It’s supposed to work this way: Farmers finalize all the paperwork for this year’s unprecedented crop loss and get their indemnity check roughly 30 days after that. That is what insurance policies state and what approved crop insurance companies have agreed to.
"Given the number of claims that will occur this year, we will test the system in ways it has not been tested, however," says Keith Coble, ag economist at Mississippi State University. "Companies can process claims much more quickly than in the past, but we have not had such widespread losses in years."
If a payment is delayed through no fault of the insurance holder, the insurance company has to pay that client interest beginning on the 61st day after the claim has been finalized. It is a strong incentive for quickly making good on claims.
But given the expected record number of claims this year, just when can farmers expect to receive their money?
An insurance company official speaking on condition of anonymity says there could be a five-month window for payments—from October 2012 through February 2013—depending in large part on when claims are finalized.
That sounds worse than it actually is. Corn harvest alone will last about five months this year, depending on where producers are located. That alone will go a long way to help guarantee indemnity checks are made in a timely manner.
Additionally, insurers will not be deluged with all claims within a two-week window, says Kevin Johnson, sales manager at Farmers Mutual Hail Insurance Company of Iowa. His company has customers throughout the Midwest.
Furthermore, many producers do not want to be paid in 2012 for tax reasons, particularly if they sold their 2011 crop this year. The last thing some want is to trigger two years of income within one year. For them, checks in January or even February are acceptable.
"We hope to get everything paid within 30 days of filing," Johnson says. "If farmers have their claims in now, it will be no problem" getting them processed quickly. For producers who don’t get their claims filed until later this month or November, "we will get bogged down," he says. Those might not be completed for a month or more.
Johnson estimates that 75% of his company’s farm customers will have a claim this year. He adds, though, that "we can withstand a year like this year. Every farmer will get paid."
The only remaining issue is timeliness.
"No company can be staffed for a year like this," Johnson says.
One practice his company and others like it are pursuing to meet expected demand is to move adjusters from areas with a small number of claims to areas awash in claims.
"We’re prepared and ready to go," Johnson says. While claims normally are processed in a week or two, that simply won’t happen this year.
Steve Worthington, crop claims supervisor for Country Financial, predicts that his company will be able to process and pay claims within 30 days despite heavy volume, "so long as claims meet all the requirements." The business serves Illinois.
Companies audit all claims in excess of $200,000.
"Any delay would be related to the insured’s inability to provide the records," Worthington says. Audited producers are required to provide acreage and production records, and possibly sales records, for the last three crop years in order to verify the yields they have reported. Other documentation may be required.
The final settlement for farmers with the harvest price option, the most popular form of policy this year, is determined this way: Corn is based on the October average price for December futures on the Chicago Board of Trade. Soybeans are based on the November price during October.
All legitimate claims will get paid, either by the companies or the federal government, says Laurie Langstraat, spokeswoman for National Crop Insurance Services. "Companies go through an annual review by (USDA's Risk Management Agency, known as RMA) prior to them writing policies. This is done to ensure that companies have the financial reserves to withstand back-to-back years with loss ratios exceeding 500%."
It’s possible issues other than claim volume could delay payments. One is grain quality. Because the drought has raised quality issues, insurance companies might wait for grading certificates. In some areas, for example, insurers might wait for the results of corn aflatoxin tests to determine harvest value. "This will be done on a case-by-case basis," one source says.
On claims above $500,000, RMA offers the option to participate from the beginning, and those tend to take longer because of the claim amount. That’s a threshold many will hit. A producer with 750 acres, a loss of 100 bushels per acre and an October corn price of $7/bu. could have a claim of $525,000.