Agriculture and Natural Resources
Brett Chedzoy, [email protected]
Risk Management for Farmers Against Natural Disasters and Related Perils
By Brett Chedzoy ([email protected])
After one of the coldest winters that I can remember (followed by a very dry spring) it’s no surprise that summer started off recently with some wild weather, including a tornado and some major flooding. Farmers are no strangers to the damages caused by storms, fires, droughts, floods, pests and every other imaginable natural disaster. But what can and what should they do about it? According to local insurance expert, Mike Stamp, farmers have three options: 1) they can assume the risk personally (“self-insured”); they can transfer to risk to someone else (buy insurance, or contract out the service); or they can eliminate the risk (sell old equipment, demolish old buildings, change technologies, etc.). Most farmers use a combination of these three strategies.
Unlike most other types of risks that are inherent in farming (liability, safety, financial, etc.), the occurrences of natural disasters are largely beyond the farmer’s control. However, farmers can take measures to make their operations more resistant to the impacts of natural disasters. Some examples are: increasing soil health to buffer against drought and floods; maintaining firefighting and prevention equipment like extinguishers (do you have sufficient working extinguishers on your farm, and does anyone other than yourself know where they are?); and the proper construction of buildings, access roads and other infrastructure to handle heavy snow loads, rains, wind and other extreme weather events. I’ve witnessed a lot of washed-out farm roads over the past two weeks that probably could have escaped the flooding with minimal damage had they been better designed and maintained.
Although these things can go a long ways towards managing the losses and hardships of a natural disaster, it may be prudent and reasonable for farmers to take additional steps to protect their interests. This is most commonly done by purchasing insurance. There are two basic types of insurance policies typically used by farmers: crop and farm (business). Crop insurance programs are generally underwritten by the US Department of Agriculture, and focus on specific commodities that are susceptible to weather-related events (grains, forages, orchards, vineyards, etc.). There are also variations to protect against market fluctuations (such as the MILC program for dairies).
By contrast, farm insurance (known as a “farm policy”) typically provides coverage for the farm’s: buildings; loss of use of those buildings; residence; loss of contents of the residence (e.g. personal belongings are destroyed in a fire); equipment; and liability exposure. Farm policies should be customized for each operation to accurately report the farm’s activities and assets. If a significant asset like a barn or tractor is not listed on the policy, it is not covered. Coverage extends up to the insured amount for each asset (minus deductibles), and only applies to loss from certain types of natural disasters. Fire, lighting and wind are generally covered, but flooding and earth movement (mudslides, earthquakes, sinkholes, etc.) are generally not. Special insurance policies (such as “flood insurance”) are required for coverage against these excluded risks.
Farmers are encouraged to periodically review their policies with their insurance agents to make sure that sufficient protection is provided. “Sufficient protection” can be thought of as how much unrecoverable loss could the farm could sustain. But insuring against every risk is neither possible nor practical, so farmers must continue to manage against loss through a combination of strategies discussed here – and not just leave it up to luck!