Like all businesses, farms purchase insurance to protect themselves from unexpected financial losses. While farms face many of the same risks as other businesses, they also have unique characteristics that require special coverages. Many insurers offer farm (or farm and ranch) policies that are specifically designed for agricultural businesses. These policies combine elements of homeowners, commercial property, and general liability policies.
Farm or Homeowners Policy?
Should you insure your farm under a farm policy or can you rely on a homeowners policy for coverage? The answer depends on the nature and purpose of your farming activities. A farm you operate to produce food or other products solely for your own use can probably be insured under a homeowners policy. However, a farm you operate to generate income should be insured under a farm policy.
Homeowners policies aren't suitable for insuring for-profit farms because they contain "business-use" exclusions under both property and liability coverages. The property section typically excludes any structures you use to conduct business operations. The liability section excludes claims that arise out of a business conducted at the insured location or engaged in by the insured. The term business generally means any trade, profession, occupation, or other activity you engage in for money.
A farm policy is intended for farm owners that live and work at the same location. It typically covers the farm owner's residence as well as barns, machinery, and other property used in the farm business. Farm policies vary widely. Some insurers use standardized policy forms published by ISO or AAIS (an insurance advisory organization similar to ISO). Others use proprietary forms or a combination of standard forms and proprietary endorsements. The following forms are often included in an ISO farm policy:
- Farm Dwelling, Appurtenant Structures, and Household Personal Property. Covers the farm residence, ancillary structures (such as a detached garage), and residential personal property like furniture and appliances. This form doesn't cover property used for farming.
- Barns, Outbuildings, and Other Farm Structures. Covers buildings and structures used for farming like barns, stables, sheds, silos, portable buildings, and fences.
- Farm Personal Property. Covers machinery, equipment, tools, livestock, animal feed, seeds, fertilizer, and other items used for farming. All personal property can be covered under a single blanket limit. Alternatively, individual items can be scheduled on the policy, each subject to a separate limit.
- Farm Liability. Covers third-party claims against the farm owner (whether an individual or another type of entity) and other insured individuals for bodily injury or property damage caused by an occurrence or for personal and advertising injury caused by an offense. Excludes claims arising out of businesses other than farming.
Most farm policies are flexible so policyholders can add coverages as the need arises. For example, Susan owns a small farm that includes farmland, her residence, and a barn. She purchases a farm policy that covers the dwelling and farm structures (the barn). Susan adds farm liability coverage to her policy when she begins selling produce to restaurants. Once her sales have increased she buys several pieces of farm machinery, which she insures under her policy as farm personal property.
Beware of Exclusions
Farm policies contain many exclusions. Here are a few you should be aware of.
Growing crops. Farm personal property coverage does not cover growing crops. If you wish to insure your crops you'll need to purchase crop insurance. You can buy Multiple Peril Crop Insurance, which is financed by the federal government, or Crop-Hail insurance, which is offered by private insurers.
Livestock racing or rides. Farm liability insurance often excludes the use of livestock or other animals for racing or stunting activities if the accident occurs at the contest site (such as a racetrack). It also excludes any injury or damage that arises out of the use of livestock to provide rides to any person for a fee or to provide rides at a fair or charitable function.
Custom farming. Farm liability insurance may also exclude custom farming, meaning farming performed away from the insured location in exchange for money or goods. The exclusion applies if you generate more than $5,000 annually from custom farming.
Non-Farm businesses. As noted above, the liability section of a farm policy excludes claims arising from business pursuits other than farming.
Farm policies don't cover occupational injuries sustained by employees or claims that arise from the use of automobiles. Thus, some farms may need a workers compensation and/or a business auto policy.
State laws vary regarding workers compensation coverage for agricultural workers. Only about a quarter of the states require employers to protect farm workers from on-the-job injuries by purchasing a workers compensation policy. Some states require employers to provide coverage if their farm payroll exceeds a specified threshold. Farms that aren't legally required to obtain workers compensation insurance can provide benefits to injured workers voluntarily by purchasing voluntary compensation coverage.
Commercial Auto Coverage
Automobiles are excluded under both farm personal property and farm liability coverages. If vehicles you use are your farm are subject to a compulsory insurance law in your state, you may need commercial auto coverage.
If your farm or ranch offers horseback riding lessons, you should understand the equine liability law that applies in your state (if there is one). Forty-six states have enacted such a law. Equine liability laws limit the liability of individuals and businesses (like stable owners and riding instructors) that provide horse-related activities to others for a fee. The laws vary by state but generally shield horse owners from liability for injuries to riders that result from risks inherent to horses (like their unpredictable behavior).