Flood damage and insurance – are you covered? What farmers need to know

It is still too early to determine the total value of insurance claims resulting from the recent storms and floods in the Eastern and Western Cape, but in insurance terms, all indications suggest the losses could be regarded as catastrophic.

By Carien Kruger, senior journalist at African Farming and Landbouweekblad

Strong winds and continuous heavy rain have left a trail of destruction in the Eastern and Western Cape, and new information about the extent of the damage and disruption continues to emerge daily.

Andries Wiese, head of agriculture at Hollard Insurance, said in many cases people were still simply trying to save their homes and livelihoods. Many areas remain under water, and the true extent of the damage will only become clear over the coming weeks.

Dennis Geldenhuys, business development manager at Santam Agri, says South African insurers place limits on the value of claims they pay out for events like these. If claims exceed that limit, the event is classified as catastrophic, and the remaining amount is claimed from reinsurers – companies that provide insurance to insurers when they face large or unexpected claims. These limits and the related reinsurance arrangements are in place to ensure the long-term sustainability of insurers.

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What Farmers Can Insure

Wiese says most commercial farmers have some form of insurance. “It is not always the right combination of cover, and many are underinsured.”

About 70% of farmers likely have insurance to protect their assets, Geldenhuys says. This includes vehicles, machinery, feed, seed and fertiliser, with protection against a broad range of risks.

About half of farmers likely have crop insurance covering drought, hail and storm damage.

When a farmer insures buildings, crops and vehicles, flood damage is automatically covered, Geldenhuys says, unless Santam Agri determines during the application process – using geographic information system mapping and flood-line data – that the farm faces a high flood risk.

In such cases, a farmer may still qualify for insurance, but with a higher excess payment, or flood damage may be excluded entirely.

He says livestock can also be insured against floods. Santam Agri offers a special extension for this in its policies.

The farmers he has visited generally know where flood lines are located on their farms. Flood lines are determined according to the likelihood that floodwaters could reach or exceed a certain point within a specific time period, for example, a one-in-10-year flood line or a one-in-100-year flood line. Insurers use the flood-line standard considered appropriate for the area concerned.

Wiese says flood lines can be fairly arbitrary and change over time as rivers shift course and carve out new paths.

He says many insurers place restrictions on how close infrastructure may be built to a river. To manage this risk, insurers will ask whether there are waterways nearby when you take out a policy. Many insurers also use satellite maps to determine whether the risk falls within a recognised floodplain.

There are now parts of KwaZulu-Natal, for example, where flood cover is simply no longer available because those areas flood too frequently, he says.

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One half of Leon de Koning’s vegetable land under water during flooding in the Gamtoos Valley. Photo: Supplied

Farmers Must Also Reduce Their Own Risks

Every insured person has a basic duty of care, says Wiese. “It differs from situation to situation, but essentially it means you should not do reckless things. A simple example would be not building your house on a sandbank in a riverbed.”

He says insured buildings must comply with local building regulations.

“The problem is that many properties on farms do not have approved building plans. Farmers should therefore make sure what their insurer’s position is on this. In extreme events such as the one we are currently experiencing, insurers cannot apply unreasonable requirements retrospectively, and the so-called reasonable person test should apply.”

Geldenhuys says that, in the bigger picture, everyone involved in the insurance market must do their part to show that risks are being managed to reduce damage. This is important for reinsurers because it affects the premiums they charge insurers, which in turn affects the premiums paid by clients.

A farmer who can demonstrate that they actively work to reduce risks will find it easier to obtain insurance and will likely pay lower premiums, Geldenhuys says.

Santam itself became involved about two years ago in risk reduction efforts along the Olifants River by supporting the Cederberg Municipality in removing reeds from the river. The company also sponsors weather stations for the South African Weather Service to contribute to an effective warning system.

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Business Interruption Cover

Geldenhuys estimates that only about 40% of farmers have cover for business interruption, something many farmers in the disaster-stricken areas are now experiencing.

Business interruption cover can include situations where milk buyers are unable to collect milk because roads have been damaged in a natural disaster, or where farmers cannot transport products to market. It can also apply where tourists are unable to visit a guest farm because roads are damaged.

Such cover may also protect against widespread water and power interruptions caused specifically by extreme weather conditions, rather than issues like load-shedding.

Wiese adds that this type of cover is highly client-specific, and, for example, a damaged road would need to be critical to the farmer’s operations. It can also provide protection if a warehouse has been washed away and products can no longer be packed.

It is also possible to protect your markets in cases where one of your suppliers or buyers suffers damage and can no longer receive or deliver your product, Wiese says. It is important to understand that this type of cover consists of extensions to a basic policy and should not be regarded as a given. If you are potentially exposed to such risks, discuss them in advance with your broker or insurer, and make the necessary arrangements.

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Report Damage As Soon As Possible

When disasters occur, farmers should notify their brokers of losses as soon as possible, Geldenhuys says.

Insurers understand that many farmers remain in crisis conditions even after severe weather has passed, and that ongoing power outages and cellphone signal problems continue to create difficulties. Even so, it is important to report damage quickly so that Santam Agri can determine how it may assist farmers in the meantime. Emergency cover, for example, is available.

Wiese says the importance of a good broker cannot be overstated. Your broker is typically your first point of contact and will assist you with everything required and negotiate with the insurer on your behalf. Some insurers also have contact centres, or farmers can visit their nearest insurer office.

General policies usually require damage to be reported within 30 days of becoming aware of it, Wiese says. Insurance policies will normally state that insurers may choose whether to repair, replace or compensate. Assessors will inspect the damage and determine the best course of action.

When widespread damage occurs in one area, there are often too few local contractors to complete all the repair work, Geldenhuys says. After the Knysna fires, for example, Santam Agri brought contractors in from Gauteng to assist with the work.

More Frequent Natural Disasters Could Increase Premiums

South Africa forms part of a larger global system, Wiese says. “It is important to understand that large parts of the South African insurance market are reinsured. This means we contribute to the broader global reinsurance pool.

“The fact that these events are occurring more frequently locally could make it more expensive to insure against such events. At the same time, individual farmers who are serious about managing risks on their farms will gain greater bargaining power to secure tailor-made and financially sustainable insurance solutions for their operations.”