WRITING FARM INSURANCE REQUIRES A DIFFERENT APPROACH
Family farms feature both personal and commercial risks
By Casey Roberts, CIC, ACSR, AFIS
High property values, protection classes, older properties, and multiple liability exposures—just to name a few obstacles—can make writing farm insurance a challenge. Over 90% of the 2 million-plus farms in the United States are owned by individuals/families, sole proprietorships, or family-held corporations, according to the Economic Research Service of the U.S. Department of Agriculture (ers.usda.gov). This means that most farms will have both personal and commercial risks that need to be addressed. Because of their unique needs, the insurance product of choice used in response to farm risks is often the farm owner’s program.
It’s worth taking a look at how writing a farm risk differs from everyday commercial or personal risks, focusing on ISO farm products (04/16 edition dates).
Appurtenant structures and personal property concerns
The ISO HO-3 and its farm policy cousin, the FP 00 12, require that homeowners insure their dwellings to at least 80% of their replacement value as of the time of loss in order to receive loss payment on a replacement cost basis without deduction for depreciation. These two policies diverge on how they treat appurtenant or other structures.
ISO HO-3. The HO-3 provides for Coverage B – Other Structures and states that “we cover other structures on the ‘residence premises’ set apart from the dwelling by clear space.” Then it tells us what structures are not included as other structures:
Other structures rented or held for rental to persons who are not tenants of the dwelling
Other structures from which any “business” is conducted
Other structures used to store “business” property
FP 00 12. The FP 00 12 provides for Coverage B – Other Private Structures Appurtenant to Dwellings. Just the title alone of this coverage section should give pause. The insuring language says that Covered Property under Coverage B exists of “private structures you own that are appurtenant to a covered ‘dwelling’ and:
Separated from it by a clear space; or
Attached to it by only a fence, utility line, or similar connection
Interpreting potential challenges under Property Not Covered
This section includes:
Structures that are rented or held for rental to any person who is not a tenant of the dwelling (other than private garages)
Structures that are used principally for farming purposes (other than private garages)
Any structures shown in the Declarations as Other Property Not Covered under Coverage B
Let’s look at a scenario. Imagine an insured has what looks like a two-car garage. The insured uses the “garage” to store seed, fertilizer, and various farming implements. Is this still covered as an “appurtenant structure?” Probably not.
In the farm program, the “use” of the structure will always come into consideration. When the appurtenant structure is being used principally for farming purposes it would need to be insured under Coverage G – Barns, Outbuildings and Other Farm Structures on Coverage Form (FP 00 14). The use of the structure—not its location nearby the dwelling—is what provides for the application of coverage or not.
When it comes to Coverage C – Personal Property, there are some challenges. In the HO program Coverage C is for Personal Property “owned or used by an ‘insured’ while it is anywhere in the world.” Coverage C in the farm owner’s program applies to Household Personal Property and is partially defined as “Household personal property owned or used by you or members of your family who reside with you.”
Under the Property Not Covered area, we see that “farm personal property” other than office fixtures, furniture, and office equipment is not covered property under Coverage C. As such, those items of personal property that the insured uses in their farming operation (think of the equipment [tractors], supplies [fertilizers/seeds], and/or products of their farming or ranching, to name just a few) would need to be insured under Coverage E or Coverage F of the Farm Property-Farm Personal Property Coverage Form (FP 00 13). That form allows for either a scheduled or unscheduled approach to insuring those items of “farm personal property.”
One more consideration for insuring the dwelling
In personal lines, many carriers provide for “extended replacement cost” for the insured’s dwelling and then provide for an additional percentage of coverage in addition to the limit provided for on the declarations page in the event of a covered loss—not so in the Farm program with ISO. The limit shown for the dwelling on the declarations page is the limit. As always, proper insurance to value is of paramount importance for the insured and their agent.
Farm liability coverage
A discussion of farm exposures can’t happen without considering how farm liability (FL) coverage will apply. The ISO Farm owner’s program provides liability coverage using the Farm Liability Coverage Form (FL 00 20) (latest revision, 04/16 edition).
This form addresses an interesting combination of both personal and business exposures that the farmer may face. Because of various limitations in this contract, it is often our recommendation that the farmer consider a CGL in addition to the Farm Liability Coverage Form.
Essentially, the only “business” coverage provided for in the FL 00 20 is the business of “farming” and “custom farming.” Of course, these are both defined terms in the policy. At this time, we’ll forgo a review of what “custom farming” entails. The definition of “farming” is a bit lengthy and intricate. Here it is in its entirety:
- Means the operation of an agricultural or aquacultural enterprise, and includes the operation of roadside stands, on your farm premises, maintained solely for the sale of farm products produced principally by you. Unless specifically indicated in the Declarations, “farming” does not include:
(1) Retail activity other than that described above; or
(2) Mechanized processing operations;
- However, “farming” does not include the operation of:
(1) Any “agritainment” on your farm premises; or
(2) Any retail activity or any mechanized processing operations performed, in whole or in part, for “agritainment”.
The first part of the definition, “the operation of an agricultural or aquacultural enterprise,” is straightforward. Is your insured operating an agricultural enterprise? Are they growing crops or raising livestock? If so, then at this point they are covered for their farming. This also applies if they raise fish as part of their agricultural/aquacultural endeavors.
Are they also selling farm products from a farm stand on their farm premises that they have principally produced? If so, at this point the coverage still applies. What if they sell their products at a farm stand or at a farmer’s market that is not on their farm premises? Without an acknowledgement shown on the Declarations, no coverage would apply.
Farming does not include the insured’s engagement in any retail activities (except that brief exception for farm stands) and, more important, does not include coverage whenever the farm products have been processed.
For example, Farmer Jones decides to engage in some other activity of a retail nature on or off the farm premises. In this case, coverage would not apply. Many farm underwriters will provide for coverage by stating so on the Declarations; but absent of such a notation, no coverage would apply for those other retail activities.
What if Farmer Jones decides that in addition to growing the crops, the farm will also process them? In this case, coverage would not apply. Think of the grape grower who sells her grapes to a winery. As the vineyard owner, her liability is covered under the FL form. Because she does not process the grapes into wine, but solely grows them and then sells them to a winery (who does the processing), the FL should suffice.
Should she, however, later decide to grow the grapes to make and sell wine, a CGL would be necessary as she is now not just growing the grapes but is also processing them.
The exclusion of “agritainment” is a recent development and an addition to the 2016 coverage form. “Agritainment” is defined as “an agricultural or aquacultural-related activity or enterprise that is primarily operated on the “insured location:”
- For the purposes of tourism or entertainment; and
- Engaged in for monetary or other compensation.”
Many farm operators will engage in whatever activity they can in order to make money, and why not? Farm operators who use their locations to host weddings, provide for weekend farm stays, offer u-pick operations, create pumpkins patches and the like should either be provided with a CGL for those exposures (as they are not “farming” as defined) or have their insurer endorse their policy with the Agritainment-Liability endorsement (FL 05 01). There are multiple operations that may fall under the Agritainment endorsement. Not all insurers will endorse all of the potential eligible operations. As such, a discussion with the underwriter is in order and use of a CGL may be needed.
What can agents do?
There are multiple other areas to consider when writing a farm operation: pollution; property valuations (ACV, RC, functional); leased, rented, or borrowed equipment; autos vs. mobile equipment; the contracts that the farmers sign and use; power generation; and more. The list is almost endless.
Utilize a coverage checklist and have a firm and complete understanding of what the farmer is doing. Absent such, something may be missed. When that occurs no one is happy.
Casey Roberts, CIC, ACSR, AFIS, is the principal and founder of Laurus Insurance Consulting, specializing in providing continuing education classes, sales coaching, sales management and expert witness work. Established in 2010, the name “Laurus” (Loris) was chosen with intent and purpose. Derived from Latin and meaning “victory” or “success,” Casey strives to make every interaction just that … a success/victory for all concerned. Prior to founding his consulting firm, Casey spent 34 years on the retail side of the insurance business as an agency owner, personal lines and commercial lines producer and sales manager. He has been teaching CE classes for some 25 years. He attained his CIC designation in 1989, his ACSR in 1992 and his AFIS in 2005. His past commitments to the industry include stints as a director for the Independent Insurance Agents and Brokers of California and as a director for the Agriculture and Farm Insurance Specialist (AFIS) designation, as well as serving on his state’s agribusiness insurance committee. He currently serves on the California Department of Insurance’s Curriculum board.