Thursday, January 26, 2017
Many farmers and ranchers produce agricultural products under a production contract for someone else. These contracts generally provide for the raising of livestock, birds or crops with the farmer supplying the facilities and labor and the integrator supplying the livestock, birds or seeds and the feed and other supplies. The integrator generally retains title to the livestock, birds or crops and the contract generally establishes the amount paid to the farmer by the quantity and quality of the final product. Many of these contracts are forms drafted by the integrator, with no terms negotiated by the parties. That feature, by itself can raise an issue about fairness. Other issues can include the economic impact of production contracts.
But what about insurance? Does a farmer’s comprehensive general liability policy cover losses sustained by livestock produced under contract? The insurance angle is the focus of today’s post
As noted above, it’s not uncommon for livestock (particularly hogs) and poultry to be produced under contract. But, with livestock raised in a farmer’s barns that are owned by someone else, which party is responsible for any loss that occurs to the animals? The producer or the supplier? Typically, the party that has the control over the livestock (or poultry) produced under contract is the liable party. Indeed, production contracts commonly state that, even though the supplier owns the livestock/poultry, the producer is responsible for any death loss.
In that event, it is important that the producer has insurance coverage for any losses to the livestock or poultry. But, the standard farm comprehensive liability policy probably does not cover losses if that loss can in any way be attributed to the negligence of the producer to animals in the “care, custody or control” of the producer.
There are numerous cases involving the question of insurance coverage for livestock and poultry produced under contract. In many of those cases, the producer has even identified in advance that they needed additional coverage for livestock and/or poultry raised on contract and, as a result, has sought additional coverage. The additional coverage that is purchased is typically in the form of a “custom feeding endorsement” that says that if “the bodily injury or property damage arises from the activities of care or raising of livestock or poultry by an insured person for any other person or organization in accordance with a written or oral agreement…” the policy provides coverage. But, what does that language mean? One recent Iowa court decision illustrates the problem that faces contract growers.
In the Iowa case, Schulz Farm Enterprises, Inc. v. IMT Insurance, No. 15-1960, 2017 Iowa App. LEXIS 11 (Iowa Ct. App. Jan. 11, 2017), the plaintiff farming operation contracted with a company to custom feed hogs that the plaintiff owned at a third party’s site. The company was to take delivery of 50-pound hogs and raise and care for them until they reached 275 pounds. The plaintiff owned the hogs, but they were under the care of the company. The company contacted its insurance agent to get coverage for the custom feeding of the hogs, telling the agent that the company neither owned the hogs nor the facility in which they were raised, but that the company was responsible for the care and feeding of the hogs and building maintenance. The agent recommended a liability policy, and a custom feeding endorsement for an additional $118 annually. The custom feeding endorsement extended coverage for custom feeding and deleted exclusions in the liability policy that pertained to custom feeding. The ventilation system in the building failed when an electrical breaker tripped and 837 hogs died. The company filed a claim with the defendant for coverage, and the defendant denied coverage. The company then assigned its claim to the plaintiff who sued the defendant, the insurer.
The trial court granted the defendant’s motion for summary judgment. On appeal, the plaintiff claimed that because the endorsement deleted the exclusions pertaining to custom feeding, the death of the hogs produced in the custom feeding operation was a covered loss. However, the court determined that the custom feeding endorsement functioned only to remove the exclusion for bodily injury or property damage arising out of the insured’s performance of, or failure to perform, relating to the custom feeding of the hogs. In other words, by removing that exclusion, the company had coverage for bodily injury or property damage to others or the insured as a result of the custom feeding operation (i.e., damage caused by the hogs). But, the court determined that the endorsement did not eliminate the exclusion of coverage for damage to the hogs. Damage to the building caused by fire, smoke or explosion was a covered loss. The court reached this conclusion because the company paid only $118 annually for the endorsement which the court believed did not correspond to the additional risk of insuring the hogs. The court believed that the $118 annual charge did reflect the additional risk of damage caused by the hogs. The court provided no data for its conclusion (I don’t know whether there was data in the record) and no analysis of the endorsement language, instead merely citing a 2013 opinion of the state (IA) Supreme Court where the Court held that a custom feeding endorsement did not cover the loss of 535 feeder pigs that died due to suffocation.
Pointers for Producers
Contract growers seeking insurance coverage for the potential loss of the livestock or poultry produced under contract should take several common-sense steps to protect themselves. It’s a good thing to start with a general review of the comprehensive farm liability policy. Is there a custom farming exclusion? Is there exclusionary language involving “care, custody or control”? There likely is. If so, then a custom feeding endorsement to the policy should be acquired. But, that endorsement should contain language that specifically addresses both of those exclusions and specifically overrides them. So, it’s really important to know exactly what the policy covers and that it covers what it needs to cover. That is the case even if the owner of the livestock/poultry has coverage under their own policy. It’s even a good idea try to get a written opinion from the insurance company delineating the specific types of death loss events that are covered under the policy.
Uncovered losses for contract-produced livestock/poultry can result in significant financial problems for the producer. It’s not only the producer that could face severe financial hardship. A lender that provides financing for the producer is also at risk if that borrower defaults. So, both the producer and the lender have a vested interest in making sure that losses to the animals/poultry are covered. There are specific endorsements that exist that cover specific losses such as death loss of livestock by suffocation (such as when a building ventilation system fails). Indeed, in one case about four years ago, the court upheld an insurance company’s denial of a $24,075 claim filed by a small farming operation that was raising hogs on contract when the hogs died as a result of suffocation. After the litigation ended, the company started selling another endorsement covering livestock death by suffocation.
So, endorsements do exist that can cover the type and causes of losses that a producer needs coverage for. Producers, and their counsel, should be very careful to ensure that the coverage that is obtained is precisely what is needed.
Just another thing for contract grower to think (and worry) about.