by Reuben Dourte
If you have found yourself in the situation of expanding your farming operations to business activities that fall outside of the scope of normal or traditional farming ventures, you probably need to take time to reevaluate your insurance coverages. Often, farming policies will exclude coverage for what the insurance company considers as incidental commercial business pursuits unless they are endorsed on the policy and accounted for appropriately so an accurate premium rate can be determined.
Still, other situations may arise where your business activities are beyond incidental in nature, in which case the underwriter may require that a separate commercial policy be purchased to insure for general liability and products liability exposures arising from those business activities. This doesn’t automatically mean that having an additional policy will require you to pay more for your insurance. In fact, there are cases where the opposite may be true! You may also find it advantageous from a legal standpoint to separately insure your operations if your farm is operated as a sole proprietorship, and your on-premises business is operated under the name of an LLC. A lawyer can assist you in determining whether or not you would benefit from having separate liability policies.
Aside from the legal matter of entity separation, the incorporation of business activities into your farming operation may create unforeseen challenges from an insurance point of view, or even possible problems for you in a claim situation. One area where the insurance buyer may find a potential coverage pitfall is in the case of Business Personal Property (BPP) versus Farm Personal Property (FPP). Even though these coverages sound similar, they have significant areas of difference.
Farm Personal Property
Farm Personal Property can include your farming equipment, implements, machinery, tools, supplies, products, and even livestock; in other words, the items you use in your pursuit of agricultural operations. Typically speaking, a farm insurance company will insure these items on an actual cash value basis, meaning the amount you may receive for the item will be calculated by subtracting the depreciation of the item from the replacement cost of a new item of like kind and quality. Your Farm Personal Property inventory coverage is very similar to what is commonly referred to in Commercial Insurance as Inland Marine coverage. Like Inland Marine, your FPP inventory is covered even when it is not on your premises. This means if you are driving a tractor down the road between two farm locations and you hit a tree, you may still receive a claim payment for your damaged equipment. In this sense, farm personal property is not a location specific coverage.
Scheduled and Blanket Coverage
It’s also important to note that your farm insurance company will allow you to insure your FPP inventory on a scheduled or blanket basis. Scheduled FPP requires you to assign a value to each individual piece of equipment for which you want to purchase insurance. This means you may insure your old Massey Fergusen for $5,000, your 2016 New Holland discbine for $30,000 and your miscellaneous hand tools for $10,000. If you were to lose one of these items due to a covered cause of loss on your policy, your insurance company will pay you the actual cash value of the item(s) lost up to, but no more than, the policy limit (less your deductible).
The other option when insuring FPP is to place it on blanket coverage. With this method you will need to account for your entire inventory. The company may allow you to specifically exclude certain items, such as livestock or feed, for example. Your entire equipment inventory should be accounted for when insuring on a blanket basis. Your insurance company will then allow you to insure to as low as 80% of the total limit of your entire inventory. This can save premium dollars since you may have a total of $100,000 of equipment, tools and supplies but only have to pay premium based on $80,000! Insuring for less than 100% of your equipment inventory should only be considered if you have your loss exposure adequately segregated. This is simply a fancy way of referring to spreading your equipment across multiple buildings or locations. Since it is unlikely (or at least less likely) that a wind storm or fire will hit buildings at two separate locations at the same time, having your equipment separated makes a total loss very improbable.
The second thing to be aware of when insuring on a blanket basis is that you want to be sure you the inventory value you are insuring is in fact within 80% of your total actual inventory in order to avoid a coinsurance penalty at time of loss. For this reason it is advisable to insure your inventory at 85-90%. In our example, you would insure your $100,000 of FPP at $90,000 and still save some premium while allowing for some small calculation errors on inventory value or the addition of a new piece of equipment in which you forgot to tell your agent about. Since you do not need to name specific items on your blanket FPP, you can still receive a claim payment for an item lost that you did not account for in your inventory as long as you are within 80%, whereas scheduled FPP requires a listing of specific items; in other words if you forget to add your new equipment, you have no coverage!
Business Personal Property
Business Personal Property is similar to farm personal property; however, it usually comes with more limitations in certain areas. If you have a farm policy coupled with a commercial policy, you may need to divide items between FPP and BPP.
You may decide to sell your farm produce through a retail store location, which you own and operate. You may have significant value in the items within the store, such as shelving, display cases, freezers and coolers, signs, cash registers or computers, and even items purchased for resale. These items should not be insured on your farm personal property. Instead, they should be included in a BPP limit on your commercial policy, (or within the commercial section of an agribusiness type of policy which can cover commonly owned farm and commercial risks together). These items are used in the commercial business and are not considered farm property. If you have several thousand dollars of freezer beef cuts that you purchased from the organic farm down the road to sell in your store, a loss to this inventory could go unpaid if you have these items insured under FPP. Since they are not your own farm product that you raised, it will likely be considered as Business Personal Property. Bear this in mind when you are deciding where to insure certain items and ask your agent to help you determine the correct place on your policy for each item.
The second large difference between FPP and BPP is that most companies will place a limitation on how far from a building Business Personal Property will be covered. Standard language may only provide for coverage within 100 feet of the commercial building, while some companies may extend this to 1000 feet or more. If you are moving BPP from one location to another, you may need an inland marine policy, an auto policy with owner’s cargo coverage, or possibly a policy endorsement providing a limit for “property in transit”. An experienced agent can help to make sure you are appropriately covered if your business property is not contained to one location and building.
Like Farm Personal Property, Business Personal Property may be insured on a schedule or a blanket. The minimum 80% coinsurance requirement still applies to the blanket, but you may be able to receive a lower rate per thousand dollars of coverage if you choose to insure to a higher percentage of your total inventory. This is important to keep in mind when looking to receive the most value from your policy. One difference between FPP and BPP is that insurance companies will more likely offer BPP coverage on a replacement cost basis. In the event that you choose to insure your BPP at replacement cost, you would receive “new for old”, or in other words, the value of a new replacement for the item you lost (less your deductible). This can be an important consideration for the perpetuation of your business after a large loss.
There are certainly a lot of confusing acronyms and coverages within farm and commercial insurance policies. Understanding the differences between certain line items is important, however. An agent with experience in agricultural types of risks as well as commercial insurance is a valuable asset to your business. With ever-increasing frequency, farmers are implementing commercial operations into their farms and if you find yourself within that group, it is time to have a detailed conversation about your insurance policies and the coverages they contain.