AGRIBUSINESS WEBINAR Underwriting And Risk Management Considerations

April 28, 2011

Ann Yachwak Senior Vice President Client Manager Reinsurance Division

Kelli Kukulka Senior Vice President Manager Agriculture Reinsurance Division

Presenters

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Agenda

Emerging Exposures – Defined

Agritourism

Organic Farms

Antibiotic Resistance

Key Takeaways

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Questions and Answers

Emerging Exposures – Working Definition(s)

New and developing risks and their related business opportunities that result from changes in risk factors with a high degree of uncertainty in terms of occurrence probability and loss amounts, and with a substantial potential impact on the company’s risk profile.

New, evolving, or previously benign, loss exposures or risks that have the potential to significantly impact insurance or reinsurance balance sheets or that provide material business opportunities that are currently not explicitly contemplated in coverage, pricing, or underwriting techniques.

Enterprise Risk Underwriting

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Emerging Exposures Underwriting Working List

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Aging Population

Fragile Global Economy

Climate Change

Exports to & Imports from Emerging Markets

Ethical/Political issues (e.g. Proposition 2)

Cyber-risks & Social Media

Technology (Alternative Energy, GMO, Nanotechnology)

Agritourism Overview

The Issue

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Origin

Problem

Estimated Magnitude

• All States – TX, CA, CO, SD, NJ, HI • 23,350 farms • $567 million in sales annually • USDA Program ‘Know Your Farmer, Know Your Food’ and Farmers

Market Promotion Program (FMPP)

• Problems associated with change in duty of care owed to these ‘business invitees’

• Additional legal complications stemming from non-farming business • Animal Welfare Act, Food safety & public health, liquor licenses, zoning

laws, building codes including ADA, taxation & permits

• Increasing in popularity - 2008 economic recession increased popularity of ‘staycations’ - opportunity to diversify & increase profits

• Small seasonal operations to large operations providing numerous consumer services year-round

Agritourism

Business Invitees

Animal Welfare Groups

Local Governing Bodies (Zoning/Building Codes/Permits)

Farmowner/CGL Insurer

Farmer/Operator

Contractors/Subcontractors

Manufacturers/Suppliers

Plaintiffs and Defendants

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$$$$

Plaintiffs Defendants

Complex, Fluid Situation…..

Agritourism

Key Legislation/Regulatory Action

22 states have Agritourism statutes (www.NationalAgLawCenter.org)

Liability protections, tax credits, zoning requirements

Recreational use statutes may apply

Legal Landscape

9 http://www.nationalaglawcenter.org/ http://www.animallaw.info/

Source: National Agriculture Law Center

Source: Animal Legal and Historical Center

Animal Welfare Act – applies when animals are exhibited, including farm animals

46 States have equine activity liability statutes

Animal Legal and Historical Center (www.animallaw.info/)

Agritourism

Notable Court Cases

Lawson v. Dutch Heritage Farms, Inc., 502 F.Supp.2d 698 (N.D. Ohio 2007) negligence

Lilya v. Greater Gulf State Fair, Inc., 855 So.2d 1049 (Al. 2003) operator liability-duty to

warn

Westfield Companies v. Knapp, 804 N.E.2d 1270 (In. App. Ct. 2004) farm stands and

insurance

Everett v. State Farm, So.3d, 2010 WL 1170202 (La. App Ct. 2010) damages from

horseback riding accident

Brennan v. Schappacher, No. CA2008-09-231, 2009 WL 501639, 2009-Ohio-927 (Ohio

App. Ct. 2009) injuries sustained during hay ride; assumption of risk; negligent assumption

of risk

Smith v. Phillips, No. M2009-00104-COA-R3-CV, 2010 WL 1221436 (Tn. App. Ct. 2010)

horse owner not entitled to immunity under equine activities law

Legal Landscape

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Agritourism

Standard Policy Exclusions…. Will they apply??

(a) Expected or Intended Are the injuries/damage excluded because the policyholders knew or should have known that the activity would lead to injury?

(h) Use of Livestock or Other Animals Does this exclusion apply to agritourism rides, etc?

(k) Business Pursuits How does this exclusion apply to agritourism? Considered farming?

Very fluid.........More questions than answers at this point. Many issues need to play out on a case by case basis in court.

Coverage Questions – Exclusions

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Agritourism

No Easy Answers

Risk Selection – Supplemental Applications

Classes – Which classes acceptable Experience – understanding past activities – critical Risk Management – compliance with law & best practices

Contain Limits / Defense Sub-limits for agritourism liability claims Defense within limit

Additional Exclusions – To Avoid Coverage Must be drafted carefully,

not too broad Consider impact on

standard exclusions

Agritourism – Most absolute approach but exclusion must be realistic ---May impact application of standard exclusions

Specific Classifications

Pricing – CGL or Incidental Business

Rate Adequacy -- can charge be made under FCPL or is GL a better match to hazard class?

Underwriting Considerations – Summary

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Agritourism

Organic Farms Overview

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The Issue Organic Farms

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Origin

Problem

Estimated Magnitude

• Organic produce commands price premium in agricultural industry - December 21, 2000 Organic Foods Production Act (OFPA) enacted - October 21, 2002 National Organic Program (NOP) implemented

• Sets national organic production & handing standards, labeling requirements, certification requirements

• Liability emanating from overspray and/or run-off of pesticides or herbicides, run-off of petroleum based fertilizers, cross-pollination with genetically engineered crops

• Does a commodity price differential constitute property damage?

• Top States – CA, WI, WA, NY, OR, PA, MN, OH, IA, VT and MI dominate

• 14,540 farms totaling 4.1 million acres • 10,903 USDA-certified and 3,637 exempt from certification • $1.7 billion in sales

Complex, Fluid Situation…..

Organic Farmer

Grower Cooperative

Processor/Mill/Packer

Community Supported Agriculture Groups

Farmowner Insurer

Traditional Farmer

GMO Developers

Custom Farmers/Contractors

Material Suppliers

Plaintiffs and Defendants

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$$$$

Plaintiffs Defendants

Organic Farms

Key Legislation/Regulatory Action

Legal Landscape

National Organic Program

− Organic Foods Production Act (OFPA), 7 U.S.C. §§ 6501-6522

− Agricultural Marketing Service final rule, 7 C.F.R Part 205

− Potential defenses found under § 205.290 “Temporary variances”

State Organic Program may apply (can be more restrictive than NOP)

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Organic Farms

Notable Court Cases

All One God Faith, Inc. v. Hain Celestial Group, Inc., No. C 09-03517 JF (HRL), 2009 WL

4907433 (N.D. Ca. 2009) claim that products do not meet NOP standards

Harvey v. Johanns, 494 F. 3d 237 (1st Cir. 2007) use of synthetic ingredients in processing

organic foods

Ongoing cases:

Missouri AG sues Armand & Teddi Bechard for distribution of raw milk in parking lot away

from farm premises.

Billy Goat Dairy Farm, Longmont, CO raw milk sickens 30 since June 2010.

Legal Landscape

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Organic Farms

Standard Policy Exclusions…. Will they apply??

(a) Expected or Intended Are the injuries/damage excluded because the policyholders knew or should have known that their activity would lead to damage of organic?

(c) Pollution Is the run-off; overspray; pollen drift “pollution” if the Pollutants are brought to the job site by acts of nature?

(j) Custom Farming Apply the same to organic farming?

Very fluid.........More questions than answers at this point. Many issues need to play out on a case by case basis in court.

Coverage Questions – Exclusions

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Organic Farms

No Easy Answers

Risk Selection – Supplemental Applications

Classes – Which classes acceptable Experience – understanding past activities – critical Risk Management – compliance with law & best practices

Contain Limits / Defense Sub-limits may not be practical Defense within limit

Additional Exclusions – To Avoid Coverage Must be drafted carefully,

not too broad Consider impact on

standard exclusions

Organic farming – Most absolute approach but is such an exclusion realistic

Specific Classifications – Raw milk sales, etc.

Underwriting Considerations – Summary

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Real Milk Resource www.realmilk.com/where1.html

Organic Farms

Antibiotic Use in Livestock Overview

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Origin

Problem

Estimated Magnitude

The Issue

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• On the agricultural side, low-dose antibiotics used for over 50 years to prevent disease or promote growth do not kill the disease.

• On the human side, antibiotics are still widely misused. Often, the diagnostics used to determine what bacteria is ailing a person are not precise, so the doctor will use a broad spectrum antibiotic. Broad spectrum drug may not kill the specific bug, instead making it stronger.

• Recently Documented Outbreaks - 2006 E coli outbreak traced to spinach contaminated from livestock waste run-off - 2010 Salmonella outbreak in eggs

• Food Cycle: Recall, Forget, Repeat

• 28.7 million pounds of antibiotics used annually in US livestock operations • 48 million Americans impacted (1 in 6 people) • Reported in 35 States – CA, IA, FL,TX, MS, OH and NC dominate • Ultimate scope of the problem still to be determined

Antibiotic Resistance

Consumers

Food Safety Watchdog Orgs

State & Local governing bodies

Food Processors & Suppliers

Importers / Exporters

Farmowners

Food Processors & Suppliers

Insurers

Pharmaceutical Industry

Importers / Exporters

$$$$

Plaintiffs Defendants

Complex, Fluid Situation…..

Plaintiffs and Defendants

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Antibiotic Resistance

Key Legislation/Regulatory Action

December 19th, the Senate passed food-safety legislation intended to improve safety standards and give the FDA the power to order recalls.

Among the biggest red flags in the FDA Food Safety Modernization Act (S. 510) is a provision that would exempt farmers and ranchers who earn $500,000 or less in annual sales and sell most of their food directly to consumers, local restaurants or retailers within a 275-mile radius or within the same state from much of the federal oversight the bill mandates.

An estimated $1.3 billion in additional funding to implement the additional oversight is the next major hurdle for this legislation.

July 2009, Rep. Louise Slaughter (D-NY) introduced the Preservation of Antibiotics for Medical Treatment Act (H.R. 1549) and the late Sen. Edward Kennedy (D-MA) sponsored the Senate version of the bill. Did not pass…

September 2010 – (S. 3767) Sen. Patrick Leahy (D-VT) The Food Safety Accountability Act would establish appropriate criminal penalties for certain knowing violations relating to food that is misbranded or adulterated. Did not pass…

Legal Landscape

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Antibiotic Resistance

Notable Court Cases

September 2010 – Dwyer v. Quality Egg LLC, 10-cv-05847, U.S. District Court, Northern

District of Illinois (Chicago).

11/15/10 – New York Times headlines “BETTING ON JUSTICE: Putting Money on

Lawsuits, Investors Share in the Payouts”

February 2010 in the U.S. District Court of the Northern District of California, the Oceano

Packing Company is suing True Organic Products and Western Farm Service for selling

fertilizer contaminated by salmonella.

Legal Landscape

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Antibiotic Resistance

1st party insurers appear to have strong coverage positions….

Coverage not likely to be routinely applied except in cases of weak policy wording

3rd Party Coverage will be the focal point of the issue going forward • Multiple coverages – CGL; Umbrella; Misc. Professional (e.g., consultants E&O) • Multiple parties – Grower; Processor; Importer, etc.

3rd Party Exposures and Coverage

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Consumer Distributor Food Safety Inspection Processor Farmer/Producer

Antibiotic Resistance

Standard Policy Exclusions…. Will They Apply?

(a) Expected or Intended Are the injuries/damage excluded because the policyholders knew or should have known that the use of antibiotics would lead to the development of resistant bacterial strain?

(f) Pollution Is the run-off of resistant bacteria found in animal waste “pollution”?

(j) Your Product How does this exclusion apply to the meat or eggs or the animal itself? To animal waste products? Is it fertilizer (product) or is it by-product (waste)?

Very fluid.........More questions than answers at this point. Many issues need to play out on a case by case basis in court.

Coverage Questions – Exclusions (1 / 2)

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Antibiotic Resistance

Standard Policy Exclusions…. Will They Apply?

(n) Product Recall No coverage in the CGL. If purchased separately review terms as no standard exists. Is the withdrawal, inspection, repair, replacement, or loss of use excluded if the product is withdrawn voluntarily? Ordered by government authority?

(h) Use of Livestock or Other Animals Does this exclusion apply to agritourism rides, petting zoos, fairs & exhibitions, etc?

(k) Business Pursuits How does this exclusion apply to agritourism, processed cheeses, meat processing, milk sales to public? Considered farming?

Very fluid.........More questions than answers at this point. Many issues need to play out on a case by case basis in court.

Coverage Questions – Exclusions (2 / 2)

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Antibiotic Resistance

No Easy Answers

Risk Selection – Supplemental Applications

Classes – Which classes are acceptable? Actual Work – Understanding past activities - critical Risk Management – Compliance with law & best practices

Contain Limits / Defense Sub-limits for bacterial contamination claims Defense within limit

Additional Exclusions – To Avoid Coverage Must be drafted carefully,

not too broad

Agritourism – Most absolute approach but exclusion must be realistic ---May impact application of standard exclusions Prior Work – Excludes work that was started (or completed)

prior to the policy period – Best alignment of exposure and premium

Underwriting Guidelines Pricing – CGL or Incidental Business

Specific Classifications – Raw milk Rate Adequacy -- Can charge be made under FCPL or is GL

a better match to hazard class?

Underwriting Considerations – Summary

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Antibiotic Resistance

Key Takeaways

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Fluid, Rapidly Evolving Issues – Many Challenges; Stay Pro-active

Casualty More Likely To Be Seriously Impacted Than Property

Policy Wording A Key Wildcard >>>> Triggers, Exclusions, Etc.

Court Jurisdiction State vs. Federal; Treatment of Coverage Questions

Risk Selection / Coverage Focus on past as well as present operations and exposures; Consider interaction among trends

More Information

Contact your Munich Re Client Manager for additional information.

Kelli Kukulka kkukulka@munichreamerica.com 312.993.8478

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More Information Client Resources

Discuss specific emerging exposures

Resources and information concerning lines of business, industry topics, claims, timely insurance news, and training Publications, presentations, newsletters, white papers, state

profiles, and more. connect.munichre.com

Produced quarterly Provides the latest news, reports, and publications available on

many emerging issues that could have an effect on future claim and underwriting activity

Emerging Exposure Newsletter

Connect – Extranet Site

Client Visit

Your company’s Munich Re Client Manager or HSB Client Company Manager is your first point of contact to discuss all of these services.

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THANK YOU FOR ATTENDING

© Copyright 2011 Munich Reinsurance America, Inc. All rights reserved. "Munich Re" and the Munich Re logo are internationally protected registered trademarks. The material in this presentation is provided for your information only, and is not permitted to be further distributed without the express written permission of Munich Reinsurance America, Inc. or Munich Re. This material is not intended to be legal, underwriting, financial, or any other type of professional advice. Examples given are for illustrative purposes only. Each reader should consult an attorney and other appropriate advisors to determine the applicability of any particular contract language to the reader's specific circumstances.