Think about your key farm advisors. You likely have regular conversations with your agronomist, veterinarian, equipment dealer, and grain buyer throughout the year. But when was the last time you spoke with your insurance agent?
For many farmers, insurance agents fall outside their regular circle of communication. This can be a risky oversight. Here’s why regular contact with your insurance agent is crucial:
Proactive Protection: Unlike other advisors you might consult reactively for problems, your insurance agent plays a preventative role. They ensure your farm has the right coverage to bounce back from unexpected events.
Customized Coverage: Farms are unique operations. A good insurance agent will understand your specific risks and tailor your policy accordingly. This could involve covering unique assets, activities, or environmental concerns.
Maximizing Coverage: Insurance policies can be complex. Regularly reviewing your policy with your agent helps ensure you understand your coverage details, including property value limits, replacement options, and liability protection levels.
Take Action Today: Schedule an Insurance Review
Here are some talking points to get the conversation started with your agent:
Policy Review: Go over your current coverage thoroughly. Are all your farm properties and assets listed accurately? Are the listed values up-to-date to reflect true replacement costs?
Coverage Gaps: Discuss any unique farm activities or assets that might require additional coverage beyond your current policy.
Liability Needs: Evaluate your current liability coverage. Is it sufficient for your operation?
An Investment in Peace of Mind
An hour or two spent with your insurance agent can make a world of difference in the event of a loss. They can be your partner in safeguarding your farm’s financial future. Don’t wait until a problem arises; take charge today and schedule a comprehensive insurance review.
We know farms are subject to more risks than ever before and we know the important role insurance plays in protecting our farm assets. But how many of us actually read and understand our farm insurance policies? The failure to read a policy is probably not due to apathy but is more likely due to the complex nature of an insurance policy. Reading and understanding an insurance policy is difficult for anyone other than those in the insurance industry. But it’s a critical necessity for farm risk management.
Our newest publication can help. Farm Insurance: Covering Your Assets provides a general description of farm insurance and insurance policies. This information will help a farmer understand how farm insurance coverage works. Our goal with this publication is to prepare farmers for a review of policy provisions with their insurance agents and ensure the farm has a comprehensive and carefully tailored insurance policy. We’ve coupled the publication with a new law bulletin, Farm Liability Insurance: Examining Your Covered Activities and Assets, which provides a quick reference list of farm activities and assets that might not be covered in a standard farm liability insurance policy.
Robert Moore, attorney with the OSU Agricultural & Resource Law Program, authored the publication with the assistance of Jeff Lewis, attorney with OSU’s Income Tax Schools, and Zachary Ishee and Samantha Capaldi, National Agricultural Law Center Law Fellows. The National Agricultural Law Center and the USDA National Agriculture Library provided funding for the project in partnership with OSU Extension. Find the new publications in our Business Law Library on Farm Office at https://farmoffice.osu.edu/law-library/business-law.
Farms are subject to more risks than ever before. Whether it’s the liability exposure of driving equipment on roadways or the potential of property loss due to a barn roof collapse, every farm has multiple sources of risk. While farmers can reduce their risk exposure through good business practices and rigorous safety protocols, there is no way to entirely eliminate inherent risks. For this reason, insurance policies that adequately protect against the multiple risks present is a necessity for farm operations.
All farmers probably know the importance of insurance to protect their livelihood and their farm assets. However, few farmers take the time to read and understand their insurance policy. The failure to read policies is not a result of apathy but more likely due to the almost unreadable nature of an insurance policy. Reading and understanding an insurance policy is difficult for anyone other than those in the insurance industry.
While each policy is unique, most farm policies do share some common terms or characteristics. The following is a discussion explaining the more general parts of a farm insurance policy. Understanding the different parts of a policy and the concepts of the policy can help to better evaluate a policy to determine if it provides adequate coverage for a farm.
An Insurance Policy Is a Contract
An insurance policy is a legal contract between an insurance company (the “insurer”) and the person or business entity being insured (the “insured”). The policy holds the insurer responsible for paying the insured for eligible claims. Furthermore, the contract requires the insured to meet certain obligations such as the timely reporting of claims. Once the policy becomes active, both the insurer and the insured are legally bound to the terms of the policy. This legal obligation is present even if the insured is unaware of some or all of the terms of the policy. It is the obligation of the insured to understand the policy.
Structure of an Insurance Policy
Most insurance policies contain the following sections:
Declaration Page – identifies the person/entity insured and details about the policy
Insuring Agreement – summary of terms and conditions of the policy
Exclusions – specifically identifies what the insurance policy does not cover
Conditions – provisions that can limit an insurance company’s obligation to pay or perform
Endorsements and Riders – provisions that add, subtract, or modify the original insurance policy
What Does a Typical Farm Insurance Policy Cover?
Areas of Protection. A typical farm policy includes the following areas of protection:
Liability
Home and contents
Farm personal property
Farm structures
Other additional coverages
A farm insurance policy typically covers both farm assets and household personal property. Having all assets covered under one policy is usually less expensive than having one policy for the farm assets and another policy for non-farm coverage. Noticeably absent from the above list are vehicles. A separate policy may be issued for the coverage of vehicles for both liability and property loss.
Liability Coverage. Liability coverage protects against most risks associated with the farm operation such as bodily injury, medical expenses and property damages caused by accidents associated with the farming operation. Also, and sometimes just as importantly, the policy will cover attorney’s fees associated with defending the liability incidents.
Property Loss Coverage. A farm policy will provide coverage for the loss of farm assets due to a covered peril. Farm assets are typically divided into two categories within the policy: personal farm property (machinery, grain, livestock) and farm structures. In the event of damage or destruction of a farm asset due to a covered peril, the insurance company will pay at least some, but necessarily all, of the value of the covered asset to the farm operation.
Types Of Coverage
Basic Coverage. A policy that provides basiccoverage is only going to cover the insured for named perils. If an event that is not named in the policy occurs, no coverage is provided. Common perils that are often included in basiccoverage are:
Fire
Lightning
Windstorm or Hail
Explosion
Smoke
Vandalism
Aircraft or Vehicle Collision
Riot or Civil Commotion
Sinkhole Collapse
Each of these perils will also include exceptions to coverage. For example, the Vandalism coverage usually excludes any buildings that have been vacant for more than 30 days. Again, any perils that are not expressly provided for are not covered under a basiccoverage policy.
Broad Coverage. Broadcoverage is more expansive than basiccoverage but is still limited to only the named perils. This type of coverage will include the perils identified in the basiccoverage plus additional named perils. The additional perils covered by broad coverage often include the following:
Burglary/Break-in damage
Falling Objects (like tree limbs)
Weight of Ice and Snow
Freezing of Plumbing
Accidental Water Damage
Artificially Generated Electricity
Accidental Tearing Apart
Loading/Unloading Accidents
Like basiccoverage, the broadcoverage perils often include exceptions. An example of a broadcoverageexception is freezing of plumbing may not be covered in a building which does not maintain heat.
Special Coverage. Specialcoverage is the most comprehensive coverage available. Unlike basicand broad coverage, specialcoverage includes everything except the identified exceptions. Instead of identifying the perils covered, special coverage applies coverage to everything except what is specifically identified as an exception. Specialcoverage provides more comprehensive coverage because everything is included unless excepted. Remember, basic and broad coverage only applies to those perils expressly identified.
Specialcoverage may include many exceptions. For example, specialcoverage will likely include an exception for vandalism in buildings that have been vacant for 30 days. It is important to know what exceptions are included with specialcoverage.
Incorporation of Basic, Broad, and Special Coverage in The Insurance Policy
A policy may include one or more of the different types of coverages. For example, a policy may include specialcoverage on all farm machinery but broadcoverage on all other personal property. It is important to know what assets are covered under which type of coverage. Specialcoverage is best for the most comprehensive coverage, but specialcoverage is also more expensive than basic and broadcoverage. Weighing the additional cost of specialcoverage versus the benefit of comprehensive coverage provided is an important analysis to be done for each insurance policy.
In Part #2, we will discuss obtaining, managing and maintaining a farm insurance policy.
Farms are subject to more risks than ever before. Whether it’s the liability exposure of driving equipment on roadways or the potential of property loss due to a barn roof collapse, every farm has multiple sources of risk. While farmers can reduce their risk exposure through good business practices and rigorous safety protocols, there is no way to entirely eliminate inherent risks. For this reason, insurance policies that adequately protect against the multiple risks present is a necessity for farm operations.
All farmers probably know the importance of insurance to protect their livelihood and their farm assets. However, few farmers take the time to read and understand their insurance policy. The failure to read policies is not a result of apathy but more likely due to the almost unreadable nature of an insurance policy. Reading and understanding an insurance policy is difficult for anyone other than those in the insurance industry.
While each policy is unique, most farm policies do share some common terms or characteristics. The following is a discussion explaining the more general parts of a farm insurance policy. Understanding the different parts of a policy and the concepts of the policy can help to better evaluate a policy to determine if it provides adequate coverage for a farm.
An Insurance Policy Is a Contract
An insurance policy is a legal contract between an insurance company (the “insurer”) and the person or business entity being insured (the “insured”). The policy holds the insurer responsible for paying the insured for eligible claims. Furthermore, the contract requires the insured to meet certain obligations such as the timely reporting of claims. Once the policy becomes active, both the insurer and the insured are legally bound to the terms of the policy. This legal obligation is present even if the insured is unaware of some or all of the terms of the policy. It is the obligation of the insured to understand the policy.
Structure of an Insurance Policy
Most insurance policies contain the following sections, detailed further below:
Declaration Page – identifies the person/entity insured and details about the policy
Insuring Agreement – summary of terms and conditions of the policy
Exclusions – specifically identifies what the insurance policy does not cover
Conditions – provisions that can limit an insurance company’s obligation to pay or perform
Endorsements and Riders – provisions that add, subtract, or modify the original insurance policy
What Does a Typical Farm Insurance Policy Cover?
Areas of Protection. A typical farm policy includes the following areas of protection:
Liability
Home and contents
Farm personal property
Farm structures
Other additional coverages
A farm insurance policy typically covers both farm assets and household personal property. Having all assets covered under one policy is usually less expensive than having one policy for the farm assets and another policy for non-farm coverage. Noticeably absent from the above list are vehicles. A separate policy may be issued for the coverage of vehicles for both liability and property loss.
Liability Coverage. Liability coverage protects against most risks associated with the farm operation such as bodily injury, medical expenses and property damages caused by accidents associated with the farming operation. Also, and sometimes just as importantly, the policy will cover attorney’s fees associated with defending the liability incidents.
Property Loss Coverage. A farm policy will provide coverage for the loss of farm assets due to a covered peril. Farm assets are typically divided into two categories within the policy: personal farm property (machinery, grain, livestock) and farm structures. In the event of damage or destruction of a farm asset due to a covered peril, the insurance company will pay at least some, but necessarily all, of the value of the covered asset to the farm operation.
Types Of Coverage
Basic Coverage. A policy that provides basiccoverage is only going to cover the insured for named perils. If an event that is not named in the policy occurs, no coverage is provided. Common perils that are often included in basiccoverage are:
Fire
Lightning
Windstorm or Hail
Explosion
Smoke
Vandalism
Aircraft or Vehicle Collision
Riot or Civil Commotion
Sinkhole Collapse
Each of these perils will also include exceptions to coverage. For example, the Vandalism coverage usually excludes any buildings that have been vacant for more than 30 days. Again, any perils that are not expressly provided for are not covered under a basiccoverage policy.
Broad Coverage. Broadcoverage is more expansive than basiccoverage but is still limited to only the named perils. This type of coverage will include the perils identified in the basiccoverage plus additional named perils. The additional perils covered by broad coverage often include the following:
Burglary/Break-in damage
Falling Objects (like tree limbs)
Weight of Ice and Snow
Freezing of Plumbing
Accidental Water Damage
Artificially Generated Electricity
Accidental Tearing Apart
Loading/Unloading Accidents
Like basiccoverage, the broadcoverage perils often include exceptions. An example of a broadcoverageexception is freezing of plumbing may not be covered in a building which does not maintain heat.
Special Coverage. Specialcoverage is the most comprehensive coverage available. Unlike basicand broad coverage, specialcoverage includes everything except the identified exceptions. Instead of identifying the perils covered, special coverage applies coverage to everything except what is specifically identified as an exception. Specialcoverage provides more comprehensive coverage because everything is included unless excepted. Remember, basic and broad coverage only applies to those perils expressly identified.
Specialcoverage may include many exceptions. For example, specialcoverage will likely include an exception for vandalism in buildings that have been vacant for 30 days. It is important to know what exceptions are included with specialcoverage.
Incorporation of Basic, Broad, and Special Coverage in The Insurance Policy
A policy may include one or more of the different types of coverages. For example, a policy may include specialcoverage on all farm machinery but broadcoverage on all other personal property. It is important to know what assets are covered under which type of coverage. Specialcoverage is best for the most comprehensive coverage, but specialcoverage is also more expensive than basic and broadcoverage. Weighing the additional cost of specialcoverage versus the benefit of comprehensive coverage provided is an important analysis to be done for each insurance policy.
In Part #2, we will discuss obtaining, managing and maintaining a farm insurance policy.
For people who are concerned about potential long-term care (LTC) costs, LTC insurance may be an option. Several insurance companies sell these policies that pay out to cover some or all LTC costs. There are many different types of policies and coverages available. For example, some coverages may start soon after LTC is needed while some coverages will not begin to pay for a longer period, sometimes as long as one year. Also, some policies are combined with a death benefit so that the policy holder can be sure that at least some benefit will come from the policy. The following are some, but not all, of the terms and conditions to consider when exploring a LTC insurance policy:
Duration of Benefits. Most policies cover at least one year and may cover up to five. Policies that cover more than five years are no longer available. Obviously, a longer-term policy is preferable but that must be balanced against the higher premiums.
Benefit Triggers. The LTC policy will only start to pay out when certain triggers, or conditions, are met. Before paying out, most policies require the policy holder to need assistance with at least two of the following activities: bathing, dressing, toileting, eating, transferring and continence. Be sure to understand what conditions are required for payout to be triggered.
Waiting Period. Policies will include a waiting period. The waiting period may be a few days or as long as one year. The longer the waiting period the lower the policy premiums will be.
Daily Benefit Amount. A LTC policy will include a daily benefit amount. Some policies may pay 100% of the daily LTC costs. Other policies may only cover 50% of the LTC costs. The policy can be used to cover only that portion of LTC costs that income does not.
Inflation Protection. Like any cost, LTC costs will increase over time. Some policies will have inflation adjustment built in and automatically increase over time. Other policies will offer the holder the ability to increase the coverage to keep up with inflation but this will also increase the premium. It is important to know what type of inflation adjustment provision is in a policy.
Depending on the type of policy and robustness of coverage, LTC policies can be expensive. Not everyone will be able to fit LTC policy premiums into their budget. Also, not everyone is insurable. People with significant pre-existing health care issues may not be able to obtain a LTC policy.
If a policy can be obtained to cover all LTC costs or at least cover the deficiency that income does not cover, all assets will be protected. Therefore, the owner can keep all their assets and continue to enjoy and use them for the remainder of their lives. LTC insurance policies, in many ways, provide the most flexible LTC plan.
It is worthwhile to at least explore incorporating a LTC insurance policy into a LTC management plan. Many insurance agents and financial advisors can provide free estimates for policies without too much difficulty. They can also help with a risk assessment to determine what policy may be needed for a given circumstance. Before assuming that assets must be gifted or transferred to protect them, the possibility of LTC insurance should be explored.
It’s time to round up a sampling of legal questions we’ve received the past month or so. The questions effectively illustrate the breadth of “agricultural law,” and we’re happy to help Ohioans understand its many parts. Here’s a look at what has come our way:
I’m considering a carbon credit agreement. What should I look for? Several types of carbon credit agreements are now available to Ohio farmers, and they differ from one another so it’s good to review them closely and with the assistance of an attorney and an agronomist. For starters, take time to understand the terminology, make sure you can meet the initial eligibility criteria, review payment and penalty terms, know what types of practices are acceptable, determine “additionality” requirements for creating completing new carbon reductions, know the required length of participation and how long the carbon reductions must remain in place, understand how carbon reductions will be verified and certified, be aware of data ownership rights, and review legal remedy provisions. That’s a lot! Read more about each of these recommendations in our blog post on “Considering Carbon Farming?”
I want to replace an old line fence. Can I remove trees along the fence when I build the new fence? No, unless they are completely on your side of the boundary line. Both you and your neighbor co-own the boundary trees, so you’ll need the neighbor’s permission to remove them. You could be liable to the neighbor for the value of the trees if you remove them without the neighbor’s approval, and Ohio law allows triple that value if you remove them against the neighbor’s wishes or recklessly harm the trees in the process of building the fence. You can, however, trim back the neighbor’s tree branches to the property line as long as you don’t harm the tree. Also, Ohio’s line fence law in ORC 971.08 allows you to access up to 10 feet of the neighbor’s property to build the fence, although you can be liable if you damage the property in doing so.
I want to sell grow annuals and sell the cut flowers. Do I need a nursery license? No. Ohio’s nursery dealer license requirement applies to those who sell or distribute “nursery stock,” which the law defines as any “hardy” tree, shrub, plant, bulb, cutting, graft, or bud, excluding turf grass. A “hardy” plant is one that is capable of surviving winter temperatures. Note that the definition of nursery stock also includes some non-hardy plants sold out of the state. Because annual flowers and cuttings from those flowers don’t fall into the definition of “nursery stock,” a seller need not obtain the nursery dealer license.
Must I collect sales tax on cut flowers that I sell? Yes. In agriculture, we’re accustomed to many items being exempt from Ohio’s sales tax. That’s not the case when selling flowers and plants directly to customers, which is a retail sale that is subject to the sales tax. The seller must obtain a vendor’s license from the Ohio Department of Taxation, then collect and submit the taxes regularly. Read more about vendor’s licenses and sales taxes in our law bulletin at this link.
I’m an absentee landowner who rents my farmland to a tenant operator. Should I have liability insurance on the land? Yes.A general liability policy with a farm insurer should be affordable and worth the liability risk reduction. But a few other steps can further minimize risk. Require your tenant operator to have liability insurance that adequately covers the tenant’s operations, and include indemnification provisions in your farm lease that shift liability to the tenant during the lease period. Also consider requiring your tenant or hiring someone to do routine property inspections, monitor trespass issues, and ensure that the property is in a safe condition.
My neighbor and I both own up to the shoreline on either side of a small lake–do I have the right to use the whole lake? It depends on where the property lines lay and whether the lake is connected to other waters. If the lake is completely surrounded by private property and not connected to other “navigable” waters, such as a stream that feeds into it, the lake is most likely a private water body. Both of you could limit access to your side of the property line as it runs through the lake. You also have the legal right to make a “reasonable use” of the water in the lake from your land, referred to as “riparian rights.” You could withdraw it to water your livestock, for example; but you cannot “unreasonably” interfere with your neighbor’s right to reasonably use the water. The law changes if the lake is part of a “navigable” waterway. It is then a “water of the state” that is subject to the public right of navigation. Others could float on and otherwise navigate the water, and you could navigate over to your neighbor’s side. Public users would not have the riparian rights that would allow them to withdraw and use the water, however, and would be trespassing if they go onto the private land along the shore.
If I start an agritourism activity on my farm, will I lose my CAUV status? No, not if your activities fit within the legal definition of “agritourism.” Ohio law states in ORC 5713.30(A)(5) that “agritourism” activities do not disqualify a parcel from Ohio’s Current Agricultural Use Valuation (CAUV) program. “Agritourism,” according to the definition in ORC 901.80, is any agriculturally related educational, entertainment, historical, cultural, or recreational activity on a “farm” that allows or invites members of the general public to observe, participate in, or enjoy that activity. The definition of a “farm” is the same as the CAUV eligibility—a parcel devoted to commercial agricultural production that is either 10 acres or more or, if under 10 acres, grosses $2500 annually from agricultural production. This means that land that is enrolled in the CAUV program qualifies as a “farm” and can add agritourism activities without becoming ineligible for CAUV.
Send your questions to aglaw@osu.edu and we’ll do our best to provide an answer. Also be sure to check out our law bulletins and the Ag Law Library on https://farmoffice.osu.edu, which explain many of Ohio’s vast assortment of agricultural laws.
By: Jeffrey K. Lewis, Attorney and Research Specialist, OSU Agricultural and Resource Law
Did you know that a male moose loses its antlers every year? Moose usually lose their antlers every winter and grow new ones in the spring. Additionally, because of the lack of antlers during the winter months, a moose’s first line of defense is its sharp hooves, which can mortally wound a wolf or bear. This edition of the Ag Law Harvest kicks around a few USDA announcements and FDA rule proposals and sheds some light on overtime compensation for California’s agricultural workers.
USDA announces new micro-farm insurance policy. The U.S. Department of Agriculture’s (“USDA”) Risk Management Agency (“RMA”) announced that the USDA has developed a new micro farm insurance policy for agricultural producers with small-scale farms who sell locally. The new insurance policy seeks to simplify recordkeeping and introduces insurance coverage for post-production costs and value-added products. Farm operations that earn an average allowable revenue of $100,000 or less, or for carryover insureds, that earn an average allowable revenue of $125,000 or less are eligible for the policy. The new insurance policy will be available for the 2022 crop year. Crop insurance is sold and delivered sole through private crop insurance agents, a list of which can be found at the RMA Agent Locator.
USDA accepting applications to help rural communities get access to internet. The USDA announced that it has begun accepting applications for up to $1.15 billion in loans and grants to help rural communities gain access to high-speed internet. The announcement follows the recently enacted infrastructure bill, which provides another $2 billion in additional funding for USDA’s ReConnect Program. According to the USDA, the funding will be available for projects that serve rural areas where at least 90% of the households lack broadband service at speeds of 100 megabits per second (Mbps) (download) and 20 Mbps (upload). The USDA will give funding priority to projects that will serve people in low-density rural areas and areas lacking internet service speeds of at least 25 Mbps (download) and 3 Mbps (upload). In making the funding decisions, the USDA will consider the economic needs of the community to be served and the extent to which a provider will offer affordable service options to the community.
FDA proposing changes to testing requirements of pre-harvest agricultural water. The Food and Drug Administration (“FDA”) published a proposed rule that would change some provisions of the FDA’s Produce Safety Rule. The proposed rule seeks to replace the microbial criteria and testing requirements for pre-harvest agricultural water for covered produce other than sprouts. Some of the proposed changes include:
Replacing the microbial quality criteria and testing requirements with new provisions for conducting pre-harvest agricultural water assessments for hazard identification and risk management purposes;
A new testing option for certain covered farms that elect to test their pre-harvest agricultural water for generic Escherichia coli (“E. coli”);
Providing additional flexibility in responding to findings from pre-harvest agricultural water assessments;
Expedited implementation of mitigation measures for known or reasonably foreseeable hazards related to certain adjacent and nearby land uses; and
Required management review of pre-harvest agricultural water assessments.
The FDA is accepting comments on the proposed rule until April 5, 2022.
California’s overtime compensation for agricultural workers. In 2016, California passed Assembly Bill No. 1066 that slowly implemented overtime wages for California’s agricultural workers. Beginning in 2022, agricultural employees are entitled to one-half times their regular rate of pay for all hours worked over eight hours in any workday or over 40 hours in any workweek. However, the law only affects agricultural employers with 26 or more employees. Agricultural employers with 25 or fewer employees will be required to follow the same overtime compensation structure beginning in 2025. California will also begin to require that any work performed by an agricultural employee in excess of 12 hours in any workday be paid twice their regular rate of pay. Again, this provision only effects agricultural employers with 26 or more employees but will go into effect for all agricultural employers in 2025.
Written by Jeffrey K. Lewis, Attorney and Research Specialist, OSU Agricultural & Resource Law Program
When was the last time you read your farm business insurance policy? Under your policy, do you know when coverage is triggered for loss of business profits and loss of assets? In the case below, you will learn about a dairy farm that recently dealt with the issue of stray voltage causing dairy cattle to unexpectedly pass away. Even though the farm had insurance, the farm continued to operate, albeit at a reduced capacity, while it dealt with the silent killer. The farm continued to operate under the assumption that any loss of business income and the loss of its primary assets would be covered under its insurance policy.
Mengel Dairy Farms
Mengel Dairy Farms (“Mengel”) could not begin to fathom why its dairy cattle were unexpectedly dying off. Beyond its loss of livestock, Mengel also suffered loss of milk production and business profits. The farm eventually hired an expert to help it determine the cause of death of its cattle. The expert determined that a stray electrical current was present on the property, causing the dairy cattle to die.
Mengel then proceeded to file an insurance claim with its insurance provider, Hastings Mutual Insurance Company (“Hastings”), hoping to receive insurance benefits for the lost cattle, cost of the investigation into the death of the cattle, the subsequent repairs to correct the stray electrical current, and for its lost business profits.
Hastings, however, sent out its own expert to help determine the cause of death of the cattle. Hastings’ expert could not find any stray voltage on the property but did believe that electrocution may have caused Mengel’s cattle to stop eating and ultimately die.
After its investigation, Hastings paid Mengel for the death of its cattle and the cost of the investigation into the deaths of the livestock, but Hastings rejected coverage for the loss of business income. Hastings then filed an action in the Federal District Court, asking the court to determine that there was no coverage for Mengel’s lost business income as a result of the electrocuted dairy cattle.
After Hastings filed its action, Mengel submitted a second insurance claim to Hastings for the death of additional livestock, costs of additional investigation and repair, and additional lost profits. Hastings did not provide any coverage, this time, to Mengel for its second insurance claim and instead issued a reservation of rights letter to Mengel stating that coverage for Mengel’s second claim may be subject to exclusions under Mengel’s insurance policy. Hastings then asked the court to also determine whether Hastings was required to pay for the loss of the additional dairy cattle and additional lost profits.
Coverage for Electrocuted Dairy Cattle
In its argument to the court, Hastings claimed that under the dairy farm’s insurance policy, Hastings was not required to pay any insurance benefits for the additional dairy cattle that passed away from the stray electrical current. Hastings argued that even though death or destruction of livestock by electrocution is a covered peril under Mengel’s insurance policy, the term electrocution means instant death, and because Mengel’s cattle did not die instantly, Mengel was not entitled to insurance benefits for the cattle.
The Court disagreed. The court found that the term “electrocution” was an ambiguous term within the insurance policy because it was not expressly defined. Additionally, the court went on to analyze that coverage existed for both the death ordestruction of livestock. The court determined that the term destruction encompasses more than just death. Reading the terms destruction and electrocution together, the court held that electrocution can consist of an event that does not necessarily result in instantaneous death but may still cause irreparable harm.
Therefore, the electrocution causing Mengel’s cattle to stop eating and ultimately die could be considered “destruction of livestock” which would be covered under the farm’s insurance policy.
Coverage for Lost Business Income
Since discovering the cause of death to its dairy cattle, Mengel reduced its farming operations to deal with the stray electrical current. Under Mengel’s insurance policy, coverage existed for lost business income “due to the necessary suspension” of operations. The insurance policy also indicated that the necessary suspension of farm operations must have been caused or resulted from an insured peril. Mengel thought that because it reduced operations for a covered peril (the electrocution of its livestock), it was entitled to coverage for its lost business income. Hastings disagreed and claimed that coverage did not exist for Mengel because the farm did not shut down its farming operations completely, it only reduced operations.
The court sided with Hastings. The court found that “necessary suspension” means a complete shutdown of operations, even if temporary. The court noted that a slowing down of business is not covered under the insurance policy. Therefore, Mengel’s claim for lost profits is not covered under the policy because it continued to operate at a reduced capacity.
Other Claims
Mengel filed its own claims against its insurer for bad faith and breach of contract. However, after the court’s determination that coverage existed for electrocuted cattle that did not die instantly and the court’s conclusion that Mengel was not owed any insurance benefits for lost profits, the parties settled their dispute out of court.
Conclusion
It may not be as easy as you think to determine what is covered (and what should be covered) under your insurance policy. Insurance companies do their best to draft insurance policies to be as precise as possible. Certain prerequisites must be met in order for coverage to exist for a farmer and their business. It is vital that you understand what is covered (and not covered) under your insurance policy. You may be taking steps to remediate any issues with the assumption that insurance will cover any expenses or lost revenue you may endure, but as the above case demonstrates, this is not always true.
Food is likely on the minds of many people as we head into the holiday season. Being an agricultural attorney, it’s hard to think about food without also worrying about food product liability. Whether growing turkey or romaine lettuce, producing food for human consumption is a risk-laden endeavor that can lead to legal liability for a farmer. That’s why knowing and following Good Agricultural Practices (GAPs) is imperative for farmers who raise produce, eggs, meats, and other foods for direct human consumption. Employing those production practices is critical to producing a safe food product. But what if a food isn’t safe and causes illness or death?
No one wants to believe their food product would harm someone or that their customers would sue them for such harm. But it’s a reality that food producers must face. I’ve recently had the pleasure of working with farmers in OSU’s Urban Master Farmers Program and OEFFA’s Begin Farming Program who are taking these risks to heart and learning not only about GAPs, but also about tools that address food product liability risk. Teaching these producers has reminded me of how important it is to remind all producers about these tools. So here’s a rundown on four important food product liability tools:
Management practices. In addition to using production practices such as GAPs, a producer’s management practices can also manage food liability risk. Thorough employee training, for instance, ensures that everyone is following GAPs and other risk management procedures. Documentation of production procedures can be useful evidence when determining liability for a food product. Keeping records of such documentation along with other records such as sales and training records can help inform what caused the incident and whether it can be traced to a producer’s product. Regulatory compliance, such as following Ohio’s Uniform Food Safety Code, might also be necessary, depending upon the food product. Each of these management practices feed into a solid risk management plan. This requires a producer to engage in continuing education.
Insurance. An insurance policy can be an excellent way to manage food safety liability risk. But to obtain adequate insurance coverage, a producer should review all food products and food sales activities with an insurance professional. A farm’s standard liability policy might offer adequate coverage for the foods and food sales activities. Alternatively, a producer may need to add an endorsement or “rider” or obtain a separate commercial food product liability policy. The goal is to ensure coverage for medical and related costs if someone contracts a food borne illness from a particular food product sold in a particular way. It’s also important to revisit the insurance coverage when taking on a new activity or creating a new food product. Doing so will ensure maximum protection and reduce the possibility that an incident is not covered.
Recall insurance and planning. A producer who sells a sizeable quantity of food products through a number of sources or a food broker may need to consider recall insurance. This type of policy will kick in when a food product must be recalled because it has been identified as a food safety risk. It can help cover the costs of notifying the public about the product and removing the product from stores, institutions and consumers. Likewise, having a detailed recall plan can minimize such costs by ensuring that the recall process is responsive, efficient and effective.
Business entity formation. “Do I need an LLC?” is a common question we receive, and the answer is usually “it depends.” Organizing as a Limited Liability Company (LLC) or Corporation won’t prevent a producer’s liability, but it can limit the liability to the assets of the business. An LLC, for example, contains a producer’s business assets and separates them from the producer’s personal assets, such as a home. If there is a legal liability incident, the LLC assets would be subject to that liability. It would be difficult for someone to get beyond the LLC and into the producer’s personal assets. The LLC doesn’t relieve the producer from liability, but it can safeguard those personal assets.
Talking about legal liability has a way of ruining one’s appetite, but hopefully that won’t stop food producers from thinking seriously about food product liability risk. The good news is that like most liability exposure areas, tools can help minimize liability risks for our food producers. Using those tools might just help settle our worries about food product liability.
The Limited Liability Company (LLC) is a relatively new type of business entity. The first LLC statute passed in Wyoming in 1977. Since then, all fifty states passed legislation permitting LLCs as an operating entity. Many Ohio farmers use the LLC as their preferred operating entity.
In Ohio, an LLC is a legal entity created by Ohio statute. An LLC is considered to be separate and distinct from its owners. An LLC may have a single owner in Ohio, or it may have numerous owners. LLCs combine the best attributes of a corporation and a partnership. Individuals, corporations, other LLCs, trusts, and estates may be members in a single LLC. There is no limit on maximum members.
The Importance of an Operating Agreement
When an agricultural operation chooses to operate as an LLC, that operation must consider drafting an operating agreement. An operating agreement specifies the financial responsibilities of the parties, how profits and losses are shared among members within the LLC, limitations on transfers of membership, and other basic principles of operation.
If an LLC does not choose to draft an operating agreement, Ohio’s default rules apply. Ohio law prescribes default rules of operation for LLCs in R.C. Chapter 1705. However, LLC members often wish to modify state rules to tailor an LLC to their business. Ideally, agricultural operators should draft an operating agreement with the assistance of an attorney.
Single Member LLCs
Every state in the Midwest permits single-member Limited Liability Companies (SMLLCs). A single member LLC is an LLC which has one member or manager; that means that there are no other owners or managers of that LLC. In 2016, Ohio enacted R.C. 1705.031 which states that Ohio LLC laws apply to all LLCs, including those with only one member. Therefore, small agribusinesses that have only one member are not prevented from forming an LLC.
Will a Personal Guaranty on a Loan Affect Limited Liability Protection?
Ohio farmers operating as an LLC enjoy the benefits of limited liability protection. Usually, that means that the debts and obligations of a farm LLC operation are solely those of the LLC. That means that a farmer is not personally liable for any debts or obligations incurred by the LLC.
However, lenders, implement dealers, financial institutions, and others are finding ways around an LLC’s personal liability protection. Those parties are increasingly requiring that the members and managers of LLCs provide personal guarantees. That is, a member or manager of an LLC agrees to be personally liable for a debt or obligation, if an LLC is not able to pay.
A full discussion of personal guarantees and LLCs in an earlier blog post is here.
LLCs are not Invincible
Limited Liability Companies are extremely popular among Ohio farmers. However, LLCs merely limit liability. LLCs don’t create a perfect liability shield, they are subject to a concept known as “veil piercing” where the owners of a company are held personally liable for the actions of the company.
Generally, a person cannot use a corporation to commit fraud on others or to use a corporation as an alter ego for a member’s own personal gain. Plainly speaking, Ohio courts may hold an owner of an LLC liable in certain cases of fraud committed by the LLC or where an LLC is undercapitalized and is not treated as a separate entity from a member (i.e. the LLC is used as an “alter ego”). While this is not a common scenario among farm business LLCs, LLC members should be aware that a business’s status as an LLC will not shield it from liability in all instances.
Carrying Liability Insurance
Many LLC owners consider the protections under Ohio’s LLC laws to be sufficient. Some LLC members are satisfied that their personal assets are sufficiently protected and separated from LLC assets and LLC liabilities. However, every business should have liability insurance. Liability insurance is a relatively inexpensive means of managing liability exposure for injuries and physical damage to a third party. While insurance doesn’t lower liability, it gives the business a way to pay for damages in the event of an incident.
The question of “how much liability insurance should a farm operation have?” is a difficult one. The amount of insurance that a farm should have must be determined on a case-by-case basis. Factors such as farm size, type of operation, location, and other factors impact the insurance needs of a farm operation.
More information on LLCs and other alternative business organizations through the National Agricultural Law Center is here.
It’s time to round up a sampling of legal questions we’ve received the past month or so. The questions effectively illustrate the breadth of “agricultural law,” and we’re happy to help Ohioans understand its many parts. Here’s a look at what has come our way:
Ohio Agricultural Law Blog 