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The farm insurance business today is extremely complex and involves more and bigger risks all the time

Brynna Leslie on December 11, 2010

Farms in Canada are big business. Not only does agriculture account for over 2% of Canada’s $1.6-trillion GDP, but the shift away from traditional, mixed family farms over the past 30 years has been a game-changer for insurance brokers. A combination of factors has driven this change. Rapid advances in technology such as computerization of milking or the mechanization of barn climate control systems have turned farms into huge commercial enterprises, creating a wealth of opportunity for brokers who specialize in farm.

Gerrid Gust is a fourth-generation, Saskatchewan grain farmer. With his brother and father, 34-year-old Gust has been growing grains, pulses and seeds for the domestic and international market for 15 years on 6,475 hectares of land. Equivalent to 64-kilometres-square, his property is over half the area of the city of Regina. To put it in layman’s terms: it’s pretty darned big. And to put it in insurance terms? “We buy a lot of insurance,” says Gust.

Gust runs a sophisticated, capital-intensive, commercial operation, which includes millions of dollars worth of machinery, buildings and computerized equipment. He also owns one of the last of 50 farmer-operated, wooden grain elevators in the province (most have been replaced by less fire-prone cement terminals).

Finding ways to insure Gust’s property is complicated for a lot of reasons.

“For one thing, there aren’t many companies interested in insuring wooden grain elevators because the potential loss is so great,” says Jason Shaw, a broker with Cliff Shaw Agencies in the village of Davidson, five kilometres south of Gust’s farm, halfway between Regina and Saskatoon. “If there was a fire, there would never be just partial loss.”

If I owe millions of dollars for my milk quota and my buildings and equipment, and everything burns down, I still have to maintain my income.

Shaw says Gust would have to insure the elevator with two separate companies to adequately cover risk to both the structure and the grain inside, which is increasingly the case with the growth of farm values.

Greater Complexity
Regardless of the size of the farm, traditional, private farm insurance policies cover property for three basic perils: fire, wind, and hail. It’s been that way since the first 20 farm mutual insurance companies were established in Upper Canada (now Ontario) in 1836.

“Fire has always and still is the biggest area of concern for farms,” says Rick Roberts, managing director of Beacon Underwriting in Salmon Arm, B.C. “Farming is the kind of business where you get accumulation of dust, straw and hay, and often, especially in older buildings, the structure has been constructed or updated by the farmer, and there are no inspectors.”

Depending on the region of the country, standard peril may differ. In southwestern Ontario, for example, tornadoes are usually included; in the Prairies, standard policies account for flooding.

In recent years farming, and insurance for it, has become increasingly sophisticated thanks to an abundance of new equipment, from computer systems to multimillion-dollar tractors. This is often true, regardless of the actual size of the operation.

“One of the difficulties for companies is having the capacity to insure operations that, once worth a few hundred thousand dollars, are now worth $10 million,” says Roberts. “You often need several insurance companies to come together and provide the coverage.”

Standard policies vary so much these days it’s hard to give an example of average. But it’s safe to say that most farm packages–except for the smallest of hobby farms–now include electronic data processing (EDP) policies for computerized equipment, and mechanical breakdown policies, also called boiler machinery policies.

“Business interruption insurance has also become very important to farmers,” says Roberts. “If I owe millions of dollars for my milk quota and my buildings and equipment, and everything burns down, I still have to maintain my income.”

Specified Insured: The Biggest Pitfall
The epitome of the modern commercial farmer, Gust takes photos of newly purchased machines with his BlackBerry and instantly emails the serial numbers and photos to his broker to add to the inventoried list of “specified insured.”

Gust is insurance-savvy because he knows firsthand why having a detailed inventory is so important. Last year, for the first time in 15 years, he had to make a claim.

“When you’re out cutting low to the ground, there’s always a risk of rocks getting caught in the combines,” he explains. “It tears up the inside of the machines.”

Fortunately for Gust, “ingestion damage” is an insurable claim: $10,000 to fix it the first time on a $350,000 combine. Then it happened again to another comparable machine. Each time, Gust had to interrupt his work on the farm to host adjusters and get on the phone with insurance people to go through what he calls the “uncomfortable” process of wondering, “am I covered for this, or not?”

“Twenty-thousand dollars may not seem like a lot of money on the surface,” he says. “But farmers–like all businesses–rely on predictable cash flow. So, depending on the size of the farm, it’s a lot of money to have to put up front before the insurance claim comes through.”

In the end, Gust’s claims went through without issue. But that wasn’t the case for Barbara Clark in the 1970s, when she and her husband, Don, first launched a commercial cattle operation near Westlock, Alberta.

“We found out the hard way what ‘specified insured’ meant,” Clark recalls. “In the beginning, we didn’t realize that all of our equipment had to be listed. So it wasn’t until our round baler broke down that we realized it wasn’t covered. Like most farmers starting out, we were cash-strapped and everything was borrowed, so at the time, it made things difficult.”

Klemens always advises his clients to be very careful about authorizing people to come onto the property to, say, swim in a pond or go hunting or snowmobiling on the perimeter.

Ross Totten, president and CEO of the Totten Group, says it happens more often than brokers may realize.

“Too often, once an account is written, the broker becomes complacent and doesn’t keep on top of the client year after year,” says Totten. “Or they may simply fail to ask the right questions. ‘Anything change on the farm, Bob?’ ‘Nope.’ But Bob didn’t realize that he was supposed to list the $120,000 combine he purchased last month.”

Special Circumstances
“There is a mix of the personal and the commercial with farm insurance that can make it rather complex,” says Gary Klemens, a broker with Hub International in Leamington, the heart of Ontario’s tomato and potato belt south of Windsor. “In rural Ontario, for example, there are still a lot of smaller farms, so you have to deal with personal property and personal dwellings, and then look at liabilities, both personal and business-related.”

“Farm liability is quite different from general liability,” says Totten. “It covers the residential, the commercial, and in some cases the personal exposure of the farmer.” But it can also cover a lot more. For example, farmers may have other occupations such as contracting or tree trimming. Depending on the exposures, their liability insurance can be expanded to cover some of those secondary occupations.

However, Totten also notes that farmers are frequently tragically underinsured, often because their broker failed to examine and explain all possible risks. Brokers have to be very clear on what those exposures are on a farm so they can explain them to their clients. They also need to understand what’s included in a policy, and perhaps more importantly, the exclusions.

“A very good example is farmers with horse barns,” Totten explains. “The broker really needs to know what that horse barn is being used for. Is it being used for boarding neighbours’ horses? That’s another exposure. Is it being used for riding lessons for adults, for children, for special-needs children? All of these will change the exposure.”

In Ontario where farms are close together and close to urban centres, another big risk is retail exposure. “In Alberta, where the ranches and farms are large and spread apart, you’re unlikely to have someone head out to a farm to buy half a cow,” says Totten. “But in Ontario, people are selling grapes, fruit, and eggs to city-dwellers who drive out to their property on a Sunday afternoon, so they had better make sure they have the liability insurance to cover that.”

Klemens always advises his clients to be very careful about authorizing people to come onto the property to, say, swim in a pond or go hunting or snowmobiling on the perimeter.

“I tell them do not give anyone authorization to be there,” Klemens says. “There’s a big difference between someone going on your property as a trespasser or with your permission; it’s a whole different duty of care.”

The Seeds of Success
Advice for brokers in the farm field

Appropriate Footwear
Brokers looking to specialize in farm better be prepared to get their feet wet, literally, says Rick Roberts, managing director of Beacon Underwriting.

“If you’re a broker and you’re planning to sell farm insurance, you’d better have a pair of gumboots in the back of your car so that farmer can show you around his property,” says Roberts, who has a degree in agricultural economics. “There’s nothing worse for a farmer than having to explain to you what he does day in and day out.”

While you don’t have to be from the country to know the ins and outs of the business, “if you’re on Bay and Bloor in Toronto, you’re not necessarily the best person to be selling farm insurance,” says Ross Totten, president and CEO of the Totten Group.

Ross Totten The Totten Group

“It’s worth knowing that mortality insurance is normally reserved for a prize bull or stallion, but that most farmers do not insure their livestock,” Totten adds.

Frequent Check-ins
It’s essential that brokers check in often with clients and make sure they understand that new equipment or new occupations on the farm need to be reported and accounted for in insurance policies.

“It’s important to stay in physical touch at least a couple of times a year,” says Gary Klemens of Hub International. “A lot of things can happen on the farm within a few months. The dynamics are changing all the time, and you need to be on top of it.”

Specialize Within the Specialty
Totten Group has a reputation for underwriting policies that fall through the cracks of traditional farm. “At one time we were one of the largest mortality writers of ostriches and emus,” says Totten with a laugh. “Here was a huge expansion by farmers and ranchers out west to raise them for hide, for meat, et cetera, and no one wanted to touch it.”

Wineries are another potentially untapped market, says Roberts, who is part-owner in a vineyard in BC’s Okanagan Valley.

Other specialty farm-related markets include greenhouses, extended crop insurance (beyond the majority of crop insurance, which is administered by provincial governments) and manufacturing related to agriculture.