Parts of Europe continue to be ravaged by two devastating livestock diseases: foot-and-mouth disease (FMD), or hoof-and-mouth; and bovine spongiform encephalopathy (BSE), also known as “mad cow” disease. In the United Kingdom alone, hundreds of thousands of animals have been slaughtered in recent weeks by order of the government in its attempts to halt the spread of FMD, which has impacted approximately 2,098 farms in the country’s infected areas.
In response to any potential threat to California, Governor Gray Davis recently ordered the state’s Department of Food and Agriculture and the Office of Emergency Services to take measures to prevent any spread of the diseases to California.
It has been estimated that an outbreak of FMD could cause upwards of $13 billion in losses to domestic livestock and wildlife. But while officials report that an outbreak of either disease is unlikely, many companies that deal with coverages related to farm animals report they have been receiving numerous calls in recent weeks, from insureds worried about FMD and/or mad cow, or agents looking for a market.
Dustin Lewis, who runs the agribusiness department at Networked Insurance Agents in Grass Valley, Calif., noted that he had received between 20-30 phone calls in a two-week period from customers inquiring about coverage to protect them from a possible outbreak of FMD in California.
“Dairy producers are looking for it,” Lewis noted. “You’ve had some people in the industry of hog confinement that are looking for coverage on this…If it hits, it’s going to be absolutely catastrophic.”
Stringent regulations and preventative measures may help California and other U.S. states dodge the bullet, but some observers feel that it may be naïve to be absolutely positive that an outbreak of either disease can’t happen here.
“We get about two to three calls a week,” said Kimberly Montiel, a mortality underwriter assistant at Fredricksen Insurance Services Inc. in Hemet, Calif.
Montiel explained that while Fredricksen, which specializes in equine, only occasionally writes cattle coverages, it has received an influx of inquiries into cattle mortality. A lot of the calls, which have come from Northern California and as far away as the Midwest, are about mad cow, but some relate to FMD as well. “People are just concerned about obtaining mortality insurance for their animals,” Montiel said. “There’s usually about 1,500-3,000 head of animals…At this time, we’re just not handling large schedules of cattle.”
FMD is a virus that affects cloven-hoofed animals, including cattle, swine, sheep, goats and deer (horses are not affected). According to the United States Department of Agriculture, the disease causes fever, and blistering of the mouth area, teats and between the hooves of infected animals, causing them to lose condition and production. Many animals that contract FMD will recover from it. Furthermore, the sickness cannot be contracted by humans, although they can easily spread the highly contagious disease to other animals. FMD can be carried on an individual’s clothing or on contaminated vehicles. As a result, international travel greatly increases concerns of contagion across borders.
On the other hand, mad cow, according to prevailing theory, is caused by protein molecules which have become infectious. These molecules, or prions, are resistant to both extreme temperatures and harsh chemicals. Cattle become infected by ingesting as feed the by-products of previously infected cattle. In recent years, BSE has been cited as having spawned in humans a variation of Creutzfeldt-Jakob disease (CJD), which attacks brain tissue and is always fatal. In the U.K. and other European countries, BSE is estimated to have caused the deaths of approximately 200,000 cattle, while CJD has killed approximately 94 individuals. The majority of the human deaths have allegedly been caused by the consumption of beef from an animal infected with BSE.
Regardless of how small a threat actually exists now for an outbreak of either disease in California, there is a precedent with foot-and-mouth, which devastated that state twice back in the 1920s. During the last confirmed case in 1929, more than 3,500 animals were slaughtered. However, in 1924, nearly three times that number were killed when the disease struck the state. Seventeen counties were put under quarantine, and strict border-checking measures were implemented. A number of ranchers went under, and a great number of deer were decimated.
There are numerous nightmare scenarios of what would happen if a new outbreak of FMD were to occur in the state today.
“I can’t even imagine what would happen if we all of a sudden had an outbreak,” said Joann Russell, commercial lines manager at Pacific Specialty Insurance Co. (PSIC) in Menlo Park, Calif., which specializes in agricultural risks but does not write livestock mortality. Russell observed that while many precautions can be taken to control livestock on a farming facility to decrease the risk of an FMD outbreak, there could be a problem in some rural farming communities that are near foothills and other areas that have deer. If the deer become infected, they may go near dairy properties or feedlot facilities, increasing the potential to spread the disease.
Philip Nelson, chairman and CEO of SBJ Nelson Stevenson Ltd., London, which specializes in bloodstock and agriculture-related coverages, explained that no policy specifically tailored for FMD exists in the U.K. because the government is pledged to compensate farmers for the value of the animals slaughtered. Furthermore, an animal mortality policy would not kick in because the cattle are not slaughtered for humane reasons. Rather, since animals can recover from FMD, the slaughter is based on economics.
However, a major cause of concern for insureds is that the level of compensation provided by the government will not fully cover losses experienced when a farm contracts FMD. In this scenario, all animals within a three-kilometer radius are slaughtered. Buildings and feed on the premises of the infected farm must be burned. In addition, the contaminated farm must stay empty for three months, which means the farmer cannot restock. Accordingly, Nelson noted that most claims resulting from the current epidemic in the U.K. are consequential loss claims.
Jennie Lahr, an underwriter with Ark Agency in Paynesville, Minn., which specializes in equine coverages and sells in all 50 states, confirmed that Ark has received a number of calls from brokers on the East Coast and other parts of the U.S., including California and Texas, looking for a market.
“Everybody’s scared about both [FMD and mad cow] in general,” Lahr said. “We do offer coverage for full mortality for cattle…We checked in with one of the companies that we write with, and they are willing to offer the full mortality. But the stipulation is that if the government were to destroy the herd, there would be no coverage.”
Lahr said getting the coverage can be difficult “because a lot of insureds run from 500 to 2,000 cattle. They would need to have a vet come out and individually check each cow to make sure that they’re free and clear of any diseases. That’s a major expense just in itself.”
Similarly, Mac Henderson, who runs the surplus lines division of Allied Insurance Co. in Sacramento, stated that he has a market through a separate surplus lines carrier for a full animal mortality policy, which includes both FMD and mad cow, but not anything slaughtered by the government.
“Let’s say the government says the cows are worth $1,700 a head, and they slaughter 100,000 dairy cows—well, you may not be able to buy any for $1,700 a head,” Henderson explained. “It may cost you $3,000 or $4,000.”
Henderson also stated that he knows of no policy existing currently that would include business interruption and excess value in the event of a government-ordered slaughter of FMD-infected livestock.
Both Lahr and Henderson noted that while inquiries were coming in, no one had actually come forward to purchase a policy specifically as a safeguard against FMD disease or mad cow, probably since no losses have yet occurred in the U.S.
“The average herd people have been calling between $1 and $5 million in value,” Henderson continued. “We’ve had a couple of calls for ones about $60,000, but those are rare. Most of the guys concerned are the really large herds. If the government’s going to pay for the slaughter, the only area that I personally believe would really be affected business-wise would be the dairy industry because they have a business interruption exposure.”
PSIC’s Russell agreed that there has been some concern about how an FMD outbreak could impact livestock and the livelihood of dairies, and livestock dealers and breeders.
“Some folks are looking to increase their business income coverage, but unless they carry livestock mortality that also provides business income, there’s really not going to be a coverage in there,” Russell said. She explained that under a standard package policy, livestock is typically excluded.
“One of the requirements for a business income claim is it has to be a loss to covered property,” Russell explained. “The second issue is you have to have a covered cause of loss. If the government just comes in and mandates that you slaughter or destroy, again governmental authority isn’t picked up under the form, so you still don’t have a covered cause of loss.”
Russell also indicated that in terms of a business having to shut down or be quarantined for a period of time due to an infestation, there are some business income forms out there that will grant coverage, restaurants being a classic example. However, this has not become a norm from an agriculture standpoint.
“If somebody really wants to come up with a form that’s going to take care of that, it’s going to be a matter of the government having to come in and subsidize it,” Russell concluded.