5 December 1997

Loss of revenue cover – check the timescale

Loss of revenue cover can be

an important way of coping

with the effects of fires,

floods etc. But its important

to ensure the period of

cover is long enough

LOSS of revenue cover is an element of farm insurance which an increasing number of producers are considering. It caters for losses subsequent to a fire or other disaster, making up for lost income until normal production is resumed.

However, many who take out this type of cover do not get the best from it, because they do not give enough thought when setting up the cover to the likely risks and level of exposure, says Lincolnshire agricultural claims consultant Robert Day.

Mr Day, who retired from farming himself six years ago and is a member of the British Institute of Agricultural Consultants, now assesses claims on behalf of both farmers and insurance companies.

He says that the most common mistake with loss of revenue cover is for policyholders to opt for too short a period of time – known as the indemnity period – after an incident and in which the cover operates.

When assessing how much cover is needed and for how long, producers should look at their production cycle and think about what the impact of a fire or other incident might be, he advises.

Livestock is particularly at risk. With breeding livestock, the period of risk increases. With a dairy herd, loss of cows will also mean loss of milk, and a long haul before the herd is restored to its former production pattern.

Failure to take account of how long it takes to get back into production sees some farmers short of cash flow when they need not have been if they had calculated their risk more carefully, says Mr Day.

"For example, with a fire in a sow and fattening unit, the loss from the breeding side does not start the next day – it could be delayed for months and carry on for up to two years hence.

"The calculation should also take into account the likely increase in value over that period. For the fattening side, however, the cash loss could start immediately and be over within six months.

"Its important for each individual farmer to look at his areas of potential loss. He should ask himself – what are my risks? Fire, lightning, malicious damage, water, impact, earthquake and hail are the most commonly covered risks."

In some cases the risk may be too small to warrant specific cover, suggests Mr Day.

If cover is taken and at the end of the year the sum insured proves to have been too high because of market conditions, then insurers will usually rebate the proportion of premium overpaid by deducting it from the following years premium. If there is under insurance, normal penalties would apply.

Also, taking out loss of revenue cover (also known as loss of income cover) may mean that a producer is able to reduce cover elsewhere. For example, with a pig herd, sows and boars might be covered under the general farm policy while progeny would come under the loss of revenue section.

Producer obligation

It is important to check that premiums are not being wasted through duplication, points out Mr Day.

Under the terms of this type of cover, the producer is under an obligation to mitigate losses as far as possible when there has been an incident. Some may have no option but to sell stock at the bottom of the market if buildings have been destroyed, for example.

But in other cases it may be possible to rent buildings in order to carry on normal production. Depending on the financial return of such an undertaking, loss of income insurance may cover the cost of this.

After a combine loss through fire or theft at harvest, for example, loss of revenue cover would be likely to include paying for the cost of hiring a replacement machine.

It is also important that good performance and financial records are kept. This will help not only in calculating the level of cover needed, but will also help in supporting any claims, says Mr Day.

Loss of revenue cover is tailored to the individual business, so needs careful consideration. Producers have to be specific about what they want covered, for how long, and against what risks. The time scale for income loss is of crucial importance, says Mr Day.

Claims assessor Robert Day (left) says farmers need to think about what the short and long term effects of a disaster like fire or flood would be.