At various times in the past, Viewpoint has reported on the transformation of American agriculture, and its implications for farm insurers.

Whereas family-run farms once dominated the rural economy, insurers today face a growing spectrum ranging from large agricultural operations to small “gentleman” or “hobby” farms, where agricultural operations are incidental or non-existent. Traditional family farms still exist, but their numbers are dwindling.

Since the overall number of farms has fallen, farm insurers have little choice but to try to serve the divergent segments of the market. Unlike commercial insurers, who can concentrate on certain sectors of an ever-growing number of business enterprises, farm insurers cannot focus on certain niches without jeopardizing growth.

And, of course, farm insurers still face the traditional need to underwrite both personal and commercial exposures. Even large “corporate” farms still tend to be family-owned enterprises, with a household on the premises.

Hence, farm insurers find they need to be “more things to fewer people,” as Viewpoint reported in 1997. To maintain market share, they have to be able to address the needs of increasingly diverse risks.

The challenge of serving a market moving in two directions was evident again as AAIS prepared the latest innovation in property/casualty coverage for farms: New endorsement options for adding equipment breakdown coverage to farm and agribusiness policies.

Automated farming

Ours is the era of automated farming, where complex production and processing operations are run by computerized equipment. As a result, farm operations are exposed to a greater risk of loss due to breakdowns in mechanical and electrical equipment.

“Today’s farming is not the kind of farming your grandparents did,” says Mark MacGougan, assistant vice president for product development at the Hartford Steam Boiler Inspection and Insurance Company (HSB). “There’s a lot of technology involved,” he says, and that technology is vulnerable to breakdown due to fluctuations in electrical power.

HSB collaborated with AAIS on the development of the new option, but use of it is not restricted to business reinsured by HSB.

“[Equipment breakdown] is a much more significant exposure today than it’s ever been, especially as farms become bigger and more integrated, and as the equipment becomes more sophisticated,” says Chris Leliaert, an agriculture specialist now working as a vice president in the Chicago office of Towers Perrin.

“It’s a whole new ballgame today,” he says.

According to Leliaert, large dairy operations now feature “turntables” where dozens of cows are automatically hooked up to milking equipment, and the milk is automatically routed through the homogenization and pasteurization processes and prepared for shipment.

Similarly, automated equipment is used to monitor the feeding of livestock in large hog operations, the maintenance of temperatures in poultry operations, and other applications.

“We see an increased need for [equipment breakdown coverage],” says Dave Eppinger, vice president for research and development, Everett Cash Mutual Ins. Co., Everett, Pa. “ Typically it’s a gap in coverage.”

No more Mr. Fixit

Moreover, MacGougan says, “today’s farm equipment is harder to fix on your own.”

From time immemorial, even in the era of mechanized farming, farmers often doubled as tradesmen, using their own tools, including blow torches, to repair broken farm equipment as well as household fixtures.

On automated farms, however, it usually takes specialists to repair or replace computerized production and processing equipment.

“The type of equipment being used on the farm today is definitely much different than in the past,” says Craig Bartling, director of underwriting and operations for American Reliable Ins. Co., Omaha, Neb. “The technology and the cost associated with that technology makes it harder for farmers to fix [the equipment] themselves.”

Given the seasonal nature of farm operations, the potential for breakdown is greatest when the equipment is needed most, adds MacGougan.

“We see a spike in losses around startup time,” he says. “Leaving equipment for half a year and running it flat out for a period puts a lot of stress on it.”

Coverage offered

In response to this need, a new AAIS equipment breakdown coverage option was filed countrywide as endorsements available under the AAIS Farmowners and Farm Properties Programs. The filings have a proposed effective date of Jan. 1, 2005.

As is customary for equipment breakdown coverage, the AAIS endorsements provide coverage for damage to property caused by an “accident” to machinery or equipment. “Accidents” are defined to include, among other things, explosion of steam boilers, rupturing of moving parts, and arcing or electrical currents (other than lightning).

The endorsements provide coverage under farm building or personal property limits for losses to some common types of farm property, including pumps and motors, as well as equipment that generates, transmits, or utilizes energy. The endorsements provide that the insurer will pay additional costs (up to a specified percentage) to replace damaged equipment with equipment that is safer, more efficient, or better for the environment.

The endorsements also provide incidental coverages under separate sublimits for physical losses due to spoilage of perishable items, contamination by refrigerants, and utility interruption, as well as for added costs needed to expedite repairs, remove pollutants, and restore lost data.

Live animals and growing crops, and accidents to farm mobile equipment, are not covered under the new equipment breakdown option, however.

Growing crops are typically insured separately; livestock is usually insured for loss caused by certain named perils (although coverage for suffocation is available); and equipment breakdown in farm mobile equipment is considered a matter for maintenance agreements and warranties.

An endorsement providing generally equivalent coverage was later filed for the Agricultural Output Program (AgOP), with an effective date of March 1, 2005. The AgOP endorsement varies in format from that filed for the Farmowners and Farm Property Programs, to fit with the structure of the AgOP base form.

“Today farmers are definitely depending on equipment, and farm carriers are integrating equipment breakdown coverage into farm policies,” MacGougan says.

The AAIS option makes it easier to do so, says Deborah Summerlin, AAIS vice president of insurance lines.

“It’s a natural evolution,” she says. “Since farms are more high tech, it makes for a natural entry for that type of coverage.”

Who needs it?

HSB’s collaboration on the AAIS equipment breakdown option is part of a larger effort by the company to make it easier for primary insurers to offer equipment breakdown coverage.

For the past several years, HSB has pursued a campaign to inform insurers and businesses that a line once known as “boiler and machinery” insurance is no longer a concern solely for manufacturers and building owners.

Today, virtually all types of businesses are dependent on electronic networks and air conditioning, at the very least, and would suffer losses if those systems broke down.

“Equipment breakdown coverage used to be an optional coverage people sought out on their own if they thought they needed it,” MacGougan says. “It has become clear that all sorts of businesses have this exposure.”

As MacGougan tells it, the more enterprises that purchase equipment breakdown coverage, the better spread of risk will result, and lower unit costs for the coverage will follow. He cites water pumps as an example of an exposure present on most farms that could qualify for equipment breakdown coverage.

As it is currently, MacGougan says, equipment breakdown premium “can vary significantly [from farm account to farm account], but typically it’s a modest percentage of the overall premium.”

To Eppinger, the AAIS provision providing coverage for computers used in farming and located in a residence is a critical feature that will enable Everett Cash to market equipment coverage to small farms.

“We see an application for this coverage on all farms,” he says, “large dairy farms, large hog operations, large grain operations, even gentleman hobby farms.”

The home computer coverage could be valuable to the last group, he says, because “pretty much everybody keeps track of records on a computer.”

There is a pattern in P/C insurance for optional coverages to become built-in additional coverages if the exposure and premium are not too great. It remains to be seen whether that would happen with equipment breakdown coverage. (AAIS has no plans to do so at this time.)

“HSB has found there can be significant advantages to farm insurers in using the automatic rather than an optional approach,” says MacGougan. “An automatic approach is much easier to administer both for the carrier and the agent, and the coverage can be offered for a significantly lower unit cost.”

Others recommend a wait-and-see approach.

“I could see a real demand for this coverage with large dairies,” says Leliaert, “but farmers raising commodity crops wouldn’t have as great a need.”