NEWS
Solving the insurance puzzle: Protecting the lifeline of the industry
Posted: Saturday, October 07, 1995
Alternatives and special policies can make racing more of a risk-free propositionRisk and chance permeate every phase of Thoroughbred racing.
Breeding farms, the foundations that annually provide the individuals that make or break potential fortunes, face a variety of risks and variables on a daily basis that could severely impact their operation. Breeding stock, the wellsprings from which come the hopefuls that carry the dreams of their owners, can be lost with no advance warning, often at the cruelest of fates. And racehorses, the culmination of so many hours and years of preparation, can be wiped out with the immediacy of one bad step.
As the stakes continue to rise, horsemen often attempt to protect their investments by
insuring them against potential hazards. In many cases, insurance is just not practical and, in the case of small outfits, not affordable. In the ensuing articles, Thoroughbred Times
examines the issues for industry horsemen.
Breeders and horse owners must consider a number of variables when determining whether or not to insure their breeding stock. The value of the horse, its importance to the farm, and the annual costs of premiums are a few of the factors that must be weighed. In addition, breeding farms that board horses for other owners may want insurance to cover potential liabilities. Questions need to be answered concerning what type of insurance best applies to certain situations, i.e., whether mortality insurance will do, or whether a policy that covers loss due to natural disasters or fire be more practical. And one must consider if insurance is necessary at all.
During the 1980s, the inflationary prices of breeding stock made insuring extremely complex. William A. Carl, president of Old Colony Insurance Service, Inc., said coverage had to be shopped around among any number of companies before the horse's total value was insured.
"(The high prices of the 1980s) didn't make insurance impossible, but it did make it difficult with the very large amount," Carl said. "Consequently, we had to seek out additional carriers to layer the coverage. It was difficult when those horses got up to $30-million to $40-million to place all the insurance with one carrier-they just didn't want to carry that much liability. So we would place it with several small companies, as long as they were strong."
Carl feels the only difference between the 1980s and insuring in the current Thoroughbred industry is that prices of that decade made it impractical for some companies to assume all the risk. For example, a stallion prospect may be syndicated for $500,000 a share, with 40 shares. An underwriter would have to assume the $20-million risk on that horse. But, if the shares increase in worth and begin trading for $700,000, the underwriter's amount of risk increases substantially. The vast inflation of prices at that time made it very uncomfortable for many insurance companies to hold any coverages on racehorses.
Self-insuring
Though the current market makes insurance a much simpler process, many large breeding operations, such as Shadwell Farm, Juddmonte Farm, and Gainsborough Farm, say insurance is not a necessity. In dealing with large numbers of horses, these farms do not believe that insurance taken on individuals would best suit their needs.
"No, we do not insure our mares," said Rick Nichols, vice president and general manager of Shadwell's Lexington farm. "Once you reach a certain number of animals, you come to a point where it's more efficient to self-insure. It's more cost effective. Your premiums for insuring that many horses would be in excess of what your predicted losses for the year would be."
Nichols cites Height of Fashion (Fr) as an example. The dam of Nashwan is obviously worth millions, but to place an exact monetary value on her is problematic at best. The potential worth of her produce makes her such a valuable commodity that any insurance premium would be a major expense. Instead, Shadwell is more concerned about making sure the horses are properly cared for, insuring them with good management.
"When we lose a mare like (Height of Fashion), we're losing genetic pools that we may never get back again," Nichols said. "The money is of little comfort in those situations."
Gainsborough also adheres to the philosophy of protecting itself.
"We do not insure breeding stock," said Allen Kershaw, Gainsborough's farm manager. "It's what they would call self-insured. When you have the quality of animals that we have, it would just cost too much, and if something happens to one of them you have ten others that are just as good."
John Muir, executive director of Hughes-Gibbs and Company, a brokerage firm that utilizes the services of Lloyds of London, understands the dilemma that large breeding farms face in terms of protecting breeding stock. And while he realizes that there will be more horses to take the place of one lost, Muir does not believe that should force you into discounting individual horses right now.
A nightmare
"Truthfully, for large farms, I would say people buying full mortality coverage on all their horses with no deductible would be a risk manager's idea of a nightmare," Muir said. "That would just be ill-advised. Then you get what I would call the middle-type approach, which is quite popular. That would be (insuring) all the horses, but (doing) it in some sort of structured insurance program. They will then take a policy where they assume an element of the risk in exchange for a significant reduction in the premium costs. We call that deductible insurance. That is quite well advised."
Even that form of strategy is not practical for all breeding farms. William Denzik owns and operates Denzik Farms, a small breeding operation located near Louisville, Kentucky. With 27 horses to care for, including 13 broodmares, Denzik does not feel insuring his breeding stock makes any sense at all.
"I have insured horses before, but you can only afford to insure something that you've got such a financial outlay that it requires insurance," Denzik said. "That's determined by how much you've got in the stud fee or something like that. But all your value in the horse is in care that you put in-the value is not there to require taking out insurance. If all small breeders that raise six or seven foals insured all their foals and all their animals, they'd go bust with their insurance payments. Where do you draw the line on something like that? I've got 27 head of horses-how in the world am I going to insure that many horses?"
Brian Chambers, vice president of Golden Eagle Insurance Company in San Diego, California, feels insurance for breeding stock is vital for small outfits like Denzik Farms.
"For the small horse owner, they usually have one or two good breeding stock. They're in a different race. They have to have foals that achieve some success three or four years down the line. The insuring of that makes sense, at least for the cost of what they put into the mare."
Boarding insurance
Large farms that board horses for others are faced with complex issues that other farms are not. Most, like Three Chimneys Farm near Midway, Kentucky, leave the question of insurance up to the particular horse owners.
"We have many horses for many people," said Dan Rosenberg, general manager of Three Chimneys. "It is up to each owner and each shareholder to determine how much risk they wish to carry and how much risk they would like to insure. "
Although Three Chimneys leaves mortality insurance up to the individual owners, they do not have to leave themselves totally unprotected. Many large farms, Three Chimneys included, can insure themselves under a care, custody, and control policy, a type of coverage that is commonly utilized by many farms that board a large number of horses.
"A care, custody, and control policy is excluded under the liability of the regular...policy," said Susan Keller of Golden Eagle Insurance Company. "For instance, if a barn caught fire and the horses could not get out in time, the care, custody, and control part of the policy would provide coverage on those horses."
Keller said that most care, custody, and control policies are signed in conjunction with a boarding agreement, which transfers responsibility of care to the farm. Keller also suggests that farms might require boarders to carry mortality policies on their horses, as well as a private horse owners policy. The mortality coverage would cover the death of the horse, whether it is in the owner's care or at a boarding stable. The private horse owner's policy would protect an owner from damages that his horse might cause the farm, such as kicking a hole in the barn.
So, how should breeders and owners approach the question of bloodstock insurance? Muir, whose firm served as broker on Lure's insurance coverage, thinks it is imperative to structure a policy that fits your needs, as well as your pocketbook.
"I always recommend that people get specialized local advice on insurance for their horses," Muir said. "They should deal with somebody that does understand horses and horse value. The breeder that says he can only afford to insure two broodmares (of many), or none at all, in my opinion, has simply not gone to a specialist equine insurance broker."
While Muir believes you have to be smart and safe with regard to insurance, you should also remind yourself what business you are in.
"The horse business is a risk business ... it's a game of chance. Frankly, if you think paying insurance premiums is going to smooth out or diminish the risk element within the horse business, you're hugely mistaken. In my opinion, you're going to be spending premium dollars when in fact you could be investing those dollars on something worthwhile."
Loading runners down with risk
Alternatives and special policies can make racing more of a risk-free proposition
In the early morning hours of July 31, 1995, fire ripped through Barn 10 on the Ellis Park backside, killing all but one of the racehorses that were stabled there. The aftermath of such a tragic event can do little to ease the trauma felt by those who suffered losses. Questions abound about lost tack, equipment, supplies, and, obviously, horses, leaving many to worry about their ability to continue. Yet, before the blaze was even totally extinguished, insurance representatives from the Kentucky Horsemen's Benevolent and Protective Association were already on the scene. The KHBPA coordinated the entire effort to assess the value of losses and file claims for individual owners and trainers.
"Everybody gives their condolences and feels badly, but at some point in time you've got to get down to specifics of what the horses are worth ... and get the people back in business," said Marty Maline, executive director of the KHBPA. "Basically, that's what we did. We coordinated the efforts through our insurance carriers and adjusters and walked each claim through."
Minimum coverage
Maline said the KHBPA is covered under a national insurance program that covers all HBPA affiliates across the country. The policy, which carries an annual premium of nearly $300,000, protects all racehorses for $25,000 from loss due to certain events, such as fire, tornadoes, electrocution, or shipping accidents. The policy does not cover deaths due to performance or accidental injury. Even with that amount of coverage at horsemen's disposal, Maline feels it can be a difficult task establishing the true value of a horse.
"You may have some adjuster in Lexington saying, 'Well, I think your horse is worth $5,000,' but you've got some horse that you've nurtured and cared for and developed into a racehorse, and you may have different feelings about (its value). So, we often serve as mediator to make sure people are treated fairly."
The KHBPA and its insurance has kept many of those from Barn 10 in business. On September 21, KHBPA representatives distributed checks totaling some $250,000 to horsemen and owners who suffered losses in the fire of July 31.
So, with the KHBPA providing $25,000 of coverage for individual horses, does it make sense to take out additional coverage to protect your racing stable, even if that stable consists of one $5,000 claimer?
According to Rick Trontz, president of the Bluegrass Bloodstock Agency, Inc., that depends on your financial ability to accept the loss.
"Like anything else, it's risk management," Trontz said. "Can you afford to lose it financially, how bad will it hurt, and do you want to lose it emotionally and replace it (using) other funds? Those are some of the parameters to decide whether to insure."
The 5% factor
Trontz said premium rates for insuring racehorses are generally 5%, depending on a number of factors. The value of the horse, the number of horses to insure, and their career records are all considerations that may affect premium price. But Trontz believes 5% is a small price to pay for the peace of mind that comes with knowing your investment is protected.
"You have to ask yourself, 'Is 5% impractical?' It would cost you $10,000 to insure a $200,000 horse. You have to decide if you can afford to lose that $200,000. Even if you have one horse worth $5,000, is 5% impractical? That depends-if that is your only horse, what would you do if you lost it? Would you be able to afford to buy another $5,000 horse, or would you be forced out? You have to be realistic about what you can and will do."
Many racing stables can afford the luxury of not insuring because of the vast numbers of racehorses they keep in training, including stables representing Shadwell Farm, Godolphin racing, Gainsborough Farm, Live Oak, Juddmonte Farm, and Ken Ramsey. They self-insure, knowing the operation will continue even if they lose one or two of their top performers.
Yet other large stables choose to insure, including Claiborne Farm, Centennial Farms, and Dogwood Stable. Though they would continue in the event of a lost runner or two, these outfits feel it makes good business sense to protect animals of such realized and potential worth.
"We think it's a minor expense to insure a major asset," said Jim Friess, financial manager at Claiborne. "It has to do with the value of the horse in general. Some are homebreds, some are purchased yearlings, some are purchased through breeding seasons where you pay a stud fee. You have board and keep, plus stud fees, invested in the horse, and beyond that you've always got the potential as a broodmare or a stallion, as well as race earnings. When you have a horse that looks like it could potentially be very strong as a racehorse or a stallion prospect or a broodmare, then we seriously consider insuring. It's a nominal expense."
If these stables, which are similar on so many levels, do not all adhere to the same insurance philosophy, then how can the small owners determine what is best for them?
"I think racing stock is the stuff to insure," said Brian Chambers, vice president of Golden Eagle Insurance Company. "I think once you go through the pain of owning a racehorse, you've got all kinds of risk at that point. If you have any sense of budgeting, whether you have three or 30 horses ... to not insure is a risk that, I think, in some cases, is unreasonable."
Most of the small owners interviewed, including the ones who owned horses killed in the Ellis Park fire, do not own insurance for their racehorses. Almost all cited the costs of premiums as prohibitive reasons for not insuring their runners. John Muir, executive director of Hughes-Gibbs and Company, feels this does not have to be the case and that owners should make the decision to insure on information they have garnered from industry experts.
"Because the horse business is so marvelously independent, and everybody goes to horse auctions and makes their own decisions, all horse owners are sort of insurance experts," Muir said. "They all have some preconceived view of what they should be buying. Where other business owners go to insurance experts and say, 'I need this,' horse owners say, 'I need to get the cheapest possible rates on selected horses or no insurance at all.' They've already made up their mind that they cannot possibly insure without examining the bigger picture. That could eventually prove to be a major detriment to their success."-Jim Cullen
Safeguarding your property
Property insurance makes most sense for many
Property insurance is probably the least complex type of insurance that horsemen must deal with and the one form that most breeding organizations have in one form or another. Much like commercial homeowner policies, farm owner policies usually include the property itself and the physical structures, i.e. barns, main house, tenant housing, etc. Many policies are written to include additional property as well, such as farm equipment, tack, maintenance equipment, and hay. Particularly with small farms, farm owner insurance may be the only type of insurance that certain breeders choose to carry, expanding the policy to include coverage for their automobiles and farm trucks.
John Milward, president of Powell-Walton-Milward Insurance in Lexington, believes the same type of farm owner policy can be applied, within reason, to most farms. He advocates insuring farms on a blanket basis when available. Blanket insurance assigns an overall figure to the farm's worth, instead of assessing what each individual barn, tractor, or bale of hay is worth. Losses can then be replaced for their full value, up to the overall worth of the farm. This policy is more convenient for insurance companies, as it takes much of the guess work out of the claim process.
Blanket policies
The blanket policy also gives farm owners the latitude to claim and recover losses as they see fit, allowing them some control over potential future premium increases.
"We'll try to write (policy coverage) on a blanket-basis amount," Milward said. "You built a barn ten or 20 years ago and you don't really know what it would cost to replace. If you have blanket coverage, then you've got the full amount available to replace what is lost."
This is the type of policy that Sheikh Maktoum bin Rashid al Maktoum chooses to employ for his Gainsborough Farm near Lexington. Allen Kershaw, farm manager at Gainsborough, feels the blanket policy saves him the headaches of constantly providing estimates and evaluations of what each barn is worth.
"The property is insured," said Kershaw. "That's barns, liability, fire-the gamut, just like a big homeowner. We have a pretty comprehensive policy-if I lose anything, I have the ability to build it back just the way it was."
Milward believes this type of protection, when available, is the most prudent form of property insurance for farms.
"I don't see any disadvantages to the blanket-amount approach on property coverages," Milward said. "Not all (insurance) companies are willing to provide it, particularly for smaller farms, but when it's available I don't see any disadvantages at all. It's a common business approach on commercial business insurance, particularly for businesses that have a number of different locations."
Other farms, such as Dr. and Mrs. John Weber's Live Oak Stud near Ocala, Florida, choose to self-insure their property and barns against loss.
"We just carry liability and the stuff we have to have," said John L. King, farm manager at Live Oak. "We do not insure our property. If they burn down, it's a blanket umbrella; we rebuild it ourselves. It would cost too much in premiums to cover us-we have over 500 acres. There's nothing other than our basic policy, which covers us for negligence, but we don't have anything for barns, houses, cars, or anything like that."
Higher deductibles
Milward said that insurance can be written to provide some form of coverage for farms on an affordable basis. A policy Milward suggests is one with a higher deductible, thereby providing some coverage so the farm will not be totally decimated by a major catastrophe. Higher deductibles lower overall property costs, thereby lessening annual premiums.
"It makes sense to go to a higher deductible to lower the cost," Milward said. "For example, going from a $500 deductible to a $5,000 deductible will save on premiums. By percentage, and this changes from insurance company to company, you can reduce property premiums by fairly significant figures. It all depends on how much you want to self-insure."
Milward acknowledges that placing a deductible over $5,000 offers little savings. Most insurance companies will not consider higher deductibles of much use, as they have extended all the credit they are apt to give. But the fear of annual premium payments should not dissuade farm owners from the concept of enlisting insurance for their property.
"I would respectfully disagree with anyone (who says insurance is not a necessity)," Milward said. "If someone is in a financial position to totally self-insure and they want to do it, then I would let them live with that decision. That way of thinking is not common in the industry. Certainly, I do not recommend insuring buildings that are not in use, or that you would not rebuild if lost, but to leave yourself totally unprotected, I think, does not make good business sense."
-Jim Cullen
Jim Cullen is a staff writer for Thoroughbred Times.
