Farm advice: Farm insurance – is it worth the risk?

Is farming insurance really worth it?

There is an old adage – may you live in interesting times. It’s unlikely that anyone would doubt that our current times are interesting, especially those who work in the insurance industry.

Insurance, in its simplest form, is effectively a bet where the stakes you pay are the premiums and the payout, or the win, is the payment received when something bad happens. The cost (being the overall cost of your premiums) is, in the long run, ideally being less than the pay-out you receive if something bad happens.

In the rural sector, there are not only the usual risks of damage to homes and properties but there are also extra risks – those of fire, wandering stock, falling trees, and much more. In this article, we discuss these risks for farmers.

Making choices about insurance cover

Some people choose to fully insure against all reasonable risks; others feel that they are in a position to bear some loss and partially insure, while others chose to not insure and pay for any loss personally. Some other people do not turn their mind to risk, or simply chose to ignore it, in which case, they will fully bear any liability from a disaster.

Home, contents, and vehicle

The benefits of home, contents, and vehicle insurance are well-known. Contents insurance, particularly for young adults flatting or renting, is highly recommended, as otherwise they can face personal liability for loss.

A landlord’s insurance will not cover personal items such as the theft of a laptop. However, it’s not always understood that if you’re renting a house that some of the liability for the landlord’s possessions falls upon the tenant, in the event that the tenant causes careless damage.

Such liability has, since 2019, now been limited to four weeks’ rent or the landlord’s insurance excess, whichever is lower. Similarly, if you have a property that’s rented out, a standard homeowner’s insurance policy is not sufficient.

Your insurer requires notification that your property is tenanted due to the extra risks involved. All insurers calculate their premiums on risk. In assessing that risk, they need to be aware of your circumstances and ask you to disclose all relevant information, frequently on an ongoing basis.

Therefore, if your situation changes and/or the risks to your property change, your insurer will require notification of the change otherwise they may not pay out if you make a claim.

Insurance in the rural sector

Every business should have insurance – for business continuation, office premises and contents, public indemnity, and so on. Public indemnity (PI) insurance is particularly important in any business; it protects a business owner against the risk of damage or loss to others as a result of their trading activities.

For rural businesses, there’s additional scope as PI insurance can cover risks associated with, say, escaped stock, loss or injury to visitors to your farm, or from accidental loss or injury caused by your plant or machinery attached to a motor vehicle or a mechanical harvester. If you don’t have PI insurance, any damage caused by your business activity could result in you having to pay personally for any damage.

Rural examples of PI situations

A common PI example is the situation of falling trees. Falling trees can damage property, injure, or even kill innocent bystanders. If a tree owner was aware (or should have been aware) of the risk that a tree might fall because it was being cut, pruned, or was unsafe (maybe rotten) at the time it fell, claims could be brought against the tree owner.

There’s also the potential that a farm contractor might be found to have liability if their actions were at fault, say felling the tree badly resulting in damage to buildings or property.

Similarly, if a property owner’s stock escapes their paddock and there’s damage to a neighbour’s property, a passing vehicle or some personal injury, the stock owner needs to be covered against these situations. Most farmers understand the liability associated with escaped stock.

With the expansion of lifestyle blocks, stock risks exist as many people living on these blocks own horses, alpacas, and sheep that may escape. The standard homeowner policy, designed for a house in town or city where the risks are easily understood and often very different from a rural property, would not usually extend – or could be expected to extend – to the risks resulting from escaped livestock.

A further risk that is well understood for rural and lifestyle properties is the escape of fire. Lighting a ‘harmless’ fire to burn excess branches, clippings, or rubbish can easily escape and damage hedges, a neighbouring property and even the homeowner’s home and farm buildings.

An historic example was where a property owner let out cottages on their land, which led to a fire in an adjoining forestry block leaving the owner facing compensation costs for the resulting damage and firefighting costs.

In this case, hot ashes were cleared from a cottage’s fireplace and dumped outside, resulted in a fire on the neighbouring property. Insurance claims were rejected on the basis that a commercial activity was being undertaken; it was not the property’s home usage for which it was insured. A commercial activity bears far greater risks and obligations than would usually be expected by your average homeowner.

Make a good choice

The risks for the unwary – personally and financially – from not adequately ensuring what level of insurance is right for them means that liability falls squarely upon the business owner/farmer for any resulting damage and costs.

Choosing not to insure, or choosing to only minimally insure, is a deliberate choice and is a business decision. Making this decision, however, without investigating insurance options and taking appropriate advice can leave an owner open to exposure, as well as the potential for exhausting and expensive litigation.

Damages awarded by a court, if your defence is not successful, can be potentially crippling or could tip a business into collapse. Be safe and review your insurance, and ensure it sits where it should for your rural business.

About John Sheddan

John Sheddan is a director of Gore law firm, Sheddan Pritchard Law Ltd. He specialises in rural and commercial issues involving rural and residential property sales, business sales, leases, subdivisions, and helping families to plan for the succession of businesses and family farms to future generations. Sheddan Pritchard Law Ltd is a member of NZ LAW Limited, an association of 53 independent law firms practising in more than 70 locations.

Information given in this column should not be a substitute for legal advice.

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