Not planning for the impact a major event could have on your farming business exposes you to a significant level of risk. Ensuring your farm has adequate insurance cover means asking some hard questions. Tim Ewen, Risk Specialist for Crowe Horwath states, “a good adviser will cut through the jargon to help you understand the policy’s features and benefits and how they will help when needed. They should also be able to recommend the best fit for your circumstances and budget.”
Policy wording is important, as is a clear understanding of the ownership of the policies. According to Ewen “the stronger the policy wording is, the more likelihood there is of claims acceptance”. It is the “owner” of the policy who receives the funds from a policy pay out – not the surviving spouse or family member. This is vitally important to ensure the funds go the correct person or entity – the correct ownership of the policies will ensure this.
Ideally, insurance policies will be reviewed annually, but at least every two years. Ewen explains, “this is especially important if there have been any significant changes, such as to the farm ownership, debt levels or personnel. The bare minimal insurance cover needed on a farm depends on debt levels, farm size, profitability, and succession planning requirements. It may be that a smaller farming operation would require a debt reduction, via insurance, to ensure it can fund a manager if the surviving spouse is to stay on farm.”
A larger farming operation may be able to sustain the loss of key personal or the owner short-term. However, they may require a farm consultant to ensure the business is moving forward in a profitable way. This could reduce the bottom line, as using a farm consultant would be an unplanned. The results from the consultant may take some time to flow through to the bottom line – especially if there is a major and significant change of the farming systems and operations. Also, there should be an assessment as to the cost to replace any labour units if required. Additional costs could be incurred such as specialised personnel companies, sign on fees, accommodation costs etc.
Ewen says most farmers will have their motorbikes, barns and other infrastructure covered, without considering income protection insurance to protect their ability to generate income. “Motorbikes and barns can be replaced – how do you replace your income if you can no longer produce one?”
Key person cover can protect the farm owner or a key person in the business, so that little or no financial pressure is placed on the business in the event of injury or illness. “Ideally the payment should be set up to pay in a relatively short time frame and the funds should go to the trading entity the farm operates,” Ewen explains.
When choosing and reviewing insurance policies, changes in circumstances for individuals and family groups need to be considered. “If it lacks flexibility there could be a cost factor involved. One size doesn’t fit all. A bespoke risk plan, to meet the farmers human capital risk requirements, can only be implemented following on from a thorough discussion around the needs and outcomes required for all people involved. Sometimes these conversations can be challenging given the subject matter. However, once the ideas have been put on the table and a plan put in place as a result, clients felt it gave them peace of mind and comfort knowing that they had the planning in place to take care of their family and the farming business should a significant and catastrophic event occur,” Ewen concludes.
And that’s the key to the planning – you want to ensure that should that moment of truth arrive – therefore a claim – then the outcomes expected and planned for will eventuate. Weighing up your risks and identifying insurance needs depends on how the farm operates, who does what on the farm and how income is generated.
Check out our Risk Insurance Checklist below to ask yourself the tough questions and see if you are prepared should a major event occur.
FOR FURTHER INFORMATION, PLEASE CONTACT: Tim Ewen, Risk Adviser for Crowe Horwath Hawkes Bay.
Telephone: +64 6 872 9204
Cell phone: +64 21 687 187