Farm business interruption insurance cover is a vital component for any farm operation. While the importance of business interruption insurance for commercial business is well documented, it’s less well recognised in the farming sector. However, it is just as important, if not more so, that farms have adequate business insurance interruption cover due to their increased external risk exposure.
This article reviews the different farm insurance options that are available for agricultural operations.
Insurance To Suit Your Farm Business
Like all insurance policies, business interruption cover needs to suit your individual requirements, in particular your farm occupation.
Intensive farming operations such as poultry, eggs and piggeries require key infrastructure to ensure that the business can operate and process batches throughout the year. Most pastoral operations don’t rely on key infrastructure, and therefore, any loss of farm infrastructure may not have a significant financial impact on the business. In these cases, the business may require an alternative solution to a gross profits interruption cover.
Farm Business Interruption Insurance For Intensive Farming- Gross Profits Insurance
In terms of poultry farms, a gross profits business interruption insurance cover is vital to ensure that in the event of insured loss or damage to property, expenses can continued to be paid. Should there be a loss to a single shed or multiple sheds, it will ensure that there is minimal financial impact to the farm until property is reinstated and bird batches can continue to operate.
The calculation of insuring intensive farming operations is no different to commercial businesses in that uninsured working expenses would be deducted from the annual turnover in order to derive an insurable gross profits figure. It’s also vital that it is understood how the farm is being paid under a processor contract, as these can differ in the market.
Example – Poultry Farm (12 months indemnity period)
Calculation for gross profits value:
Annual turnover $1,000,000
Less uninsured working expenses (e.g. gas*, power* and litter) $170,000
Insurable gross profits $830,000
* Always ensure that the fixed connections charges within power and gas costs are not deducted as uninsured working expenses, as these costs will still remain in the event of loss or damage to farm infrastructure.
Key Considerations for Farm Gross Profits Insurance:
- Suitable for farms that are reliant on key infrastructure
- Will cover the farms loss of gross profits
- Uninsured expenses will differ depending on the farm occupation and farm input costs
- Labour should be included within insurable gross profits to ensure employment costs are covered in the event of an insured loss
- Underinsurance clauses apply (check your policy)
- Consider full mortality livestock insurance extending to cover business interruption cover
Business Interruption Insurance For Pastoral Operations
Pastoral operations can be a little more complex, however they are certainly no more difficult to insure under a farm insurance policy. For example, if a pastoral operation was to lose a hay shed, it is more than likely that the farm would not incur any financial interruption to their livestock sales or production. Pastoral operations are usually more exposed to the risk of increased costs that the farm may incur in order to continue to grow and sell livestock. Therefore, a cover such as ‘Increased Cost of Working’ can be better suited to these types of operations.
See our article on livestock insurance
Business Interruption Insurance For Dairy Farms
Dairy farms can effectively be insured for either gross profits cover and/or ‘Increased Cost of Working’ cover. ‘Increased Cost of Working’ cover is well suited to dairy farms as they must continue to milk cows and cannot simply close their doors and receive payments for loss of gross profits. A continuation cover, such as ‘Increased Cost of Working’, is well suited to dairy farms as it covers additional costs that the farm may incur in order to continue to milk cows without disruption to animal lactation and calving patterns, which would ultimately have a long term impact on the farms production.
See our article on insurance cover for loss of milk
What Is Farm Business Interruption “Increased Cost of Working” Cover
‘Increased Cost of Working’ cover can not only be used in the event of insured loss or damage to property, but under some farm insurance policies, cover can also be provided for costs such as re-sowing of pasture in the event of grass fire. Other additional costs that may be considered under the policy for business continuation purposes may include, purchasing additional fodder to keep cattle fed while pastures are reinstated, additional labour costs that the farm incurs, and even transport or lease costs should cattle need to be agisted or milked on another property.
‘Increased Cost of Working’ is an elective sum insured and will not generally incur any underinsurance clauses. As a result, it can be difficult to calculate the most appropriate sum insured for a farm.
Considerations for calculating the sum insured should include:
- Costs of re-sowing fire damaged pastures (including seed & labour)
- Farm consultancy fees
- Additional labour costs to feed or milk cattle
- Fodder costs to feed livestock while pastures are reinstated and back in rotation
- Any livestock transport or lease costs should cattle be required to be moved to an alternative farm or dairy
Feed costs can represent a large portion of the required sum insured for ‘Increased Cost of Working’ cover. This can be due to the timing of the loss and various seasonal conditions that may increase the length of time required to have pastures back in working rotation
Key Considerations of Farm Increased Cost of Working Insurance:
- Elective sum insured without any underinsurance clauses
- Used to cover costs the farm incurs to continue the farming business- not loss of income
- Insurance cover for fire damaged pasture can be covered by some insurers
- No economic limit in terms of dollars spent versus income returned
- Can be a more cost effective premium than gross profits insurance
Business interruption insurance for agricultural risks can be complex to insure and will vary depending on the occupation and the individual farm activities. It is important that your insurance broker is experienced in agricultural risks and has an in-depth understanding of the farm to ensure adquite protection