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Is insurance a necessity or a luxury, especially in a down economy when every penny counts?

At its simplest, insurance is nothing more than a way for one person to shift to someone else the risk of something bad happening. I pay you a premium; in return, you agree to take the financial hit if I have an accident, or my house burns, or my horse dies. It's a gamble that works only because the number of people who suffer catastrophes and collect on their insurance coverage usually is far smaller than the number of risk-averse people who pay premiums. When the cash flow shifts in the opposite direction, when there is a natural disaster resulting in hundreds or thousands of claims, for example, or when a multimillion-dollar horse dies, insurance companies can suffer crippling losses.

Insurance is not just for high-value horses and property. The less able a person is to afford a financial loss, the more that person needs insurance to protect his or her investment. The question is: How much insurance coverage is enough, without being too much?

One way to estimate the kind and amount of coverage needed is by evaluating the type of activities in which a person partici-pates and the level of his or her involvement with horses. As the level of involvement rises, so does the need for various kinds of insurance coverage. The following generalizations might help sort things out.

Rider/competitor; no horses; no real property Horse enthusiasts who ride horses belonging to someone else, at a farm or riding facility they do not own, have limited--but nevertheless important--insurance concerns.

"The first thing this individual needs is really good personal health insurance," says Cathy Lowe, president of Kiger Insurance Inc. in Lexington, Ky. "That is necessary for anyone who works with horses because the potential for being injured is so high."

Another consideration is possible liability arising when the rider does something resulting in an injury to another person or to a horse, or that causes property damage at the farm or riding facility. Home- owner's insurance typically does not insure against off-premises liability, Lowe says, and supplemental liability coverage should be considered. Such coverage also might be required by the farm or facility owner before allowing a person onto the property to ride. Finally, a special endorse-ment covering off-site theft of tack is available. (Homeowner's and automobile policies should cover thefts from home or from a vehicle.)

Rider/competitor/breeder; horse owner; no real property; horses boarded somewhere else Add owning a horse, or horses, to the equation and the situation becomes more complicated. Additional insurance options for this individual include: 1) horse owner liability; 2) equine mortality; 3) major medical and/or emergency colic surgery; and 4) loss of use.

Horse owner liability coverage is relatively inexpensive, according to Jerry Parks of the Jerry Parks Insurance Group in Ocala, Fla., with premiums averaging between $700-$800 for $1 million in coverage. It covers damage caused by horses owned by the insured.

Equine mortality insurance reimburses a horse owner if the insured animal dies. Coverage can be either full mortality, which covers death by any cause, or limited mortality, which insures against death resulting from specified causes, such as lightning. With both types of policies, the value of the horse is determined either at the time insurance is purchased (an agreed-upon valuation, usually based on an appraisal, that does not change during the term of the policy) or at the time of the horse's death (based on fair market value that might change if the animal's value has decreased).

The fair market value of a horse is the amount a willing buyer would pay a willing seller for the animal. Fair market value can be adversely affected by entering a Thoroughbred in a claiming race for a specified price, or entering a horse in an auction with a reserve set by the owner/seller. If the fair market value of a horse increases, by winning an important competition, for example, additional insurance coverage must be negotiated.

It is tempting to think of mortality insurance as the equine equivalent of life insurance for a person, but the analogy is incorrect. The purpose of life insurance is to provide for the insured's family by replacing potential earning power. Equine mortality insurance, on the other hand, allows a horse owner to buy an equivalent animal if the insured horse dies. Mortality insurance does not include projected earnings in the show ring or on the racetrack.

The decision to buy mortality insurance can be complicated, especially when the economy is not doing well. Lowe says mor-tality insurance purchases were up slightly at the September 2009 Keeneland Thoroughbred yearling sale in Kentucky, while Parks notes that some established customers were forgoing insurance. Lowe speculates that some yearling buyers might have been trying to protect what they saw as bargain investments at the auction. Parks says that due to the economy, some horse owners are deciding to take a gamble by dropping insurance to cut costs.

There are a few situations in which purchasing mortality insurance is not an option--it's a requirement. Most common is when the horse is used as collateral for a loan. In that case, the lending institution almost always will require that the animal be insured for a value that at least covers the amount of the loan.

Mortality premiums are based on the animal's insured value and are as low as they have been in several years--from 2.0-2.5% for yearlings, to around 3.0% for broodmares, to 4.0-4.5% for other horses.

Major medical/emergency colic surgery insurance originally was popular with show horse owners, Lowe says, but now others are buying the coverage as well. It is a hot topic for horse owners right now, Parks adds, because the coverage is inexpensive. A $7,500 policy, with a $250 deductible, can be added to mortality coverage for an additional $150. Major medical is not a stand-alone option, and it is not written for racehorses. Racehorses generally are eligible for emergency colic surgery insurance, however.

Loss of use insurance pays when a horse suffers an injury that permanently curtails the animal's intended use, and it is somewhat akin to disability insurance for people. Few insurance carriers currently offer this kind of coverage, Parks says.

"There were too many gray areas," he explains, "and there were problems trying to sort out pre-existing conditions that prec-luded coverage." Lowe adds that companies typically offered two kinds of loss of use insurance, one with a higher payout that required the horse owner to surrender the animal to the insurance company.

"Most horse owners are attached to their animals," she says, "and they don't want to turn over the horse to the insurance company."

Also, if the horses are breeding animals, the owner might consider infertility insurance to protect a stud fee investment, especially if the breeding contract does not include a live foal guarantee. Infertility insurance for stallions usually is an issue when a horse is retired to stud, before he has a proven track record in the breeding shed. However, some stallion owners or syndicates keep infertility insurance in place throughout a stallion's career.

Rider/competitor/breeder; horse owner; farm owner; no boarding for others; no employees When a horse owner buys a farm for his or her own use exclusively, with no boarding of horses for other owners, a combination of traditional homeowner's insurance and commercial liability coverage should be added to the insurance portfolio already outlined. According to Parks, a comprehensive farm owner's pol-icy should cover, at a minimum, the farm owner's house and any other dwellings on the property; barns, sheds, and other outbuildings; and farm equipment; and it should include liability coverage. Liability coverage usually starts with a $1 million cap, but an umbrella policy can be added to increase the coverage limits.

Insurance premiums routinely are built into the operating budget for a farm. If the horse activity is a business in the eyes of the Internal Revenue Service, the premiums should be deductible as reasonable and necessary operating expenses.

Rider/competitor/breeder; horse owner; farm owner; boarding for outside horses; employees Finally, if a horse owner expands the facility into a boarding operation with employees, two additional types of coverage are necessary: care, custody, and control coverage for the outside horses and workers' compensation insurance for the farm employees.

Despite the name, comprehensive farm owner's policies typically do not cover harm to horses owned by other people. Care, custody, and control coverage, on the other hand, specifically insures the farm owner against harm suffered by horses owned by others and boarded at the farm.

An all-too-common occurrence is a boarder horse escaping from a field, wandering onto a highway, and being hit by a car. The farm owner is facing at least two potential lawsuits in this situation, one from the horse owner whose animal has been injured or killed, and a second one from the driver and passengers of the vehicle. While a comprehensive farm owner's policy should insulate the farm owner from liability for injuries to the driver and passengers of the car and damage to the vehicle, injuries to--or death of--the loose horse will not be covered by that insurance. A care, custody, and control policy, on the other hand, is written to cover such situations and is necessary protection for anyone responsible for horses belonging to someone else.

Workers' compensation coverage insures workers for job-related injuries, a particular concern for any agricultural activity. Workers' compensation is a win-win situation for the employer and the employees. In return for guaranteed--and quick--payment of medical bills, employees give up the right to sue the employer for their injuries; in return for protection against lawsuits, the employer pays the workers' compensation insurance premiums for the employees.

Depending on the state, workers' compensation insurance might not be required by law, depending on the number of employees or the nature of the work. Kentucky, for example, excludes agricultural businesses from the workers' compensation requirement. Many horse farm owners provide workers' compensation insurance even when not required to do so, however, as protection against employee lawsuits and as a hiring incentive for new workers.

"Another consideration," Lowe says, "is the fact that many horse businesses now operate on a multi-state level." Even if workers' compensation insurance is not required in one state, it might be a requirement in another state where the farm also does business. "Workers' compensation insurance always is a good idea," Lowe adds.

Take-Home Message

There are no one-size-fits-all solutions to the insurance maze. What works for one person might be too much coverage, not enough coverage, or too expensive for someone else. The best option is a realistic evaluation of a person's insurance needs, based on his or her budget, level of involvement in horse activities, and the advice of a trustworthy insurance agent.