Small Farm Insurance Obstacles and Considerations

Here’s a great new guest post from our friend Scrapple about Small Farm Insurance Obstacles and Considerations based on his research regarding this topic:

1.) Proximity to fire station
When we were looking at properties we hadn’t considered the fact that insurance companies might prefer it if we were close to a fire station! Wait, aren’t fire stations all over the place? Well, turns out if you’re in the middle of nowhere they could be pretty far away. These types of things don’t cross us city-folks’ minds.

In my conversations with insurance agents it’s about a 5-7 mile distance AT MOST that they’re looking for. We’re 9 miles away, so we had some trouble finding competitive rates. In the end, a couple insurers based their rates on zip codes instead of distance from fire stations and we found a few fairly competitive offers. However, given the massive gap in rates this might be something you should consider. In some instances it added a couple thousand to the annual bill, which is quite substantial.

2.) Public water
Oh, you want water to put that fire out with? Can’t you just hook your hoses up to a hydrant or something? NO! There’s not a hydrant for MILES from our property. I was totally sold on the idea of only having a well and not having a water bill. Guess there’s some drawbacks too…

Lack of public water wasn’t nearly as big of a deal as distance from fire stations, but we did have a few agents that weren’t too happy about it.

3.) Deductible
Clearly everyone knows that a higher deductible equals a lower payment, and that a lower deductible will save you money if you have a claim. The hard part is striking that balance. When I spoke with agents I was told that the most common deductibles for farms were $500 and $1,000. That sounds reasonable, until you think about the size of claims that you’ll be making and the associated penalties for making claims.

Many insurers have a three-strikes and you’re out policy (or something similar) where if you make too many claims in too short of a time period you will lose your insurance or suffer huge price increases. When thinking about it that way, is it really worth it to make small claims? And if you’re not making small claims then why worry about a low deductible? You want to insure against the very big claims that happen very infrequently, not the small claims that happy a lot. On the flip side, you never want to be caught with a deductible so high that you couldn’t afford to pay it if you needed to. That’s why I think a modestly higher deductible than average makes sense. Maybe in the $2,000-$3,000 range, it will save a few hundred dollars per year and hopefully you won’t make claims too frequently.

You can also run some simple math on the years to break-even. If a $2,000 deductible saves you $200/year when compared to a $1,000 deductible then you’d need to make less than one claim every five years to come out ahead. Your best bet is to evaluate a few different scenarios and go with what you’re comfortable with, everyone has different comfort zones.

4.) Adulterated Farm Products May Require Separate Insurance
At our future farm one of the goals is to manufacture cheese. Nearly every farmowner’s insurance provider we spoke with refused to cover any liability after milk was produced. Once you take a farm product like milk and change it by making cheese there’s a whole different set of liabilities, especially since our cheese will be sold at retail and will be raw (i.e. unpasteurized).

One of the solutions we found was to separate the business into two parts. Instead of one LLC we’ll have two LLCs. Probably Little Seed Farm and Little Seed Creamery, or something along those lines. Basically, we’ll have one “farm” business and homeowners policy that covers everything up to milk production, including the home, land, equipment, animals and structures (except the creamery). And then we’ll have a second “creamery” policy that covers the cheese production facilities, the cheese inventory and the cheese liability. A different insurer will cover the two policies.

Things we haven’t worried too much about yet, but will most likely need:
Worker’s comp
Specific equipment and livestock coverage
Larger umbrella policy
Personal/family health coverage

Insurance is a new topic for us. We’re first-time homebuyers and the small businesses we ran previously didn’t require much insurance. What are some interesting insurance obstacles you’ve come across?

– Scrapple

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6 Comments on Small Farm Insurance Obstacles and Considerations

  1. Great article. The only business I’ve ever run that didn’t require all sorts of insurance was my photography and art business. The others were in construction and farming and those require loads of insurance.

    I have a general farm insurance policy that’s essentially a glorified homeowner’s policy with 4 times the normal liability provision. Then I have a separate product liability policy to cover just the produce. I don’t produce milk or cheeses, but I do grow poultry, and lots of leafy greens, especially micro greens and those all have the potential to make people sick. Every time I go out to harvest, I remind myself to be careful so that I don’t make people sick.

    It’s good that you mention the fire department issues. I had no idea about how insurance rates were set until my partner and I moved out here to Mulino, Oregon. One of the reasons he chose this particular property is because there’s a fire station 1/4 mile north of the place and a fire hydrant 200′ from the house the other way. We’re right on the highway as well. So I enjoy low taxes (it’s rural) and low insurance rates because of the fire station and hydrant, as well as high visibility as the property’s on the main drag for commuters who are on their way to the main urban area in the northern Willamette Valley.

    My partner was retired from L.A. County Fire Department (30 years) and he knew all about how insurance companies set rates for a given area. Part of it has to do with you water and proximity to a fire station, but it’s also set by a rating system for a given area. Fire departments are rated according to whether they’re pro or volunteer, number of stations in an area, and equipment that the fire department has. How the fire department is rated determines the base rates for insurance. LA County has the highest rating that a fire department can have. Therefore, the people who live in LA County’s service areas enjoy the lowest possible insurance rates for fire protection.

    A lot of people don’t realize that when fire department funding comes up on the ballot. They think that the fire department shouldn’t have to replace equipment until it breaks down completely, but that kind of thinking really is being penny wise and pound foolish, as the equipment status and condition is one of the key elements that set the insurance rates for residents of the area. So you can turn down the local levy to fund the fire department, have your rating lowered and pay the money out in higher insurance premiums instead.

  2. When we started searching for insurance for our small farm (in NY) earlier this year, we consulted with all our farm friends and then approached the agencies insuring them. We were shocked to learn that many agencies recently stopped taking on new clients who process poultry on-farm under the 1000-bird exemption. In NY this exemption, which differs state to state, allows producers to kill, eviscerate, and package up to 1000 chickens/year (or 250 turkeys) on their farm without requiring any kind of inspection.

    It doesn’t seem to matter to the insurers that NYS Dept of Ag & Mkts feels that this is a relatively low-risk practice; we were told that we had to have inspected facilities in order to get product liability insurance for our poultry. There are almost no inspected (“5A”) facilities within feasible driving distance, and getting ours inspected would be prohibitively expensive.

    The kicker is that since many insurers offer “package” insurance products, we weren’t able to get any kind of coverage from them unless they could insure ALL our liabilities. Splitting our business into 2 separate LLCs, as you did, was an option we were seriously considering. But in the end we found a company willing to cover us, after being turned down by 5-6 others. It’s more expensive than what our other farm friends pay though, and I am frustrated that the high overheads of our farm cause us to have to charge more for our products…

    Through all this, I became very interested in alternative models for insurance, and am still interested in knowing more about how various Amish communities self-insure.

  3. Farm and Ag related insurance can be complex. Often the coverage requirements include home, outbuildings, auto, machinery, livestock, and product liabilty just to name a few. For over 50 years Farm Family Insurance has been serving the needs of family farms as well as larger corporate farms. For a comprehensive review of your insurance needs feel free to visit http://www.farmfamily.com to locate an agent near you, or for farms in NY’s Hudson Valley/Catskills feel free to contact the Frisbee Agency at (518)943-3333. We look forward to hearing from you.

  4. We are a small family farm in the lower Hudson Valley and we make farmstead goat milk cheese from our goat herd’s milk. We go to farmers’ markets and food festivals, sell to restaurants and sell on farm. All sorts of agri-tourism happens at our farm. We went to Bryan Frisbee when we started and he has worked with us every step of the way. Farm Family has been the insurance that covers what we do. It is very important to analyze your assets and what you are going to be doing and what risks you face and sit down with a knowledgeable agent who can help you plan your insurance needs. Membership in the Farm Bureau helped us find Farm Family and Bryan.

  5. It is difficult to over-state the need for limited liability in the food production business. In most states, anyone who makes food and sells it to customers is held strictly liable in civil court for the illness or harm caused by their food products. Strict liability essentially means that a farmer or food processor is liable without regard to negligence.If someone gets sick from your product, there is almost no way to avoid financial responsibility for the full amount of harm it caused. Unlike financial debts, product liability risks cannot be easily assessed because civil judgments can vary wildly. The only way to manage the risk is to adopt a corporate form.

  6. On of my life goals is to be able to have a small farm. However, I never considered insurance as part of that. I certainly didn’t think it mattered too much how close I am to a fire station. So, thanks for your tips and heads up.

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