for Cov. C. personal property. Exception is Form FO 0005, which provides open perils coverage for Coverages A, B & C. FO-6 provides named perils coverage for farm barns, buildings & structures; scheduled farm personal property; and unscheduled farm personal property. Open perils coverage may be obtained by endorsement | Open perils coverage for loss to all covered property | Open perils coverage for loss to all covered property |