Important to insure income as well as assets

It is the nightmare scenario. You’ve cleaned your store and it’s ready to take a crop worth hundreds of thousands of pounds, but overnight a fire on a telehandler spreads and burns the building down.

“This was the scene that greeted an onion growing customer of ours one morning,” says Tom Forster of insurance broker Farmers & Mercantile.

“For him the immediate problem was where to put his newly harvested onions. Fortunately, he had business interruption insurance cover that allowed him to hire alternative storage while his old store was rebuilt.”

Business interruption, loss of income, consequential loss and gross profit cover are all similar products which, if properly calculated, will pay for hired storage, production facilities or machinery to allow the business to continue to operate while the standard farm insurance deals with the reinstatement of the physical loss.

“A fire could put a store out of action for up to a year or more, while a flood in a commercial or residential unit might take even longer to sort out,” says Mr Forster.

If a business is to survive, it needs to still cover all its operating costs, points out NFU Mutual.

“It’s often not the damage to the buildings, stock and equipment that causes the business the most serious problems, but the income lost while the unit is out of production and the cost of overheads like rent, wages and interest charges which still have to be paid,” says a spokesman.

“Business interruption insurance can keep sufficient income flowing into the farm to enable it to survive the period while it is out of action.”

Loss of income can cover livestock or produce intended for sale but farmers who diversify should consider protecting other income sources such as commercial rent, says Pat Jones at farm insurance provider R K Harrison Insurance Services.

“The insurer will usually pay out the ultimate selling price – the amount that would have been received if the damage had not occurred. Reasonable extra expenses incurred to keep the farm running will also be paid, subject to adequate sums being insured.”

When calculating sums, farmers should work out their expected income during the period they want to insure, considering how long it will take to resume normal production and income following damage. The usual minimum indemnity period is 12 months, but to reinstate dairy or beef production might take longer.

Alan Goddard of Cornish Mutual urges farmers to carefully consider these calculations.

“Replacing a building might be delayed by the planning process, while hiring in specialist machinery may take time and be costly. This might be particularly relevant to dairy farmers who need replacement facilities very quickly.”

Typical business interruption cover costs from NFU Mutual:

* Premiums for typical cereal and dairy farms are shown below, based on a 12 month indemnity period. Rates vary according to location and risk from perils such as fire, flood and theft as well as other farm activities. Discounts may be available depending on other premiums paid for business insurance.

* For an arable unit with a total output of 2000t of cereals with a value of £280,000 based on £140/t, cover would cost £515 a year before Insurance Premium Tax (IPT).

* For a 200 cow dairy farm with a total output of £375,000 a year based on an average yield of 7500 litres a head and a price of 25p/litre, cover would cost £700 a year before IPT.

* All insurance should be reviewed at least annually and it is important to inform insurers through the year of changes to the business such as new activities or additions to machinery, equipment, livestock and staff.