By Peter Shanahan, CFP, CRPC, MPAS
There are often good reasons to lease a horse. For instance, you may have horses for two or three lower levels and simply need to plug the gap with a proven contender. Or, you may prefer to try a horse before you buy it, and choose to lease with an option to buy. Whatever your particular motivation, it is typical for lease contracts to require that the lessee purchase a specified amount of insurance on the horse, and insurance may be worth considering even when it’s not required.
Let’s review some of the things to bear in mind when insuring a horse. Martha Hall of the EMO agency points out that mortality coverage is the basic chassis of your horse insurance policy. The named beneficiary is the horse’s owner, although it’s customary for the lessee to pay the premiums. So if you’re leasing a horse and would like medical coverage, you will probably have to start with mortality coverage naming the horse’s owner, not yourself, as beneficiary, even if your lease agreement does not require it.
Types of Coverage
Martha points out that horse insurance is somewhat unique in that different types of coverage (“risks”) covered in the same policy may name different beneficiaries, so the medical coverage in the policy may name you, the lessee, as beneficiary. That’s important, since the terms of the lease typically require you to foot the bill for injuries and illnesses that happen during the time the lease is in force.
Typically, medical coverage is offered in increments of $5,000 to $15,000, depending on the carrier, and cannot exceed the policy’s mortality value. Underwriter Frank Aubrey III of Berkley Program Specialists reminds us that for coverage up to $100,000, all that may be required for the horse to be insurable is a statement signed by the owner declaring any known health issues, or stating that there are none. Beyond that level (although it varies by insurance company), your insurance company will likely require a veterinary exam, particularly for older horses.
If the horse will be in your barn, you may wish to add an endorsement (rider) to your “farm owners” insurance policy to protect yourself if the horse were to somehow escape and cause damage or injury to someone else, like a passing motorist. This type of coverage is called “care, custody and control,” and Martha typically strongly recommends it.
If your liability insurance (homeowners and umbrella) does not cover a leased horse, you might want to consider “personal horse owner liability” insurance and a stand-alone “care, custody and control” policy.
Loss of Use
Another type of coverage you might want to consider is a “loss of use” policy. This type of coverage is designed to compensate the owner in case of injury or illness that prevents the horse from doing the job you leased it to do. Here, Martha advises caution. In her experience, people are often surprised to discover the limitations of this type of coverage. Typically, this coverage will provide a benefit only if the illness or injury renders the horse “totally and permanently unfit” for the use that is specified in the declarations page of the policy.
Note a few things, here. First, “totally and permanently” is a pretty high bar. What if the horse is expected to recover, but not during the term of your lease? Second, it’s not cheap. Loss of use endorsements may increase the cost of the policy by more than half. Finally, coverage is typically limited to 50 percent of the policy’s mortality value, and that value must be at least $25,000. Martha urges buyers to be certain that they understand the limitations of this coverage before purchasing.
My final point is simple, but important: Start out with the proper type of insurance for your farm. By way of confession, I admit that I was unaware that for more than 10 years, my own homeowners insurance was HO3 — which is adequate for homeowners, but totally inadequate for the exposures of a horse farm. What I needed was a “farm owners” policy.
I was blissfully unaware that I was fully exposed to any number of risks attending the horse farm on my property — this, even though I had bundled my auto insurance with my homeowners, and I was insuring my horse trailer on the policy, which should have been a clue to my agent.
So dig up your policy, and if you’re not sure whether you have the right type of policy, ask your insurance agent. If he/she doesn’t know, find one who does.
JJB Hilliard WL Lyons, LLC does not provide tax or legal advice. Please seek independent advice from a tax professional based on your unique circumstances.