Gayle Van Leer photo

WHY INSURE?
HORSE OWNER LIABILITY INSURANCE
MAJOR MEDICAL INSURANCE
MORTALITY INSURANCE
COVERAGE DIFFERENCES BETWEEN FULL MORTALITY POLICIES
MARE FERTILITY COVERAGE (Guaranteed Live Foal)
AIR TRANSIT COVERAGE
IMPORTATION COVERAGE
CLAIMING INSURANCE
HOW PREMIUM RATES ARE DETERMINED
COVERAGE DISPUTES
THE PLAYERS (AGENTS, BROKERS, INSURERS AND UNDERWRITERS)
STALLION INFERTILITY COVERAGES
APPENDIX A: LARGE CLAIMS BETWEEN 2001 AND 2004
APPENDIX B: INSURANCE COMPANIES AND AGENTS


WHY INSURE?

One good reason for you to purchase insurance is that it is priced very competitively and closely tracks what loss experience you are going to have whether you are insured or not. Instead of being subject to the vagaries of Mother Nature, buying insurance breaks down the loss factor into predictable increments. In a sense, it is a useful planning device to ensure that you budget for the inevitable horses that die or foals that don’t get born.

But, the best reason to insure is that Mother Nature is very unpredictable, at least during the short term. Even the best cared-for horses sometimes die just when they are reaching their peak value. A partial listing of just the most famous and expensive horses which died between 2001 and 2004 is attached as Appendix A. This doesn’t begin to cover all the “ordinary” $250,000 and $500,000 horses which died.

As a horse owner you should also protect yourself from the unpredictable nature of horses who without warning may cause injury, death or property damage to a third party.


HORSE OWNER LIABILITY INSURANCE

Horse Owners Liability is insurance that covers injury or damage to persons or property caused by the horse. It is the equine equivalent of product liability or medical malpractice coverage. Some people assume they are covered for this in their homeowner’s policy, but homeowner policies almost always exclude “commercial pursuits” from coverage. So, any obvious commercial horse activity, such as a racing stable or show horse operation, would not be covered.

Insurance experts consider this form of insurance really mandatory for a horse owner as without it, your entire net worth might be at risk if your horse accidentally injured or killed someone. In today’s litigious society, you could be sued for negligence and, even if the case is ultimately decided in your favor, the legal expenses of defending yourself could be sizeable. Most Owner Liability policies will cover any damages you might be liable for and your legal expenses.

Horse Owners Liability Coverage is a standard part of a Farmowner policy. If you don’t have a large enough operation to justify a Farmowner policy, you can purchase coverage through a Private Horse Owners Liability policy. The cost for $1,000,000 of liability coverage is currently $95 per horse, with a $190 minimum policy premium.

A Horse Owners Liability policy typically does not cover injuries to employees of the horse owner who care for the horses. A Workers’ Compensation policy will be needed for such coverage.

A Horse Owners Liability policy also does not typically cover damages to horses boarded for other owners which are under your care, custody and control. There is specialized coverage for that exposure and the cost depends on the number of horses being boarded and their values. For example, if you board twenty (20) horses owned by others and the most valuable of the horses is $200,000 or less, you could probably get $500,000 in Care Custody and Control coverage for about $1,650 per year. If the maximum value of any one horse was $50,000 or less, the premium for this same number of horses would likely drop to approximately $825 for $250,000 total coverage.

MAJOR MEDICAL INSURANCE

Anyone who has paid veterinary bills can appreciate how easy Major Medical insurance is to sell. This relatively inexpensive type of coverage is widely used for show horses and for racehorses which have been retired to breeding. It is usually not offered for horses being used for racing because of the rigors of training. Typically, the cost of $10,000 of Major Medical coverage is about $275 per year per horse.

It is very important to compare Major Medical policies to determine what veterinary procedures are covered. Some companies take the position that only life-threatening conditions are covered, and, oftentimes, the diagnostic work-up to determine whether it is life-threatening may end up not being covered.


MORTALITY INSURANCE

The types of coverage which involve the most premium dollars are mortality and fertility insurance which fall in the category of “discretionary purchases”. That is because the typical horse owner is usually wealthy enough to self-insure if the cost of the insurance isn’t fair. In effect, this competition from self-insurance is what has always kept the horse mortality and fertility market very competitive.

There are two broad types of coverage against death of the horse.

• Specified Perils (Fire, Lightning, Transportation, and Windstorm) coverage starts as soon as coverage is bound -- examination of the horse is not required. It costs between ½% and 1% of the horse’s value. It does NOT cover the most frequent causes of death – colic, other sicknesses, diseases or injuries.

• All Risks (or “Full”) Mortality covers most causes of death and the premium rate is usually about 3% to 5% per year. So, a $100,000 yearling would cost about $3,000 per year to insure. Larger stables often use an “annual aggregate deductible” approach which gets the premium rate down to the 1.5% to 2% range. The deductible is normally about 2% of the total insured value on the policy.

Full Mortality coverage usually requires a veterinary examination to prove the horse is in good health prior to inception of coverage. Vet exams are frequently waived for horses insured at “fall-of-the-hammer” at public auction (based on the premise that a buyer has had a more extensive “pre-purchase” exam done by a veterinarian prior to bidding on the horse).

Veterinarians should not delay completing an insurance exam pending a horse’s recovery from a sickness or injury. There is some debate between veterinarians and underwriters as to whose job it is to determine if a horse is insurable. It is not really the veterinarian’s job, although some still believe it is. The veterinarian’s role is to use his/her expertise to accurately evaluate and report on the horse’s health. It is then the underwriter who ultimately must decide whether the condition is acceptable. Naturally, opinions differ among underwriters.


C0VERAGE DIFFERENCES BETWEEN “FULL” MORTALITY POLICIES

• Renewability -- Most companies require evidence of good health (via an updated veterinary exam) prior to each annual policy renewal. If a horse is sick or injured at renewal, the companies will provide an “extension of coverage” for 30 days to 1 year (depending on the extent of coverage purchased by the horse owner). If the horse dies during the extension period as a direct result of the sickness or injury previously reported, a claim is typically honored (assuming proper veterinary care was provided).

If the horse is still alive at the end of the extension period, there are typically three options:

(1) terminate coverage;
(2) continue coverage at a higher premium rate that reflects the increased risk; or
(3) continue coverage with an exclusion for the (now) pre-existing condition.

Higher valued horses are generally scrutinized more carefully before coverage is renewed if the horse has become impaired.

Some insurance policies contain a “Guaranteed Renewable” provision (without any veterinary exam requirement) for horses up to 14 years of age. The company specifically agrees to continue coverage at standard rates regardless of the horse’s health. After age 14, renewal is subject to an acceptable veterinary exam just like most other companies.

• “Actual Cash Value” vs. Agreed Value – Many companies have an “actual cash value” type of coverage, whereby they reserve the right to pay the “actual cash value” (as they determine it) immediately prior to the injury or sickness that leads to death. Racehorse values fluctuate constantly depending on recent “form”. Even the value of a broodmare can change sharply depending on the stallion to which she has been bred (and whether she is in foal or has aborted), and based on whether the mare has an early or late “last service date”.

A policy with Agreed Value is superior to an Actual Cash Value policy. There is no extra charge to have an Agreed Value policy vs. an Actual Cash Value, you just need to request it in the beginning and you and the insurance company need to come to a value. If the horse has previously been insured for its full value and the value declines, a new value can be negotiated. Usually the insured will initiate a reduction in value before the insurance company even notices the horse has declined in value. Most people are not looking to over insure their horses and want the premium refund that will result from a reduction in coverage.


MARE FERTILITY COVERAGE (Guaranteed Live Foal)

Stallion seasons are usually purchased on either a “live foal” (LF) or “no-guarantee” (NG) basis. With a NG season, the purchaser bears all the risk of his mare failing to conceive or produce a live foal. In fact, even if the stallion dies before ever covering the mare, the NG season owner is usually not entitled to any refund.

There are different versions of LF contracts, but the common thread in all is that the purchaser gets his/her money back (or does not have to pay it in the first place) if his/her mare does not produce a LF which can “stand and nurse”.

An NG season is typically sold for much less than a LF season. If the discount is great enough, it could save you money if you purchase the NG season and use an insurance policy to convert it to the equivalent of a LF contract.

This can be done via what we call a Conception and Prospective Foal (C & PF) policy.

With the use of insurance, the NG contract can actually be made superior to the LF contract. This is because the LF guarantee in a LF contract is usually not transferable if the mare is sold. In fact, there are some LF contracts that terminate the LF guarantee as soon as the mare shows up in a catalog for a public auction. In contrast, if you have purchased a NG season and used insurance to guarantee that a live foal will be produced, the coverage can be transferred to a new owner. Obviously, this could be an inducement for the prospective new owner to pay a higher amount for the mare.

Alternatively, as the original owner of the mare, you could simply request termination of the insurance policy once the mare has been sold. In this case, you would be entitled to a refund for the unused portion of the insurance coverage.


AIR TRANSIT COVERAGE

Broadly speaking, there are two types of mortality coverage during an air shipment between different countries. Some policies provide coverage only for death during the transit, due, for example, to a crash. Other, more suitable, policies also provided coverage for illnesses contracted during shipment which lead to death after the transit is completed.

IMPORTATION

In order to reduce the risk of disease transmission, almost all countries have quarantine requirements for newly arrived animals. Our USDA has certain blood tests that must be performed during quarantine which must be passed before an animal is released for permanent entry in to the USA. It is possible to purchase insurance to protect against a horse being denied entry into a country (called Frustration of Import coverage).

HOW PREMIUM RATES ARE DETERMINED

Underwriters develop rate tables by charting historical trends and these are the rates filed with the various State Insurance Departments. But, in the final analysis, competitive pressures in their rawest form often forge rates. For example, from 1986 to 2002, rates for horse insurance were under considerable downward pressure and many companies consistently lost money. Some experts believe there were simply too many companies wanting to write horse insurance. It took the combined onslaught of Mare Reproductive Loss Syndrome in 2001 and 2002, numerous and huge Stallion losses all over the world, the terrorist attack on the World Trade Center and the collective D&O coverage debacles at Enron, Tyco and World Com to turn things around. There were no less than six MAJOR markets for horse insurance that ceased writing coverage between 2001 and 2004. In addition, most underwriters at Lloyd’s cut back on their maximum exposure per horse during this same period.


COVERAGE DISPUTES

One of the most frequent mortality insurance disputes arises because the owner fails to provide proper notice of sickness or injury to one of their horses. Insurance carriers almost always require immediate notice of life-threatening injuries or sickness. Generally, it is not a valid defense that the owner was unaware of the condition requiring notice. It is the owner’s obligation to inform the people taking care of their horses that they are insured, and that the insurance company must be called immediately if the horse is sick or injured. The reason insurance companies are very sensitive to this provision is that they want to be certain that proper (and sufficient) veterinary care is being provided.

What constitutes “immediate notice” depends somewhat on the severity of the problem, but is generally in terms of minutes or hours rather than days

One rule of thumb on what is a “life-threatening” condition is any condition where the veterinarian cannot reasonably give assurance that the condition is not and likely will not be life threatening.

Another possible coverage dispute arises if a horse is transported to another country without informing the insurance company. Most mortality policies have a defined coverage territory and if the horse is transported to a different country, the owner must notify the insurance carrier, and perhaps be subject to an additional premium. After all, the hazards one might face in Iraq might be a bit greater than Lexington, Kentucky.

THE PLAYERS (AGENTS, BROKERS, INSURERS AND UNDERWRITERS)

Some insurance brokers go to great lengths to stress the difference between themselves and insurance agents. Technically, a broker represents only the customer and is supposed to have access to many different insurance companies, whereas an agent is thought to represent the insurance company’s interests.

The fact of the matter is most of the leading horse insurance agents now represent multiple companies. The agents find this is a competitive necessity, and they routinely get quotations from two or more companies before making a recommendation to their client.

The Lloyd’s of London “market” is actually made up of about nine underwriting “entities”. The entity may be an insurance company such as XL Capital or the Lexington Insurance Company (a division of AIG) or they can be syndicates which issue coverage only under the Lloyd’s of London banner. Each of the nine entities at Lloyd’s has a maximum capacity per individual horse depending on their financial backing and appetite for risk.

Every admitted company must file their premium rates and policy forms in compliance with the Insurance Department regulations in each state where they transact business. Premium rates vary by age and use of the horse. For example, a horse currently racing commands a premium rate of roughly 4.5 – 5.5%, whereas the rate for a young broodmare, stallion, or yearling is about 3.25%. Some leeway in rates is generally permitted by the company’s rate filing. The simplest example of this is a volume discount for large amounts of coverage. In addition, each underwriter will generally have his own view as to which category of horses offers the best profit potential and will tend to be more “receptive” to horses in those categories. Since there are only a relative handful of underwriters, the better agents know the type of risk each underwriter prefers and will direct his business accordingly. For example, underwriters who have had a long and profitable association with a particular farm may be extra competitive for any client who boards at that farm, even if the client might not qualify on his own for a volume discount.

Underwriters at Lloyd’s can choose to work together on a particularly high valued horse, or group of horses, or they can choose to compete with one another just like they would do against an American company. Some underwriters prefer to go it alone, or at least be the “lead underwriter” (and, typically, take the largest share of the exposure) even when they are working in cooperation. Others prefer the exact opposite and almost never take the lead. Some Lloyd’s brokers, however, will occasionally bypass the agents and deal directly with the retail customer.

The two largest American companies insuring horses are North American Specialty Insurance Company (Swiss Re Group) and Great American Insurance Company. Appendix B list agents that write policies for the various companies.


STALLION INFERTILITY COVERAGES

• “ASD” - Permanent and total infertility caused by an Accident, Sickness or Disease which manifests itself during the policy period. Usually costs .5% to 1.0% per year. It can typically be added as an endorsement to either a Mortality or a First Season Infertility (FSI) policy. Most companies have similar policy wording.

• “FSI” - First Season Infertility coverage guarantees a new stallion will achieve a pre-agreed conception rate (typically 60%) during his first season at stud. The usual premium rate is between 5% and 6% of the insured value, depending on the expertise of the farm where the stallion will stand at stud, the breadth of coverage required and the total amount of coverage being purchased.

This coverage is not standard and is often custom-tailored to fit the needs of the stallion syndicate agreement or management preferences of the farm at which the stallion will stand at stud.

The determination of infertility is, by its very nature, imprecise and subject to interpretation. It is rarely a “dead or alive” issue like in mortality coverage.

It is imperative to tie the breeding contract and/or syndicate agreement to the terms of the FSI policy to alleviate problems for the stallion syndicate manager.


KEY POLICY DIFFERENCES IN FIRST SEASON STALLION INFERTILITY COVERAGE

• Rollover vs. Non-Rollover -- A “Rollover” policy is one where the company has the option to not pay the claim after the first year if it looks like the stallion can improve and reach the agreed fertility percentage in the second year.

A “Rollover” policy puts the depreciation risk on the stallion owner(s) rather than the company. Even if the stallion does improve in fertility the second year, the first foal crop will be small, thereby diminishing the stallion’s chance of success as a stud.

“Rollover” policies are particularly onerous for lower valued stallions (up to $10,000 stud fee). Mare owners will not risk their mares to a sub-fertile stallion unless there is a way to create a “bargain” by reducing the stud fee the second year. With a lesser valued stallion, one cannot drop the stud fee far enough to get quality mares the second year.

• Withdrawal of Mares Prior to End of Breeding Season - In most cases, a really fertile stallion will get 1 pregnancy for every 1.25 to 2.0 matings. A sub-fertile stallion will get 1 pregnancy out of every 5 to 10 matings. Obviously, in close calls, the underwriter will require that the mares remain available to be bred until the end of the breeding season.

This could cause conflict with the mare owners who will want to switch to a more fertile stallion so the mare will not be barren, or who simply don’t want a foal that will be born late in the next breeding season.

Under some policy provisions, withdrawal of mares without providing “substitutes acceptable to the insurance company” can void the policy.

Some insurance companies offer an optional endorsement offered at extra-cost whereby mares covered in 3 breeding cycles (other than the foal heat) can be withdrawn and still count against the stallion in the fertility calculation. This means that a maiden mare which is first bred in mid-February could be “excused” from the stallion’s book by early April (and still count in the fertility calculation as a not pregnant mare).

Note that without this option, if mares are withdrawn and cease to be “qualified mares” (for the purposes of fertility calculation), it will reduce the denominator, thereby improving the fertility percentage calculated. For example, if the stallion bred 100 mares and only 50 are in foal, the fertility rate would appear to be 50%. Since most policies guarantee a 60% First Season Infertility conception rate, it would appear that a claim would be payable. But, if the owners of 25 mares just decided not to breed during their mare’s last heat cycle or two, then the denominator in the fertility equation would drop to 75, thereby producing a fertility percentage of 67%. You can see from this example how important it is to tie together the stallion breeding contracts and/or the stallion syndication agreement with the insurance policy on a first year stallion.

Stallion owners should not pay extra to guarantee an excessively large book of mares in the first year. Most underwriters will now allow 85-90 mares if the stallion’s testicles are of normal size and the stallion is at least 4 years old. It doesn’t make sense to pay extra to guarantee more mares. If the stallion is impregnating the mares bred earliest at a satisfactory rate, then one doesn’t need to worry about the policy terms -- the stallion has already proven he is fertile. But, if the stallion starts off slowly, why compound the problem -- and risk irritating a number of mare owners -- by trying to overbreed the horse?

Many stallions that can handle 90 mares in the first year can handle 110 or more after another year’s maturity.

The definition of “qualified mares” has changed over the last ten years to where most underwriters require breedings in two heat cycles before a mare is counted. (For one thing, a two-cycle minimum will prevent tilting the fertility calculation against the insurance company by throwing on some “late” mares at the end of the season).