A Licorice Allsorts selection of forestry risk
Jo McIntosh, New Zealand Tree Grower November 2016.
This month’s article is a bit of a mixed bag, as reflected in the title. At times risk is a bit like a bag of Licorice Allsorts − not all of it to your taste and with a few surprises in the mix. I thought it worthwhile to touch on some topical and growing areas of risk affecting forest owners. I will briefly touch on the insurance implications of stumpage contracts, carbon pricing, drones and charter aircraft, along with a reminder about my favourite topic, that of standing timber insurance.
First of all, let us look at stumpage contracts or selling forestry rights. Many of you will see the benefit in selling some of your assets and retaining others and it may be a good way to free up capital. In terms of forestry insurance, I often see contracts where a land owner has sold the land but retains ownership of the trees until such time as the trees are harvested. Alternatively, they sell the rights to harvest the trees but retain the land.
When engaging in these types of agreements good advice is imperative. I recommend that you always obtain a legal review when entering into such a contract but also talk to Aon to review any insurance implications. Some aspects to consider are discussed below.
You need to determine who retains the risk of financial loss if the trees are destroyed? Any contract you enter into should clearly set out who carries this risk and when that risk transfers. The transfer point needs to be very clear − for example, the transfer point might be once felled, or once the log has left the skid site. The insurance placement should mirror that risk transfer point.
The contract should also be clear on insurance. What levels of insurance cover should be purchased? What perils are covered? For example, when considering the trees themselves do you agree that it is reasonable that the cover is for fire only or should it be broader and include wind and other problems, such as weather landslip? What happens if the loss is caused by a problem that is not insured, difficult to insure or perhaps too expensive to be commercially practical to insure, such as disease?
The other area that needs to be considered and determined in these forestry right contracts is a very clear understanding on liability risk. Liability in these multi-party contracts can be tricky because who is ultimately liable will depend very much on the circumstances which caused the loss. In simple terms however, each individual should hold liability insurance for their respective rights and interests.
For example, if there is a health and safety incident on the land, Worksafe may pursue the harvesting contractor, the forest company and the owner of the trees. As another example, say there is a fire on your property. The rural authority can levy costs to control and extinguish that fire under the Forest and Rural Fires Act. Section 43 allows recovery from the person responsible for the fire This might be fine if that responsibility is clear cut, such as a harvesting contractor causing the loss. However, if the cause of the loss is undetermined then the rural authority can use Section 46 to recover of costs from the eligible landholders of the forest area affected.
The Act defines land holders and any ‘owner lessee, sub lessee, licensee, holder of permit, other person having a right lawfully to use or occupy the land’. Section 46 of the Act is also relevant and relatively broad. This is where there is a fire in the district and the authority levies landholders in the district. The Act refers to the ability for the Rural Fire Authority to levy −
- Any landholder in respect of any land in the district
- Any owner, lessee, licensee, possessor, or occupier of any property which was in the district at the time of the fire and was menaced by the fire
In effect, the Forest and Rural Fires Act may be able to bring many people and companies into cost recovery. I would stress that each rural district applies and enforces the Act as they read it. Enforcement varies by region and circumstances, emphasising again that everyone needs their own separate liability covers for their respective rights and obligations.
Avoid extending liability
The other area to consider is when entering into contracts around cutting rights, or indeed any contract. You should be careful to not extend your liability beyond that which exists in normal civil law. For example, avoid signing any agreement to indemnify another party if that is beyond your normal responsibility at law. Liability insurers may deem this as being a contractual liability which is not covered. Once again, getting a legal review and good advice around insurance is the recommended way to go.
Carbon prices on the rise
Carbon prices have been rising recently, at last, and that is good for forestry as it gives forest owners another alternative income stream. However, as prices for carbon increase, so potentially does the financial effect of a loss of trees, leading to a potential loss of carbon sequestration. This is especially true if you have taken the leap and have entered into carbon trading.
You can insure carbon stock in a number of ways. One is a fairly blunt instrument where you simply add a dollar amount to your nominated values under a traditional standing timber policy. That might be effective, but keep in mind that it is not going to work for everyone.
Definition of loss
It is also important to note that the definition of loss under a traditional standing timber policy is not always going to work for a carbon loss. The definition of loss or damage under a traditional standing timber policy will refer to physical damage which triggers the tree to require righting or to die. That definition is fine for a plantation timber loss but perhaps not exact enough for a carbon loss.
The other option is you can purchase a suitable carbon policy that has been tailored to specifically cover forestry carbon risk. In these specialised policies, you will see that the definition of loss specifically refers to an emission leading to a decrease in the biomass. A tailored carbon policy will also have valuable options such as the ability to cover future carbon stock. However, forestry carbon cover is a particularly complicated area of insurance.
I suggest that the key is to try and keep things simple and go back to basics. Try to focus and think about values, and consider what can go wrong.
Contracts and carbon
I am concerned about some of the contracts I have seen floating around in the carbon space. I have seen a few where third parties have purchased the carbon and, as part of that purchase, have arranged insurance for the trees. From my reading of these contracts, there appears to be a number of unanswered questions.
The insurance limits often appear low especially when you consider the total value of the plantation and limited clarity around which party has precedence over any insurance funds. Who gets the money in the event of a claim? This might not be a problem with a small loss which is under the policy limit, but what happens if there is a large scale problem, such as Cyclone Bola? As a forest owner, I would not want to be left with a large uninsured tree loss together with a carbon trade debt. Again the solution is to get a thorough review. I would highly recommend engaging a carbon consultant and obtaining a legal review and pay close attention to insurance implications.
Aviation and forestry have been partners for a long time and the forestry industry has always been an early adopter of aviation innovation. Forest owners have often used aircraft to carry out survey work, spraying and many other activities. Today the trend is increasingly to use unmanned aerial vehicles or drones.
I think it is worth highlighting that aviation insurance is generally not covered by standard insurance policies. If it is covered, it often has many limitations and exclusions applying.
Like all risk it is important to consider what you are doing. Are you contracting another party to use aircraft or drone on your behalf? Are you the actual owner or operator? Have you chartered the aircraft? What happens if there is spray drift which affects the neighbours? What happens if there is an accident and damage to the aircraft?
Extending the policy
If you are contracting another party to undertake work on your behalf, one of the easiest ways to manage some risk is to ask the aircraft owner or operator to extend their policy to include you under their insurance programme as an additional insured in respect of liabilities. This extension should also include insurer’s agreement to waive their rights against you. In the case of spraying contractors, it is recommended that you also ask for confirmation of their operators’ aerial application liability policy which generally includes cover in the event of an error.
With a growing number of drones being used in forestry, we are seeing more and more mainstream general insurers offer extensions to standard property and liability insurance policies. We suggest however that this might not be the best way to cover this risk. A specialised policy will have broader definitions and broader coverage for agreed values which will likely be more appropriate. Aon has an aviation team which specialise in this aviation and flying risk area.
As you will note in the above discussion, the subject of values come up frequently. It is so important that when you purchase insurance you consider the basis of settlement of a policy and set your cover accordingly. In terms of the standing timber policy, we offer NZFFA members an agreed value policy and you nominate the value you want any claim to be calculated on. I suspect that a number of people still have values which are too low and do not reflect the real value of the trees.
Please take some time to dust off your policy and ensure it is in order. Finally, a reminder that we are pleased to offer advice to NZFFA members and that Aon pay a contribution to NZFFA for all standing timber insurance placements.
Jo McIntosh is an Executive Director for Aon and specialises in insurance for forestry and horticulture.