As farm and ranch operations grow, insurance coverage doesn't always keep pace. New facilities, expanded production, additional employees, and diversified enterprises can create hidden risks that remain undetected until a loss occurs.
During the first installment of our Risk Intelligence Webinar Series, insurance experts Shane Belohrad and Wayne Luebbe of Gallagher Insurance shared practical insights into common property and casualty insurance gaps affecting producers and agribusinesses today.
This article summarizes key lessons from the webinar, including replacement-cost challenges, business interruption coverage, deductible strategies, and risk management practices that can help protect your farm or ranch.
Key takeaways
Insurance should evolve alongside your operation to ensure coverage aligns with today's risks, costs, and business realities.
A partial loss can be just as disruptive as a total loss, especially when new construction must be integrated with existing facilities.
Higher deductibles may lower premiums, but they can also shift more financial risk to your operation than you realize.
Supply chain and business partner disruptions can impact operations just as significantly as damage to your own facilities.
Coverage is not the same as alignment
Farming operations can look well-insured on paper. But in reality, coverage and risk may be misaligned. Too often, the gaps aren’t recognized until coverage is stress-tested by a loss.
This happened to a livestock facility with a fire. The facility's coverage was based on a "green site," or new build, rather than the higher cost of a rebuild after a loss. The producer had $24 million in coverage, but the rebuild bid was about $26 million, creating a $2 million gap that grew because of debris removal.
Takeaway: Any operation that has expanded beyond its original size, added facilities, diversified enterprises, or increased its workforce should periodically assess its insurance strategy to ensure it has kept pace with operational changes and inflation.
Why rebuild costs are often underestimated
Underestimating the cost to rebuild can create insurance gaps. Insurance values sometimes are based on what it would cost to rebuild on a greenfield site, or undeveloped ground.
But rebuilding after a fire or storm, for example, involves demolition, debris removal, site preparation, and integrating new with old construction. If animals are involved, regulations in some areas make removal and disposal expensive.
The producer in the example above learned too late that his policy didn’t cover debris removal, which added $500,000 to his share of the rebuild, bringing his total out-of-pocket cost to $2.5 million.
Takeaway: Determine if your policy meets your needs based on today’s construction costs. Talk to a trusted contractor about different rebuild scenarios and their related costs. If you have specialized equipment, consider enlisting a certified appraiser specializing in agriculture.
The hidden complexity of partial losses
While catastrophic losses get the most attention, partial losses are more common. Damage to a single barn, parlor, feed mill, or processing area can substantially disrupt operations, and require sometimes complicated—and expensive—integration of new and old construction.
Producers might assume they are covered with a replacement-cost policy. But that applies to facilities that are completely rebuilt or replaced.
Takeaway: Because most farms experience a partial rather than total loss, it is important to understand how your coverage applies in all scenarios.
Deductibles: Premium strategy or retained risk?
Higher deductibles can reduce premium costs, but they also increase the risk carried by the policyholder. Producers need to carefully evaluate whether deductible increases are delivering meaningful savings relative to the additional exposure they assume.
In one instance, a business increased its deductible from $500,000 to $3.5 million per occurrence to control insurance costs, only to discover later that it was paying a premium on sites that would never see a loss under the higher deductible.
There are other ways to reduce insurance costs, including reducing risk within a facility. This can involve investments in sprinkler systems, fire barriers, steel construction, digital thermography, electrical current monitors, and more.
A swine harvesting and processing business with $500 million in insured value (structures and business interruption) at a single location brought in a structural engineer who determined the site's actual probable maximum loss was $35 million, thanks to sprinklers and fire barriers.
This information is important to underwriters as they determine how much risk they are willing to insure. It also is useful to the business: Do they need to buy $500 million of coverage at this location, or are they comfortable with a much lower loss limit, say $75 million?
Takeaway: Understand exactly how deductibles are calculated and whether a change creates gaps or has unintended results.
Business interruption coverage triggers
Business interruption coverage can be a point of confusion for policyholders. Policies contain specific trigger requirements, coverage periods, and limitations.
Some policies are more restrictive than others when it comes to time limits. Also, does your policy include extra expenses, or is that covered separately? This differs from policy to policy.
A large dairy suffered a partial loss that required moving some of the cows to a different location to allow time for reconstruction. Trucking the animals and leasing space was covered as extra expenses.
Takeaway: Understand what events or circumstances trigger your business interruption coverage. If you are a livestock operator, understand how animal coverage works with business interruption coverage.
Risk beyond your property line
Many producers and agribusinesses focus exclusively on risks within their own operation. But outside relationships can create significant exposure as well.
Suppliers, processors, contract partners, landlords, and customers can all affect your ability to buy or sell product. Alternatives may exist, but rarely for the same price. They also can involve delays, longer hauls, and other costs.
Takeaway: Consider contingent interruption coverage to protect against disruptions impacting outside relationships. Not all insurance carriers offer it.
How prevention, documentation and early planning strengthen your position
Strong risk management involves more than insurance coverage. Many losses originate from seemingly minor issues, some that are visible every day but get ignored until a loss occurs.
Prioritize regular maintenance, consider monitoring technology, and document the steps you are taking to stay ahead of potential problems. Underwriters increasingly are asking about maintenance practices.
Questions to ask before your next renewal
Strategic reviews of coverage are best done several months before renewal to identify gaps, evaluate alternatives, and make improvements. The best way to avoid costly surprises is to have open dialogue.
Some good questions to ask during a review:
Does my current coverage reflect the true replacement cost of my facilities?
How would a partial loss affect my operation?
How does my deductible structure impact my exposure?
What triggers business interruption coverage under my policy?
Are my key suppliers, processors, or customers creating contingent business interruption risk?
Have facility upgrades, maintenance projects, and improvements been documented?
Has my operation changed enough in the past few years to require a review of my insurance program?
Property insurance should be evaluated based on current operational state, not how the operation looked when the policy was first selected.
If you want a deeper understanding of insurance risks affecting today's agricultural operations, watch the full webinar recording of “Insuring the Physical Enterprise” to hear practical examples and strategies from Gallagher Insurance experts Shane Belohrad and Wayne Luebbe.
