Friday, March 22, 2019

Business interruption insurance eases stored crop worries

February 1, 2018 by  
Filed under Crops

Farmers are being advised to insure crops and inputs on a business interruption policy – to protect against market volatility and fluctuating values in the event of fire.

When done properly, and with the guidance of experienced agricultural insurance brokers, a business interruption policy will give flexibility on price volatility, normally allowing somewhere in the region of 30% leeway on values.

The interruption policy will insure for the future value of crops. For example, if the farm has crops in store, with a view of selling in March, yet the store goes up in smoke in September, basic fire cover will only pay out on the value on the day of the fire.

With cover on crops calculated on a loss of income basis, crops will also be insured for future market values, rather than the spot price on the day of the loss. This means fluctuations in crop value will be negated.

Nigel Wellings, of agricultural insurance brokers Farmers & Mercantile, says arable farms should insure crops on a business interruption basis, setting an annual value based on gross output, ensuring crops are automatically covered while growing, drying and when in storage.

“Crucially, the farmer must consider setting a realistic sum insured. It is not costly, so it does not make sense to cut corners,” says Mr Wellings.

Realistic value

A business interruption policy based on £500,000 of crops, for example, will be in the region of £500 – depending on previous claim history.  This equates to typically around 75p to £1.25 per ha. “It is not expensive, so place a realistic value. Do it properly, or don’t do it all.”

A major advantage of the business interruption policy is that it will also automatically cover crop inputs at replacement value.  Increasingly, a higher proportion of farms will take early delivery of fertiliser, taking advantage of discounts from merchants.

This results in inputs being stored on farm for a longer period, which represents a higher value at risk over a longer period. Without business interruption cover, a higher sum will likely need to be insured.

In a similar scenario, if inputs delivered in August go up in smoke in November, they will most likely be replaced in February when costs will be much higher. A business interruption policy will cover for the replacement costs rather than the value on the day of the fire.

There are actions the farmer can implement to minimise risks and help prevent fire damage, and farmers are urged to follow simple and practical guidance to help avoid hazards.

“It is common to see fire damage to grain caused by machinery,” adds Mr Wellings. “Farmers should consider parking loaders, tractors and other machinery away from grain stores. It is far too frequent that we see electrical faults from machinery causing grain stores to go up in flames.

Human consumption

“The smoke damage will also cause any remaining grain to be unfit for human consumption, and will be rejected by buyers. Store machinery away from grain whenever possible.”

Mr Wellings also advises farmers on the importance of annually reviewing the crop value, particularly based on the volatility of the market, market values and any rotation.

“Changing circumstances could see the crop value go down by 20%. If this is the case, premiums should also go down accordingly. Conversely, if the crop value increases, it is important to increase the values insured.”

If prices change, Farmers & Mercantile will advise clients, guaranteeing accurate values are insured year on year.

The business interruption insurance can also cover for additional costs in the case of damage to machinery or grain dryers. When grain needs to be stored or dried elsewhere, the cover will even extend to transportation costs.

Machinery damage

The same cover applies for machinery damage. Should a tractor, combine or loader be out of use, the insurance can cover for the hire of a replacement machine, or the costs of bringing in a contractor.

Mr Wellings also urges farmers to have replacement costs for grain dryers assessed, when setting sums insured.

“I would encourage insuring on a new for old basis, particularly for anything above 15-20 years old,” says Mr Wellings. “Make sure you are insured enough for replacement drying and handling facilities, including electrics.”

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