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Avian Flu Insurance
Strains of Pathogenic Avian Flu Disease have begun to crop up across the country in recent months. Along with this epidemic comes large financial implications for poultry farmers and the agricultural industries that service them. The impact of an avian flu outbreak can devastate an area and leave farmers without a way to pay bills which may continue, even if their farming operations cease.
Mortality coverage for bird loss due to government-issued depopulation orders have been insurable for some time; however, the contract grower carried a large risk of financial loss on their own shoulders because they did not have “insurable interest” in the property (birds), and therefore nothing to trigger a loss of business income claim.
Coverage is now available for contract poultry operators to receive fixed cost coverage for up to 12 months in the event they receive a governmental order to depopulate their poultry facility. While not providing coverage for loss of business income, the program is able to help contract poultry operators protect their assets from loss payees and mortgagors. In most cases, banks will be willing to work with farmers who are unable to make mortgage payments because of an avian flu outbreak. However, this may lead to scenarios which are still unfavorable for the farmer, such as interest-only or accrual-type loans that could have the potential to negatively impact credit ratings.
Avian Flu Insurance Coverage
Protecting fixed costs like mortgage payments, lease payments, insurance, utilities, payroll, etc. allows a contract poultry farmer to keep creditors off their doorstep while they are non-operational. Farmers can elect for clean-up cost coverage in specified increments, and, for those farmers who own their own birds, coverage can be purchased for the cost to replace a flock. Most insurance will pay for losses to animals on an actual cash value basis.
Avian flu insurance, which can cover flock replacement costs, serves to fill a potentially large gap for owners of laying hens. In the event that a flock of layers is almost ready to be shipped, the actual cash value of those birds may be as little as a few dollars/bird while the cost of filling the house with new birds could be between $7-10/bird, or more, depending on a number of varying factors. A farmer receiving actual cash value for his flock could be left holding several hundred thousand dollars of underinsured loss, depending on the size and scope of his operation. Receiving cost coverage for restocking your chicken house eliminates the unknown out-of-pocket costs that could be incurred.
Protect Your Business
Purchasing Avian Flu insurance is a viable stop-gap type of coverage to alleviate the financial impact of a loss due to this epidemic. It is difficult to judge the possibility of loss due to Avian Flu, even for farmers who are taking every precaution to ward against contracting the disease in their own birds. If you operate in a poultry-dense area, you could still have a large loss exposure because of your proximity to neighboring farms, regardless of the loss control and biosecurity practices you have implemented. Avian Flu insurance coverage can address some of these concerns while keeping your farm from incurring additional debt during a shutdown and your credit intact.
Talk with a Ruhl Insurance agent about avian flu insurance coverage. Call 717-665-2283 or complete our contact form.
Frequently Asked Questions
What about Government Indemnity programs?
At this time, we have not been made aware of government indemnity for contract farmers outside of providing clean-up crews in the event a flock is depopulated. The government has also promised some indemnity to flock owners, but this coverage has its limitations. Farmers should research governmental options to determine if they could apply to their situations. Some factors that might need considered are whether governmental indemnity will be paid upfront or as a reimbursement. Some farmers may not be able to foot the bill on a large loss while waiting for government compensation.
For flock owners, questions should be raised as to whether the government will pay for the replacement cost of the flock or the actual cash value of the birds at the time of loss. Our understanding is that the government will pay on an actual cash value basis for the birds that are alive at the time of depopulation. Meaning that the owner of a laying flock who loses 20% of his birds, which are nearing the end of their production life, to Avian Flu before government depopulation, may be receiving payment for a small percentage of the cost to restock a chicken house. Each farmer should be responsible for fully investigating all options and knowing how indemnity payments will be issued and how the amount of those payments will be calculated. Your local ag extension office should be able to help you with these types of questions.
I’m a contract poultry farmer. The owner of my birds says they will continue to pay us our contract fee even if we are depopulated. Why do I need to pay for Avian Flu Insurance?
If you have an amended contract that states your contract will continue even if your facility is sitting empty, you may not, in fact, need Avian Flu insurance. However, the owner of your birds may have intentions to continue paying, while at the same time be unable to follow through based on how wide-spread the Avian Flu losses are in your area. It may or may not be sustainable for them to continue payments to a large portion of their operators. Some flock owners have indicated their intentions to pay their contract farmers using the government indemnity payments they receive for the loss of their birds.
This again brings up the same questions pertaining to the schedule of government payments and how a loss amount is determined. Additionally, when the owners of the birds are restocking the farmers’ chicken houses, this will become an out-of-pocket expense if they have used indemnity payments to continue paying contract fees. Again, the sustainability of this scenario could be adversely affected by many situational specifics that are outside of anyone’s control. Simply put, having cost coverage insurance in place can eliminate the grey area that can potentially exist with good faith promises. Clean-up costs are a huge unknown and who will be responsible to pay for those costs. For a reasonable premium, you can purchase $100,000 of clean-up costs coverage.
Do I have to cover all of my fixed costs, or can I select individual costs to cover?
You can elect which of your costs you would like to cover. For example, you may not need to cover your payroll costs if you would simply lay off your worker(s) if you are depopulated. At the same time, your mortgage may be the largest of your costs and you would want coverage for it. You can also select or reject clean up cost coverage. The policy will be issued at an agreed upon limit of insurance based on the costs you declare on your application.
Are there things I can do to get a better rate?
The rate you receive will be multiplied by the amount of fixed costs you declare to determine your premium. The rate can be anywhere between 1-5%, depending on a number of factors. You can positively affect this rating by having desirable bio-security practices in place. Keeping logs of entry to your farm, creating limited access and locking bio-secure areas, and regularly testing water supplies are all good practices that will be looked at favorably by the underwriter. Additionally, placing a spray station at the end of your farm lane and requiring entering vehicles to spray down before coming on premises is also a good control. These kinds of practices show that you are doing your due diligence, in the areas you can control, to minimize your loss exposure.
Because there are factors outside of your control that could still lead to you having a loss, the application will ask for additional information about your operation and the surrounding area. Your proximity to other poultry operations is a concern for underwriters because of the possibility of depopulation even if your flock is not hot. Other considerations include the type of poultry you have. Some species of birds are more susceptible to disease and therefore may be higher rated. These considerations do not necessarily make your farm ineligible, but the underwriter may use them to determine the rating structure of your policy.
How many months of coverage can I buy?
You can buy any number of months of coverage you choose, up to 12 months. Your policy will be in effect for a year and any loss occurring within that year will be paid based on the agreed value of the policy. After a year, you can renew the policy. However, to do so you must resubmit an application for a new quote; the policy will not renew automatically.
Do I receive monthly payment if my flock is depopulated?
No. You will receive a one-time payment if you have a covered claim. The number of months you buy coverage is simply used to determine how much insurance you need. If you have received indications from your flock owner or governmental sources that your downtime will be six months and you would like to cover your fixed costs for this amount of time, you would use your annual costs to calculate how much your costs are on a monthly basis, and then multiply that by the number of months of costs you should insure for. Here is how to determine the amount of fixed cost coverage you need:
- Total Declared Annual Fixed Costs / 12 = Monthly Fixed Costs
- Monthly Fixed Cost x Number of months to cover = Limit of Insurance
- Limit of Insurance x rate = Premium
Mortgage = $100,000/year
Farm Insurance = $10,000/year
Other Fixed Costs = $50,000/year
Total Annual Costs to cover = $160,000
$160,000/12 = 13,333.33 costs per month
Months of Coverage desired = 6 Months
6 months x $13,333.33 = $80,000 of costs to cover
$80,000 X 2.5% = $2,000 Premium
What if I buy a policy and my flock is depopulated a week later?
One of the exclusions in the policy is for losses occurring within 2 weeks of the inception (start date) of the policy. In the event your flock goes hot and is depopulated a week after the policy is put in force, you would not receive a payment. This waiting period is similar to what is seen on flood insurance policies. It helps avoid adverse selection of risk, meaning the program would become unsustainable if participants could simply buy coverage immediately before it becomes highly likely that they would suffer a loss.
Can I cancel my policy?
You can cancel your policy at any time. You may be subject to minimum earned premium and taxes/fees that would not be refunded. Your premium refund would be based on any additional unearned premium.