Agricultural producers face liability risks generally experienced by most businesses – workers compensation, for example, and risks that can easily be covered by standard property and casualty insurance policies. However, agricultural growers and producers are also confronted with particular risks of losses and liabilities endemic to agriculture that go to the very heart of their businesses as farming operations. As those involved in agribusiness realize, standard property and casualty policies may not be available to provide coverage for the unique risks and potential losses an agricultural producer faces – losses attributable to:
- environmental matters;
- animal diseases;
- crop diseases;
- pesticides and fertilizers; and
- livestock and crop contamination, resulting in food borne illnesses for which there is liability and product recalls;
to name a few. Even if the commercial insurance is technically available, it is not available on practical terms because the premiums are so costly and the deductibles are so high the producers and growers cannot afford to pay them and still generate sufficient net income from their farming operations. Further, if and to the extent carriers are willing to write insurance policies for these unique agricultural risks, they are of little value because the policy exclusions leave uncovered many of the very risks of which the producer is most concerned and for which it needs the policy.
Many large agribusiness companies have addressed their risk management issues through the formation and operation of single parent captive insurance subsidiaries as referenced in a previous post. However, producers and growers have not embraced captive insurance despite the fact that it may represent a risk management tool tailor-made for the unique risks faced by crop growers as well as for the risks faced by livestock producers. Most give as their reason for not pursuing captive insurance their belief that implementing and operating a captive insurance company is too costly, too complicated and draws their attention away from their primary focus – growing and selling crops or livestock or operating their related businesses.
We suggest that instead of dismissing out-of-hand the idea of a captive insurance solution, growers and producers despite of their sizes might consider joining together with other growers and producers to form a group captive insurance company.
The captive insurance company could be a mutual insurance company, a corporation or a limited liability company. Of course it would have to be licensed as an insurance company under the licensing authority of its state of incorporation or organization. Further, the captive insurance company must have a capital account sufficient to meet the capital requirements mandated by the state insurance regulatory authorities with sufficient operating capital to pay the organizational costs and the costs of the captive manager. Premium payments made by the growers and producers that become policy holders can also be applied to meet these costs. It would issue policies for those unique but insurable agricultural risks faced by the growers and producers for which the captive insurer was formed. Professional advisers can provide guidance on these issues based on the unique risks for which the growers and producers believe they need coverage.
The insurance policies could be structured so that with respect to each claim, the producer or grower policy holder would pay a deductible, with the captive insurance company paying the amount of the claim above the deductible. As an insurance company, the captive could purchase reinsurance to pay claims above the amount of the policy limits of the insurance it issued. The ability to purchase reinsurance is another benefit to a captive – companies that are not licensed insurance companies are not able to purchase reinsurance.
As readers of this blog know, agricultural cooperatives are businesses owned, controlled and operated for the mutual benefit of the farmers and ranchers who utilize them for the benefits they can provide. Formed by its members, cooperatives provide strength in numbers. They provide bargaining power allowing the members to obtain products and services required for their farming or ranching businesses more efficiently and cost effectively than the individual farmer or rancher could acquire them on his or her own. Types of agricultural cooperatives include bargaining cooperatives, farm supply cooperatives and credit cooperatives. Simply stated, through their operations, agricultural cooperatives manage risk.
Although recent captive insurance legislation has effectively eliminated captive insurance as an estate planning tool, a cooperative, through its farmer or rancher members, could still find it useful to organize a captive insurance company to insure its members from various types of insurable risks inherent in the agriculture industry, diversifying the risk among its members.
With a sufficient number of grower and producer policy holders, the group captive can provide coverage for insurable agribusiness risks that are either not available by commercial carriers or at premiums that are too high for the individual grower or producer to purchase for itself. This insurance effectively “fills the gap” providing insurance for losses that are excluded by third party commercial carriers.