New technology is allowing AAIS to expand the amount and nature of its communication with it members.

The article below is an edited transcript of a discussion among AAIS staff members of the insurance concerns related to “community-supported agriculture,” an innovation in the way consumers purchase fruits, vegetables, and other farm products.

The discussion features three AAIS staff members:

• Joseph Harrington, director of corporate communications;
• James Bessler, manager of farm and agribusiness programs; and
• Deborah Summerlin, vice president of insurance lines.

You can hear a recoding of the exchange as an mp3 file by going to www.AAISonline.com and clicking on the icon on the AAIS home page.

Community Supported Agriculture

The topic of our first AAIS online interview is a concept called “community supported agriculture,” which first arose about 15 years ago and has expanded slowly but steadily throughout the U.S., particularly in the Northeast.

In a “CSA” arrangement, individuals agree to pay upfront for a share of a farm crop. In most cases, CSAs are created as a means for individuals to purchase fresh, organic produce and to provide direct support to a local farm.

CSA members support local farmers by reducing or eliminating their need to borrow money, and by agreeing to share the risk that a crop might not meet expectations, or fail altogether.

The members of a CSA are sometimes called “shareholders,” but they rarely have ownership interest in a farm. In their simplest form, CSAs are also referred to as “subscription farming,” where the farmer owns and operates all the farm property, and the members simply pay upfront for their produce.

However, there are a considerable number of CSAs where the members provide volunteer labor, and some where the shareholders actually own and/or operate a farm through a cooperative board.

In almost all cases, however, the presence of a CSA arrangement raises important considerations regarding
insurance, particularly liability coverage.

In the following interview, Jim Bessler states that most CSAs are typically “big gardens,” but even then, the addition of marketing activity beyond that of a farmstand may require that liability coverage be written on a commercial general liability base.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Joe Harrington: How do such community farming arrangements affect insurable interests in the property, the first party exposure?

Jim Bessler: I believe [the shareholders generally] take no ownership in the property. They’re receiving the fruit or vegetable that is harvested. So the first-party exposure still remains with the farmer.

Debi Summerlin: I would certainly agree with that. It’s a nice opportunity for a farm, typically a small farm.

Jim Bessler: Yes, these are small acreages. Some might consider them large gardens, 10 acres, 20 acres. A lot of it is hand-tilled acreage the volunteers can help out with.

Debi Summerlin: It’s a nice way for the farmer to have a ready-made and locked-in market for the produce the farm is producing. It draws a wider segment of the population into an awareness of the commitment required to sustain small farming efforts.

Jim Bessler: The real advantage to the farmer is that he is not forced to go to a bank or an ag lender to get an operating loan for the coming year. He’s going to use the income from the shares he receives upfront as his operating money for that year.

Joe Harrington: I would presume that, the more subscribers he has, the more operating income he’ll have. Does that raise any potential contractual exposures?

Jim Bessler: In the contracts I’ve read, the farmer makes no commitment to deliver a certain vegetable or a fruit, or a certain volume. Whatever he harvests that week, you’ll receive a share of it.

So, it looks like they are protecting themselves and not over-promising.

Debi Sumerlin: If this becomes more widespread, there are always opportunities for fraud. I suppose that a very savvy consumer might require that the farm be bonded or carry some kind of fiduciary coverage in the event there is any kind of fraud committed.

That kind of exposure, the willful or intentional bilking of the member of the community who thinks he or she is buying a share of the community farm would not typically be covered by a liability policy because we’re talking about an intentional act or an intentional injury.

Joe Harrington: Could there potentially be any exposure to the members if, say, a crop is harvested, tomatoes are in a barn, the necessary insurance has been purchased, and the barn burns?

Debi Summerlin: [First], under a farmowners policy you typically get very, very little coverage, almost nothing, for growing crops. There could be some coverage for harvested crops, including the packing materials the insured uses to distribute the crop.

Still, I would not expect that the shareholders would be named under the property section of a farmowners policy as additional insureds. So, while the farmer may have some moral obligation to make good with his or her shareholders, I don’t believe in most situations the insurance company would be drawn into any distribution of payment to additional insureds.

Joe Harrington: Okay, what about on the liability side? What kinds of liability exposures could community-supported agriculture present?

Jim Bessler: Well, I think it changes the risk the farmer’s taking on himself because, under most farm policies, the liability [coverage] is going to be limited to a roadside stand.

When you read the [CSA] contracts and the way they work, they’re contracting delivery of a fruit or vegetable to a location off the farm. They’re definitely moving the marketing of the product beyond the limitations of a farm liability policy.

When that happens, the enterprise changes from a farm enterprise to an agribusiness enterprise, and the farmer would need to look at a commercial general liability form to cover the marketing risk.

Another issue is whether CSA members working on a farm would qualify as volunteers as defined by an insurance contract.

Debi Summerlin: I would certainly agree with Jim’s observation with respect to the volunteer workers.

In most instances we would have a hard time viewing the shareholders as farm employees and, therefore, subject to the liability exclusion that an employer typically has under a general liability [policy] for farm employees. That type of exposure would be covered under a separate coverage part or perhaps even under a workers comp policy.

The company insuring a farm that operates a CSA may want to know the extent to which the shareholders are encouraged, invited, or allowed to visit the farm and to work on the farm, because that would create a premises exposure that would not be present in many farming situations.

Another aspect of liability coverage, an important one for farm, of course, is products liability coverage.

As I understand the CSA exposure, I don’t believe that the products liability coverage provided in farmowners
policies would be impaired or affected at all.

So, in the unfortunate event that there was any contamination of the farm product, I don’t believe the coverage would be impaired.

In fact, it’s likely that the shareholders could very directly trace the farm product to the CSA arrangement. There may be even a more direct connection between the product that was the source of bodily injury and the provider.

Joe Harrington: What about the members themselves? In those rare but prominent examples of community supported agriculture operations where a board of people runs the operation, what’s their exposure and how should they seek to address it?

Jim Bessler: I wouldn’t think it would be any different than being on the board of a cooperative or being on a board of directors. The primary shareholders I have found are using that term as [referring to] owning a share of a crop.

Debi Summerlin: Clearly, that [situation] makes a very strong case for using a CGL policy to insure the farming operation, since corporate officers and “others” have rights and coverage as insureds under CGL policies. Clearly, that would be the more desirable insurance policy for covering that kind of risk.

Joe Harrington: Are there any other insurance product issues, issues about applying the products and writing the right endorsements that underwriters should be concerned about as they address these kinds of exposures?

Debi Summerlin: It seems [that] a standard application question may need to address the presence of a CSA as a means of either gaining capital or distributing product.

[If] that question is answered “yes,” then the underwriter is certainly going to need to delve into the detailed arrangements and determine the proper way of covering the risk. Are there increased exposures that need rate consideration? Are there exposures they need to address from a policy language standpoint?

Even if the basic policy is generally appropriate, are there some endorsements that should be considered, whether it’s to address additional insureds or to target some exposures that a company may not want to cover?

Joe Harrington: I’ve read of one situation where a group was trying to form one of these [CSAs] for free-range poultry. Do you think there is any practicality to considering this for any type of livestock?

Jim Bessler: Poultry may be the most applicable, [but] I have a hard time imagining this being a beef or pork concept. We’ve moved away from the [practice of] going to the local locker and buy a side or a quarter of beef.

Debi hit on a key issue earlier [in that CSA arrangements] create a huge opportunity to trace back [the cause of a food injury] in the case of any unintentional contamination. There’s a big issue there from an insurance standpoint.