Custom Farming and Farm Management

THE ISSUES

Economic pressure creates need for additional income and better, more profitable use of land

Important to make a distinction between Custom Farming and Farm Management

Legal relationships and insurance implications are different

CUSTOM FARMING

• History• Special expertise (examples: planting,

cultivating, harvesting, breeding, feeding, etc.)• Available labor and specialized equipment• Custom farmer farms his/her own land as well• Landowner maintains principal control of the

land and methods of production

CUSTOM FARMING

• Your Client: Has a custom farming operation performed on his or her land

• EXAMPLE: Hires someone with special equipment to harvest this year’s crop

CUSTOM FARMING

• Your Client: Performs a custom farming operation for someone else• EXAMPLE: Client has special knowledge or expertise in planting a certain

crop and is hired by another farm owner to plant this year’s crop – but still farms her own land

CUSTOM FARMING

• Landowner pays all costs of production, aside from the fee paid to the custom farmer

• Examples: seed, chemicals, materials used in planting, growing and harvesting

• Landowner receives the proceeds from the sale of the crop and any insurance payments or payment from government programs

• Custom farmer receives a flat fee or other negotiated amount

But always keep in mind, this can vary!

FARM MANAGEMENT

• Contrasted with Custom Farming• Farm Manager has a substantial agricultural

background and provides a vast array of services• Examples: what to plant, when to plant, how to plant,

what types of chemicals to apply, fertilization techniques, etc.

• Provides services to others, but does not actively farm himself/herself

FARM MANAGEMENT

• Involved in all aspects of farm operations• Compensated with the actual receipts derived from farm operations• Landowner receives a percentage of the receipts or other negotiated

amount• Some are paid a salary and bonus based on production• Landowners does not make material decisions

WHY LANDOWNERS HIRE FARM MANAGERS

• Owner lacks the interest in or knowledge of farm operations• Owner wishes to retire from farming, but keep the land• Owner does not reside on the farm property• Owner is engaged in another profession• Owner is seeking increased profitability from farm operations• Owner does not wish to have tenant farmers or lease the land to

others

FARM MANAGEMENT

• Sometimes short-term or limited basis• Farm Manager is paid a consulting fee• Example: farmer is seeking increased yield and hires a consultant with

special expertise in that crop, but only for the current growing season• Owner retains decision-making• The service is advice, not farm operations

FARM MANAGEMENT AS A PROFESSION

• American Society of Farm Managers and Rural Appraisers (ASFMRA)• Accredited Farm Manager (AFM) designation• Accredited Agricultural Consultant (AAC) designation

VARIATIONS IN FARMING AGREEMENTS

• Landowner and Contractor must create an agreement for services

• Agreement will outline the insurance and other risk management issues of each party

• Contract will specify if it’s for farm management or custom farming

And farmers and ranchers are very good about putting things into a legal agreement!

COMMON AGREEMENTS

• Custom Farming Agreement– Sets forth the specific operations to be performed– Includes type of services, dates of service, terms of payment, responsibilities

of each party• Farm Management Agreement

– Services to be performed, including purchase of inputs, labor, record keeping, marketing and sale of crop or livestock, maintenance of equipment, etc.

– Creates additional legal duties since Farm Manager is agent for the landowner and has a professional duty

Figure 1. Contract for custom farming for the year ________________.PARTIESThis contract is entered into by (name) ______________________________________of (address) ___________________________________________________________contractor, and (name) __________________________________________________of (address) ___________________________________________________________owner, on (date) ________________________________________________________

DESCRIPTION OF FARMThe contractor agrees to perform custom farming operations for the owner on the following land or parcels of land: (include county, township, and section number) _____________________________

METHOD OF PAYMENTThe contractor agrees to submit to the owner an itemized written statement of work completed after (date, or last operation to be completed)___________________and ______________________.The owner agrees to make payment to the contractor within _______ days after receiving the statement.

CUSTOM FARMING AGREEMENT

PROCUREMENT OF SUPPLIES(describe who is responsible for the purchase and delivery of seed, fertilizer, chemicals and other supplies, and procedure for reimbursement, if any) ____________________________________________________________________________________________________________________________________________OTHER PROVISIONS(parties may wish to include language regarding bonus or incentive payments, contractor’s right to subcontract, or owner’s right to hire a different contractor) __________________________________________________________________________________________________________________________________________________________________________________________________________________

CUSTOM FARMING AGREEMENT

Figure 2. Acres, field operations and ratesUnit Rate Field 1 Field 2 Field 3 Field 4(acre, per hr., bu.) unit _____ ac. ____ ac. ____ ac. ____ ac.Crop _______ ________ ________ ________ ________ ________Operationchop stalks ________ ________ _______ ________ ________ ________chisel plow ________ ________ _______ ________ ________ ________tandem disk ________ ________ _______ ________ ________ ________spray ________ ________ _______ ________ ________ ________field cultivate ________ ________ _______ ________ ________ ________plant ________ ________ _______ ________ ________ ________spray ________ ________ _______ ________ ________ ________combine corn ________ ________ _______ ________ ________ ________combine soybeans________ ________ _______ ________ ________ _______dry grain ________ ________ _______ ________ ________ ________haul grain ________ ________ _______ ________ ________ ______________________ ________ ________ _______ ________ ________ ________1/ Fields may be described on page one of the contract, or on an attached map or description. Indicate with an X which operations are to be performed on each field. Several fields may be combined into the same column if the same operations will be performed on each of them.

CUSTOM FARMING AGREEMENT

COMMON AGREEMENTS

• Farming Joint Venture Agreement• Farming Partnership Agreement• Custom Feeding Agreement• Lease Agreement

INSURANCE ISSUES

INSURANCE FOR CUSTOM FARMING

• ISO Farm Liability Coverage Form (FL 00 20)– Covered as an exception to an exclusion (2.j.)– Receipts must be $5,000 or less

This insurance does not apply to:

j. Custom Farming

"Bodily injury" or "property damage" arising out of the "insured's" performance of, or failure to perform, "custom farming" operations.

But this exclusion will apply only when your receipts from "custom farming" operations exceed $5,000 for the 12 months immediately preceding the date of the "occurrence";

ISO DEFINITION

"Custom farming" means performance of specific planting, cultivating, harvesting or similar specific "farming" operations by an "insured", at a farm that is not an "insured location", when the performance is for, and under the direction or supervision of, the owner or operator of the farm or the authorized representative of the owner or operator. But "custom farming" does not mean:

a. Operations conducted at a premises rented to, leased to or controlled by an "insured";

b. Operations for which no compensation in money or goods is received; or

c. A neighborly exchange of services.

AAIS 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.

ISO ENDORSEMENTS

• FL 04 69 Custom Farming Liability Coverage– Used when receipts exceed $5,000– Requires identification of specific work performed– Estimated annual receipts– Rate per $1,000– Auditable exposure– Can be added to CGL

• Endorsement to CGL– Broad Farm Premises Liability (FL 04 37)

• Carrier proprietary forms

OTHER CONSIDERATIONS

• Coverage is only provided for BI and PD• No coverage for decreased yield, market price changes, or other economic

losses – important to handle this in the contract• Coverage may be available under specific policies• No definition of “farm management”

INSURANCE FOR FARM MANAGEMENT

• Management firm typically provides insurance for the farming operations• “Master” policy for all landowners to whom services are being provided• Landowner maintains liability coverage for the ownership of the property• Insurance requirements are detailed in the contract

INSURANCE FOR FARM MANAGEMENT

• Professional liability exposures– Failure to render sound advice– Failure to perform services– Negligent rendering of services

• Farm Liability Coverage Form contains a professional services exclusion (2.k.)This insurance does not apply to:

k. Professional Services

"Bodily injury" or "property damage" arising out of the rendering of, or failure to render, professional services;

• Requires a Farm Management E&O Policy

COMMON PROVISIONS

• Exclusion of BI and PD• Exception to the PD exclusion for damage caused in “normal farming

operations”• Exclusion for farm labor contracts and other employment-related losses• Exclusions for market risk

CAUTION: Since this is usually written using a Miscellaneous Professional Liability form, be careful and review each policy!

OTHER FARM CONTRACTS

It’s

CONTRACT DEFINED

• A legally binding agreement involving two or more people or businesses that sets forth what the parties will or will not do. – Can be oral (with some exceptions) or written

• Requires– Agreement (“meeting of the minds”)– Competent parties– Legal purpose– Consideration

CONTRACTS AND RISK MANAGEMENT

Using a Risk Management Approach is essential to establishing your value as a trusted advisor to your

clients, not just someone who takes orders for insurance policies and procures them from an insurer

RISK MANAGEMENT DEFINED

• Risk Management is an organized method used to protect an individual or organization from financial harm by identifying, analyzing, controlling risks at in the most efficient and cost-effective manner to accomplish the client’s objectives

• Risks can either be controlled (avoided, prevented, reduced) or financed (insured, retained, transferred to others)

• Non-insurance risk transfer (usually accomplished via contract) is an important and essential part of a sound risk management program– May INCREASE risk for either party– May DECREASE risk for either party

EXAMPLES OF AG CONTRACTS

• Purchase agreements• Warehousing• Processing• Transportation• Farm labor• Custom farming• Farm management

The most important part of risk management is understanding the nature of the contract and the indemnification agreement

CONTRACT CONCERNS - Indemnification

• “Indemnification” means different things– Broad– Intermediate– Limited

• Implied indemnity (common law)• Express indemnity (contract law)

CONTRACT CONCERNS - Indemnification

• South Dakota - generally, in order to relieve a party of the consequences of its own negligence, the language of an indemnity or hold harmless agreement must be clear and unequivocal and any doubts are to be resolved in favor of the indemnitor. Indemnification for an indemnitee’s sole negligence is disallowed. The key to interpreting an indemnity agreement is the intention of the parties. Courts in South Dakota have found the intent to indemnify against a party's negligence, even though the term “negligence” is not actually used, where such intent is clearly expressed.

CONTRACT CONCERNS - Indemnification

• Negotiation of contract terms based on– Size of contracting parties– Supply and demand– Sophistication of contracting parties– Involvement of attorneys and insurance professionals

• Wording of the indemnity agreement– “Clear and unambiguous”– Intent– Compliance with law

CONTRACT CONCERNS - Indemnification

• The efficacy of a contractual risk transfer is only as good as the indemnitor’s ability to pay– Insurance requirements

• During the term of the contract• After completion of the contract

– Additional insured status v. Contractual liability insurance– Defense should always be addressed

FARM LABOR CONRACTS

• Multi-jurisdictional issues• Both grower and FLC must comply with all laws• If the risk transfer to the FLC fails, grower is responsible

Employee

Farmer / Landowner

Premises / Work site responsibility

FLC

Direct Employer Responsibility

BORROWED SERVANT DOCTRINE

• Three criteria– Express or implied contract between PEO/FLC and “special

employer” (farmer)– Employee engaged primarily in work for the “special employer”– “Special employer” controls work details (can be modified by

statute, common law or contract)

• “The vital test in determining whether a workman furnished by [the primary employer] is a servant of [the special employer] is whether they (the employee(s)) are subject to the “special employer’s” control or right of control not only with regard to the work to be done but also with regard to the employee’s manner of performing it.” 

FARM LABOR CONRACTS

• Advantages to the farmer– Access to labor– FLC can provide loss control / legal services– Less cost (payment of fee less than cost of labor, workers compensation, etc.)

• Disadvantages to the farmer– Loss of control – limited right to approve / disapprove of ee’s– Could have to pay twice (to FLC and to government)– FLC may lose valuable workers– Third party EPLI exposure may not be dealt with in contract

FARM LABOR CONTACT REVIEW

1. Which party(ies) has responsibility for assigning job duties and supervision

2. Severance terms and conditions, if any

3. Collection and payment of withholding taxes (proof of payment)

4. Compliance with labor laws, including unemployment

5. Record keeping and availability for examination

6. Compliance with all licensing, permit, health and safety, wage and hour, transportation, etc. laws

7. Clarify intent of state of hire, state of work, state of injury

8. Confidentiality / intellectual property addressed in contract

9. First and third party EPLI issues addressed

10. Fidelity or other bonding requirements

FARM LABOR CONTACT REVIEW

• Indemnification agreements not overreaching• OSHA compliance addressed• Insurance or approval for self-insurance, RRG, RPG or large deductible

plan– Copies of policies– Certificates of insurance– Additional insured status– Waivers of subrogation– Notice of cancellation– Notice in event of loss– Alternate Employer Endorsement

FARM LABOR CONTACT REVIEW

• Warranties and indemnification provisions as to– Reporting of payroll– COBRA compliance– ERISA compliance– Records, forms, handbooks– IIPP and training– EEOC and state labor laws– Driver or state vehicle licensing laws

CONCLUSION

• Contracts are an important and necessary part of a good risk management program

• Many insurance buyers do not understand the risk management or insurance ramifications of the contracts into which they enter

• Coverage gaps can be created in the insurance program when contracts are not handled properly

• Keep clients informed and offer to work with (not in lieu of) their attorney to help protect their assets

Other than that, how did you like the play Mrs. Lincoln?