Understanding coverage gaps in farm/ranch policies

When underwriting farms and ranches, it’s important to understand the subtle nuances in risk. After all, a loss to either could mean the policyholders not only have damage to their home, but also to their livelihoods.

Insurance agents and brokers will want to determine whether the rural dwelling on the property is a home or a ranch. It’s an important distinction, as there can be substantial differences in coverage. For example, a standard homeowners policy covers fencing, as well as the contents of ancillary buildings such as a tool shed. A ranch policy does not cover either unless they are specifically scheduled.

A farm insurance policy combines the standard coverage offered by a personal homeowners policy with commercial property and liability coverage. The benefit of a farm policy is that it can be customized to the needs of the insured.

Making the determination
The first question to ask is whether the property is within 1,000 feet of a fire hydrant. If the answer is no, that’s a clue that you need to ask more questions. You also need to ask the following questions if there are more than two or three acres that need coverage:

• Are there additional structures other than a pool house and a garage? Find out whether there is a stable, equipment building or hay barn.
• What kind of animals is on the property and to whom do they belong?
• How many horses are there? Is the client accepting money or trading services for friends to keep horses on the property? Even if just a few neighbors are boarding horses, that creates a business exposure. If the client has more than one or two personal horses, a homeowners policy usually is not adequate.
• Who is working on the property? Is there only an inside domestic or are there people taking care of the horses, other livestock, land and building maintenance? In some states, a workers’ compensation policy is required if there are more than two agricultural workers. That also is a good indicator that the insured is in need of a farm/ranch policy, as the scope of their home may indeed involve commercial activity.

The answers to the above questions will provide a larger picture of whether the client needs a standard homeowners policy or a farm and ranch policy. A farm/ranch policy is essentially a hybrid of a homeowners and commercial general liability policy.

For example, homeowners policies usually have limited incidental business coverage. Special limits are set forth in the policy conditions. If a building is being used in a manner that exceeds the special limits (usually in a form of limit of gross annual revenue generated), the building then is a commercial building. It may not be covered under a homeowners policy as an appurtenant structure, because its use exceeds the special limit set forth for incidental business. The same concept applies to all of the owner’s activities. The question to review is whether the scope of the exposure fits within the special limit of incidental business.

Insuring horses
If there are horses on the property, be aware that most states have equine liability laws. Some states and insurance companies require state-specific equine liability signs warning that horses are inherently dangerous, and that a visitor is not a spectator but a participant assuming risk. Those signs normally are posted in riding areas and stables.

It is good risk management, and insurance companies also insist, that that anyone riding or boarding horses on the property must sign an equine liability release waiver. An attorney should review the waiver annually, as state laws may change from year to year. The waiver should include safety regulations, such as requiring people to use helmets and correct safety gear, and prohibiting children from entering the property without a guardian.

If income is generated, the activity is a business and should be reviewed as such. Advise the client to speak with an attorney about liability concerns, tax laws, whether to create an LLC to run the operation to protect personal assets, and having documentation with waivers and agreements for use with customers.

Be alert for scenarios such as the following example. A client had a $400,000 home, three-car garage, pool and pool house, as well as a $120,000 six-stall horse stable and two personal horses. Coverage was appropriate under on a homeowners policy. However, the client then decided to allow four people to board horses for $800 a month, ride on their property, and bring an instructor onto the property. That meant the revenue exceeded the incidental income limit in the homeowners policy. The stable became a commercial structure and no longer had property coverage. Furthermore, the family did not have liability coverage for the activities of people riding and keeping horses on the farm.

There are two insurance options that can be used in such situations. One is a monoline equine commercial general liability policy, with an annual premium of around $1,000. In that particular case, however, it did not protect the structure. The other option is to change the homeowners policy to a farm policy, in which the same coverage is in force for the home and personal property. Additional coverage can be scheduled for the stable, and commercial general liability coverage can be arranged for the activities.

Riding instructors should provide certificates of insurance with limits equal to that of the property owner and listing the owner as an additional insured. If the stable is rented to an individual, who is in turn running his or her own boarding and lesson operation out of the stable, a certificate of insurance again should be required, listing the owner of the property as an additional insured. The instructor or stable operator should cooperate with the property owner to provide equine liability warning signs, waivers, safety rules, boarding agreements and proof of insurance. An attorney should create equine liability waivers, also known as hold harmless agreements, as they are to be used as a legal document in the event that a court case arises.

Fencing
Fencing is one of the major distinctions between a farm and ranch policy and a homeowners policy, as most farm and ranch policies do not insure fencing.

Many people choose not to insure fencing. It is very costly and rare for a single incident to damage a massive amount of fencing. Tornados are about the only situation in which a large portion of fencing is damaged. Electronic gates, however, can cost $15,000 or more, and owners may want to insure them. Endorsements also are available for fencing if the owner desires.

Barns and ancillary buildings
The agent should walk the grounds, if at all possible, and understand all the structures and activities that occur on the site. If that is not possible, ask the insured to provide a diagram of the property. It can be a hand-drawn diagram, but that helps the agent understand and have knowledge of every structure that exists.

If the structure is not listed on the policy, and it is not used as an appurtenant structure to the main home by policy definition, then the structure is not covered. The structure and its contents must be scheduled on the policy. The amount of incidental revenue is a consideration in whether ancillary buildings are defined as commercial property. If the income exceeds specified limits, a homeowners policy may not cover them.

It’s important to remember that farm property contents are not insured under farm and ranch policies automatically. For example, a lawnmower in a tool shed is automatically covered under a homeowners policy. But a farm policy does not cover a $30,000 tractor unless it is specifically scheduled.

Many people with high-value homes have $20,000 to $80,000 worth of contents in the stable, not including horses. Horse blankets, for example, cost $300 to $400 each, and the numbers add up quickly when most horses each have a set of at least three types of blankets. Agents should have the same sort of conversation about horse accessories that they would have about art and jewelry. The agent does not have to list each item, but should have a scheduled category.

Horses themselves, as well as other livestock, can be scheduled on a farmowners policy. However, coverage is on “broad” form and only available for their value, not for their major medical expenses. High-value competition horses should be insured on a mortality and major medical policy that provides broader coverage for mortality and a major medical plan for veterinary costs.

Another difference between homeowners and ranch policies is coverage of possessions during travel. A homeowners policy provides coverage if something is stolen from a hotel. On a farm-ranch policy, that is true on the homeowners section but not on the barn contents. There is generally a limitation of 10 percent of the value off premises. But a saddle can easily cost much as $4,000; custom riding boots $1,200; and helmets $400. In general, the rider may be wearing $2,500 in competition attire. Per horse, there might be $5,000 worth of equipment traveling offsite to the competition when bridles, saddle, boots and a tack trunk full of equipment are included.

Equipment such as high-value tack should be scheduled and lower-value tack itemized for blanket coverage. There is a higher exposure to theft or damage when people are at competitions away from home. Many people travel to horse shows for extended periods of time. For example, clients may leave their primary home in December and stay in Florida for the show circuit and return in March. It is recommended that agents speak with their clients to get a thorough understanding of the scope of their activities.

Fire protection
When expensive country homes are under construction, it’s important to have a conversation about fire protection between the carrier, the client and the builder as soon as possible. Most carriers will require a paved road or a solid gravel road that allows a fire truck access to a dry hydrant. Some people think that a three-acre pond in the backfield will be adequate fire protection. Yet it’s not that simple. A tanker truck will not drive across a field in the snow to reach the pond.

It’s also important to check the distance from the water source with the fire department. If the distance is too long, the hose will not have enough suction and will collapse. Some carriers require a central station fire and burglar alarm, as well as a monitoring system.

Establishing the replacement value of ranch buildings also can be challenging. The best method is to speak with the insured and with builders in the area. The broker should be able to help estimate replacement costs, but it’s always the ultimate responsibility of the insured to choose the limit. If the owner has an ongoing relationship with a contractor for additions and maintenance, the contractor will be familiar with the property. The regular contractor’s estimate can be the most accurate number in determining the replacement value.

If the property owners are selling produce, they need a product liability policy. Crop and hail coverage is available from specialty carriers, although it typically is expensive.

While farms and ranches might appear to have more risk, agents should not fear underwriting them. By asking the right questions and understanding the insured and his or her activities, agents can ensure their clients have the appropriate coverages.

Tara Trout is chair of ad hoc committee on farm and ranch coverage for RiskProNet International Inc., a network of 28 independent brokers in North America, and director of the farm and equine division of AH&T Insurance in Leesburg, Va. She has been riding and competing for 22 years, and has taught at the collegiate level for A-rated hunter show stables on the East Coast. Phone: 703-777-2341. E-mail: ttrout@ahtins.com.