Don't Fall Into the Gap

February 6, 2009 09:18 AM

When Mike Kocher bought some new machinery, he knew he'd have to up his property and casualty insurance. But the Crawford County, Ohio, farmer didn't stop there. He realized the value of used machinery, inputs and grain—and the bins and buildings that hold them—all have gone up.

"I sat down with my agent and went over each item and decided how much I should insure it for," he says. "It took about 45 minutes, and it probably is one of the most important things we can do."

Gary Douglas, president of Nationwide Agribusiness Insurance Company in Columbus, Ohio, couldn't agree more. "Unprecedented grain price fluctuations and sometimes much higher values are having a significant impact on insurance needs," he says.

He gives this example: Two years ago, corn brought about $2/bu. If corn rallies back to last summer's $5/bu., "a farmer with just two 10,000-bu. bins, insured at a 2006 crop price, could be underinsured by as much as $60,000."
Compounded loss. You wouldn't lose just that $60,000, either. Because property insurance has a provision called coinsurance, any claim would be reduced as well, cautions Joel Jacobson of Nationwide Agribusiness.

Most policies require that you insure at least 80% of the value. In the example above, assume you insured the full value of the grain in 2006—$40,000. If you didn't increase your coverage to cover $5 corn's value of $100,000 (or at least the $80,000 coinsurance level), here's what could happen: Say you have a partial loss on that grain—$30,000 worth. That's less than your coverage, so you might well think you are going to collect $30,000 from your insurance company. Wrong. The settlement is based on the coverage that was bought ($40,000) divided by what should have been bought ($80,000), or 50%. You would get a check for only $15,000.

Other pitfalls. Don't forget the higher value of the bin or buildings, adds Bob Betzelberger, who sells insurance in Delavan, Ill. "It's easy to overlook these capital items because they don't usually have changes that would make you think about their value from year to year," he says.

"Base your values on what you could buy or sell an item for, not on a tax schedule," Jacobson adds.

Make sure your liability insurance is adequate as well, cautions Jim Chambers, vice president for reinsurance at Grinnell Mutual Reinsurance Company in Grinnell, Iowa, which works closely with 295 farm mutuals in 11 Midwestern states. "As net worth rises, more is at stake if a large lawsuit settlement is made against you.

"With property insurance, you have a pretty clear idea what a loss will cost you," he notes. "With liability, no one knows how much is enough until after the loss. If a life or lifelong injuries are in-volved, who knows how much that might total up to—not to mention the legal expenses."

Kocher in Ohio raised his liability coverage two years ago. "My thinking was that lawsuits are being settled for more money," he says.
Cost cutters. You might want to use seasonal coverage for items such as seed, chemicals and fertilizer that you store on the farm for only a few months. You can do the same with stored grain. "Perhaps your peak coverage for three months would be $1 million but you would be covered for an average $300,000," Jacobson says. But be careful if you store more grain or supplies than usual beyond your coverage period.

Stored grain also may be covered if you have a crop hail policy, Betzelberger points out. "Since you sign up yearly, values probably already have been updated."

Finally, you may want to self-insure to some degree, keeping in mind the co-insurance issue, says Don Gillings, manager, Centrec Consulting Group in Savoy, Ill. "Maybe you felt you could leave 50,000 bu. of corn or 10,000 bu. of soybeans uninsured in the past. At higher prices, that number may change."

Stay in touch with your agent. "With shifting inventory and big price swings, an annual review may not be enough," Jacobson says.

Gillings recommends an insurance review as a part of your month-end or quarter-end standard operating procedure. "Include sales," he advises. "Why pay for what you no longer have on the premises?" 

More Weather Risk Today

Rising values aren't the only reason to review insurance today. More violent weather, including tornadoes and heavy rainfall, is another.

The annual number of tornadoes in the U.S. spiked upward in 1990 and has remained hundreds per year above earlier decades (see graph). This may be partly due to better reporting of events, but it most likely represents an actual increase in number.

"We have moved into a period of fewer but higher-intensity rainfall events," says Al Dutcher, Neb-raska State Climatologist. "Looking at 30-year rainfall, when the 1960s were dropped and the '90s added, precipitation rose 6%–7%."

Flash floods are the top weather-related killer in the U.S. (averaging 4,629 deaths per year from 1960 to 1996), so this is cause for concern.  Lightning comes in second, with 3,221 deaths per year; tornadoes cause 2,734 deaths and hurricanes an average of 1,104.

Niño/Niña.  Now we have swung from a tendency for El Niño patterns, which bring a stronger Southern jet stream and more moisture in the South, to La Niñas, which are associated with more severe winter storms in the Northern latitudes, he adds. "That also means more severe weather deeper into the Southern Plains."

Dutcher believes we have come out of a 20-year period of relatively low corn yield variability and could be entering a period when we'll see record yields one year followed by heat and drought losses the next.

"In the 1930s to 1950s, farmers diversified their crops so if one was hit by heat and drought, another might overcome some of the losses," he says. "It may be time to rethink our corn monoculture again."

To contact Linda H. Smith, e-mail

Top Producer, February 2009

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