Utilizing a Farmowners' Insurance Policy to Manage Risks to Farm

Utilizing a Farmowners’ Insurance Policy to

Manage Risks to Farm Property

The risks faced by agricultural producers are

numerous and varied. There are many expo-

sures faced by farms, from liability issues, to

issues of succession and estate planning.

One of the most significant risks for a farm

is property risk. Without land and machinery

to work the land, a farm would not be able

to produce anything. In order to protect a

farm’s property, there are several choices of

insurance policies. One of the most com-

monly used is the Farm Owners’ Policy

form. This article will discuss the terms of

the Farm Owners’ Policy and how a farmer

can maximize the coverage under the policy

for the benefit of his or her organization.

The article is based on the Insurance Service

Office’s (ISO) Farmowner’s Policy which is

considered an industry standard. However,

while most companies’ policies resemble the

ISO form, it is important to note that poli-

cies can vary between insurance companies,

and there can also be some variation be-

tween policies in different states. Thus, it is

very important to consult with an insurance

professional in your state when purchasing

an insurance policy.

The ISO Farmowners’ Policy form, or FOP,

consists of multiple coverages for a wide

variety of property types that are commonly

associated with a farming operation. A FOP

is a package policy as it combines home-

owners’ and business property insurance

into the same policy. The FOP covers dwell-

ings and personal property associated with a

home on a farm, outbuildings such as barns,

sheds, grain bins, silos, and stables. The pol-

icy also covers some mobile equipment such

as tractors, all-terrain vehicles, and harvest-

ing equipment. In addition to the hard assets

described above, the FOP provides some

limited coverage for poultry, livestock, and

other animals raised on the farm. If this cov-

erage is utilized correctly, a small operation

can transfer some of the risks associated

with the production of livestock to the insur-

er. Additionally, the FOP also provides cov-

erage for harvested grain, cotton, tobacco,

and hay that are being stored on a farm’s

premises.

The Farm Owners’ Policy’s coverages are

classified into seven categories, labeled A

through G. Each of these coverage parts co-

vers specific property risks on the farm. It is

important to know the needs of the insured

farm and to pair those needs with the appro-

priate coverage parts. Additionally it is im-

portant to understand the requirements of the

insured are under each coverage.

As stated before, the Farm Owners’ Policy is

essentially a hybrid of personal homeown-

ers’ property insurance and commercial

property insurance. Coverages parts A - D of

the FOP provide coverage for residential

property and Coverages E, F, and G provide

coverage for the business aspects of the

farm.

Residential Property Coverage

The residential personal property coverage

parts of the FOP allow famers that live on

their farm access to a package policy that

will cover their residence and its contents in

conjunction with their farm business. This

portion of the FOP is very similar to a

homeowner’s insurance policy. As such,

corporate farms or farmers that do not live

on their farm premises would not need cov-

erages A-D.

Coverage A

Coverage A of the FOP covers the primary

dwelling of a farm’s owner. The policy re-

quires that this property covered under this

section of the policy be residential in nature.

This building cannot be used primarily for

business purposes. The structure in question

must either be the primary residence of the

farm owner, or the property must be rented

to a tenant to use as his or her residence.

Under Coverage A, the farm owner will be

indemnified for any covered losses arising

from either the named perils stated in the

policy, such as fire, lightening, windstorms,

or hail damage. Or, if the farm owner wants

broader coverage, there is an option to pur-

chase an open perils policy which will cover

the primary residence of the farmer from

any perils that are not specifically excluded

by the policy.

Coverage B

Coverage B of the FOP covers any “Private

Structures Appurtenant to Dwellings.” This

coverage would include items of property

such as personal sheds, garages used for per-

sonal (non-farm) property, and pump houses

for residential water wells. The policy spe-

cifically excludes farm related structures

from being covered by this coverage part of

the insurance policy. All farm structures are

covered under a different section of the

policy.

Coverage C

Coverage C of the FOP covers Household

Personal Property. This includes items such

as TV’s, clothing, and home furnishings. It

is important to note that farming related

property is not covered under this section of

the policy. This means that a farmer’s TV

would be replaced under this section of the

policy but his GPS yield mapping equip-

ment being stored in the house would not be

covered. All farm property is covered under

another section of the policy.

Coverage D

Coverage D protects insureds from the loss

of use of personal property. An insured will

be indemnified for any additional costs of

living incurred by the loss of use of his or

her dwelling under this policy. If the in-

sureds house is unlivable after a covered

loss, Coverage D will pay for the insured to

rent an apartment or hotel room while the

home is under repair.

Farm Property Coverage

Farm Property Coverage parts in the far-

mowner’s policy cover a farmer’s business

property. This can include things such as

livestock, tractors, farm buildings, and other

farm specific equipment.

Coverage E

Coverage E is one of the options under a

FOP to cover farm personal property. This

coverage provides indemnification for cov-

ered losses to multiple types of property.

These can include livestock (cows, pigs,

sheep, horses, mules, and donkeys), fish,

bees, feed, grain, computers, farm products,

hay, borrowed equipment, and computers.

Coverage E will cover these property types

on a “scheduled” basis. This means that in

order for the property to be covered, it must

be listed on the Declarations Page of the in-

surance policy. Choosing to cover business

property in a scheduled manner can be espe-

cially advantageous if the property in ques-

tion is particularly expensive. For example,

if a farm owner has a GPS guidance system

that is very expensive, if this property is

scheduled the owner will be indemnified at

an agreed upon value in the policy. Howev-

er, if it is not scheduled, it will be subject to

a coinsurance requirement which will de-

crease the indemnity payment in the event of

a covered loss to the GPS system. This

could mean that the insured might not be

able to replace the property if a loss occurs.

It should also be noted that the insurance

policy allows for livestock to be covered in a

scheduled manner. This provision of the

FOP allows producers to mitigate some of

the production risk associated with raising

livestock. While it should be stated that the

policy does not cover livestock lost from

most natural causes, e.g. illness and disease,

the policy will cover livestock losses arising

from accidents, weather (excluding floods),

accidental shootings, wild animals, and

dogs. This coverage could be especially

helpful to producers who are unable to pur-

chase livestock insurance in their states as it

provides an opportunity to transfer some of

the livestock production risk to another par-

ty. This is also particularly useful to live-

stock producers, because FOP can be used to

fill some of the holes in the Livestock Safety

Net provided by the 2014 Farm Bill.

Coverage F

Coverage F in the FOP is much like Cover-

age E in the sense that both coverages cover

farm personal property. The two coverages

differ in two very important ways. Coverage

F has a coinsurance requirement and proper-

ty is not scheduled. These two differences

are very important. Since Coverage F is not

scheduled, the items that are covered are not

listed on the declarations page. This makes

Coverage F sort of a catch-all coverage that

will take care of any property that is not

listed specifically in the policy. This catch-

all status does come with a drawback: a co-

insurance requirement. A coinsurance re-

quirement means that farmers must maintain

a certain amount of insurance coverage on a

piece of property in order to receive the full

benefit of the insurance policy. The standard

coinsurance requirement is 80%. This means

that a farmer must maintain insurance limits

on a piece of property of 80% of the value of

the property or greater. For example, if a

farmer owns a $10,000 mower that is not

listed in Coverage E, then the farmer will

need to keep at least $8,000 in coverage in

Coverage E to protect the mower. If the co-

insurance requirement is not met, then the

insured will face a penalty at the time of loss

adjustment.

Additionally, Coverage F has several exclu-

sions. These exclusions can greatly limit the

types and values of property that can be

covered under this part of the insurance pol-

icy. It should be noted that farmers can pur-

chase a separate Inland Marine Policy for

any property that is excluded in this portion

of the FOP.

Coverage G

Coverage G covers farm buildings and struc-

tures other than those covered in Coverages

A and B. These structures include silos,

portable buildings, fences, radio antennas,

and satellite dishes. This coverage will also

cover other land improvements.

Other Coverages

The basic Farmowner’s Policy form also

offers a few other minor coverages that can

protect different classes of a farmowner’s

property. A few examples of these are debris

removal coverage, coverage for trees and

shrubs, grave marker and mausoleum cover-

age, and credit card fraud protection. Gener-

ally, these coverages are relatively small,

less than $1,000. However, they can be in-

creased if the insured wishes to purchase an

endorsement on their policy.

Best Use of the Farm Owners’ Policy

The FOP is specifically designed to be used

by farmers that live on the farm and farm in

close proximity to their dwelling. This is

often not the case for farmers today whose

operations can often spread for miles. Addi-

tionally, if a farmer does not live on the

farm, there are policies that will better cover

his or her risk available to be used.

This document was prepared in by the Uni-

versity of Louisiana at Monroe’s Small

Business Risk Management Institute and

Department of Agribusiness.

Written by:

Christine Berry, Ph.D, CPCU, ARe, ARM

Associate Professor of Risk Management

and Insurance

Director, Small Business Risk Manage-

ment Institute

Zachary Moore, MBA

Instructor of Agribusiness