The AAIS Agricultural General Liability Program
A new approach to insuring farm and agribusiness liability
By Joseph S. Harrington, CPCU
Agriculture is the oldest occupation in the United States, but in some ways it is just coming of age.
For generations, property/casualty carriers that insured agricultural enterprises had to choose between using “farmowners” forms and rating developed principally for family farms or, for larger operations, using forms and rating developed for commercial operations.
Now that American agriculture has consolidated into larger but still mostly family-run operations, insurance products specifically designed for this new reality are emerging.
In 2001, the American Association of Insurance Services (AAIS) introduced its Agricultural Output Program (AgOP), the first standardized program developed for insuring first-party property risks of large farms and agribusinesses.
AAIS is a national insurance advisory organization that develops standardized policy forms and rating information used by more than 600 property/casualty insurers of all sizes throughout the U.S. It maintains programs for 24 lines of personal, commercial, farm, and inland marine insurance.
Today, AAIS is nearly finished with the countrywide filing of its new Agricultural General Liability Program (AgGL), the first standardized general liability program designed for farms and agribusinesses.
As of press time, the AgGL had been filed in 49 states (all except Florida) and approved in 35, with other approvals pending.
Although the AAIS Agricultural General Liability Program was developed for relatively large agricultural operations, the size of an operation alone does not affect its eligibility under the program.
Eligibility under the AgGL extends to the following types of risks:
• Farms, ranches, and other facilities for growing crops or produce, and raising animals
• Growing operations with associated processing, storage, and marketing of agricultural products
• Equine operations
• “Agri-tourism” activities and events
• Buying and selling agricultural products
• Agricultural commodity processing operations
• Operations that manufacture goods from agricultural products
• Lawn and garden services and related operations
• Lumber and timber and related operations
A defining feature of the AgGL is the choice it provides between two base forms:
• The Farm Commercial Liability Form, which functions on a “build up” approach. That is, the form limits coverage to farming and related operations but allows coverage to be extended to other exposures by endorsement or declarations entry; and
• The Agribusiness Commercial General Liability Form, which uses a “scale back” approach. This form generally applies coverage to all operations of the insured but allows for certain operations and exposures to be excluded by endorsement.
Under the AgGL’s farm liability form, the insurer is generally protected from exposure to undeclared hazards, including “agri-tainment” and “agri-tourism” activities that bring members of the public onto farm premises for recreational or educational activities. (Coverage for such activities can be triggered by an entry on the declarations.)
Under the agribusiness general liability form, the policyholder has peace of mind knowing that GL exposures are covered unless explicitly excluded. That would include agri-tainment activities, provided they do not involve hazards otherwise excluded (aircraft, watercraft, etc.).
The treatment of farm stands and processing operations also illustrates the contrasting approaches of the two forms.
Under the AgGL farm liability form, there is built-in coverage for farm stands on the insured premises for selling the insured’s own products. There is also coverage for operations required to prepare products for market (such as washing, sorting, grading, and field packing) as long as the form of the products is not altered.
Coverage can be added by endorsement to the farm liability form for processing operations and for farm stores, on or off the insured premises, that sell products of others. In contrast, those exposures are automatically covered under the agribusiness general liability form but can be excluded by endorsement.
The treatment of custom farming provides another illustration of the contrasting approaches of the AgGL’s two base forms.
Under the farm liability form, custom farming is defined as farming undertaken for compensation and conducted away from the insured premises under the direction of someone other than the insured. The farm liability form covers such arrangements as long as receipts from custom farming operations do not exceed an annual revenue threshold indicated on the declarations.
Under the agribusiness liability form, there is no specific reference to custom farming. It is simply another insured activity unless explicitly excluded.
Apart from their differences, both forms include limited built-in coverage for property damage arising from the application of farm chemicals (commonly called “chemical drift”) plus a comprehensive list of up-to-date exclusions, including several that are unique to agriculture.
The exclusions specific to agriculture address certain logging and lumbering operations, the Migrant and Seasonal Worker Protection Act, and animal diseases, including hoof-and-mouth and “mad cow.”
Each form can also be endorsed to add coverage for personal liability, still a critical concern for operations where the insured operators often reside on the location, even when the enterprise is corporately owned.
Although the terms “farm” and “agribusiness” are used to help identify the forms, neither the size nor the nature of a risk should necessarily determine which form is selected as the base of a policy.
The “farm” form may be appropriate for a growing and processing operation where the carrier wishes to insure the processing by identifying it on the declarations but avoid exposure to other operations.
On the other hand, the “agribusiness” form may be appropriate for a farm with incidental activities that the carrier is willing to insure without having them declared.
Many agents will have a role in selecting the base form used to insure an account under the AgGL Program, and many will also have a firsthand role in using the new rating information and procedures provided for pricing the coverage.
The AgGL program manual identifies 360 classifications of agricultural risks, including 64 farm classes that have been converted from acreage-based rating to sales-based loss costs. All but 39 of the classes use sales-based rating.
The conversion from acreage- to sales-based rating in farm classes is analogous to the transition in the mid-1980s from area-based to sales-based rating for commercial general liability coverage.
Acreage, like floor area, is relatively stable and easy to verify; but it is not the best indicator of the effects of inflation on losses, or of the intensification of operations. In farming, as in commercial enterprises, more and more output can be derived from less and less space. That is certainly the case given the “vertical integration” of farm production and processing in recent years.
To implement sales-based rating, carriers using the AgGL will have to conduct premium audits, a task that may fall on farm agents. The sales and production information needed to do the audits is readily available from standard crop insurance reports, however, and many farm insurers already have agents or insureds submit “voluntary” sales reports.
AAIS has developed several tools within the AgGL rating plan to help carriers arrive at premium charges commensurate with each risk.
The AgGL’s Commodity Price Stabilization Plan provides a six-step procedure for minimizing or eliminating distortions in rates that would result if volatile swings in commodity prices were not adjusted for a more long-term, smoother progression.
Under the Commodity Price Stabilization Plan, the program manual indicates how to arrive at an annual commodity price change factor that reflects changes in commodity prices and the overall rate of inflation.
The AgGL manual also provides an individual risk premium modification (IRPM) plan and experience modification factors. The IRPM plan allows underwriters to apply a credit or debit of up to 25% of the premium indicated after all other manual rating procedures have been applied.
The experience modification factors are provided in a manual table. To be eligible for a modification, a risk must pay at least $2,000 in annual premium and have at least three years of premium and loss experience.
When it comes to insuring agricultural risks, the forms and rating developed for the AAIS Agricultural General Liability Program transcend the limitations of traditional farmowners and CGL policies. In time, these forms and procedures may transform how property and casualty exposures of farms and other agricultural enterprises are insured.
This article is general in nature and is not intended to provide definitive information regarding use of AAIS products and services, which is restricted by copyright and license agreements. This article in no way alters, supplants, or supersedes what is written in AAIS policy forms, manuals, bulletins, or other communications, and it does not indicate any official AAIS position on the matters discussed in the article.
Joseph S. Harrington, CPCU, is director of corporate communications for the American Association of Insurance Services in Wheaton, Illinois. He can be reached at (800) 564-AAIS, Ext. 217, or joeh@AAISonline.com.