Custom Farming and Farm Management
THE ISSUES
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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
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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
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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
CUSTOM FARMING AGREEMENT
Figure 1. Contract for custom farming for the year ________________.
PARTIES
This contract is entered into by (name) ______________________________________
of (address) ___________________________________________________________
contractor, and (name) __________________________________________________
of (address) ___________________________________________________________
owner, on (date) ________________________________________________________
DESCRIPTION OF FARM
The 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 PAYMENT
The 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 rates
Unit Rate
Field 1 Field 2 Field 3 Field 4
(acre, per hr., bu.) unit _____ ac. ____ ac. ____ ac. ____ ac.
Crop
_______ ________ ________ ________ ________ ________
Operation
chop 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.
COMMON AGREEMENTS
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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
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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
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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
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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
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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
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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
FLC
Direct Employer
Responsibility
Farmer / Landowner
Premises / Work
site 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
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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
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Which party(ies) has responsibility for assigning job duties and supervision
Severance terms and conditions, if any
Collection and payment of withholding taxes (proof of payment)
Compliance with labor laws, including unemployment
Record keeping and availability for examination
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
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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
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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?