What Does Crop Insurance Cover? Policies & Payouts

Crop insurance serves as a risk management tool for agricultural producers, providing financial protection against unforeseen events that can impact crop yields or market prices. Its purpose is to stabilize farm income and ensure the continuity of operations, allowing farmers to invest with greater confidence.

Types of Crop Insurance Coverage

Farmers can select from various crop insurance options designed to address different types of financial risks. The two most common types are Yield Protection (YP) and Revenue Protection (RP).

Yield Protection (YP)

Yield Protection (YP) safeguards farmers against production losses when their actual harvested yield falls below a certain percentage of their historical average. This historical average is established through the farm’s Actual Production History (APH), a record of past yields. If the actual yield falls below the guaranteed yield, an indemnity payment is triggered.

Revenue Protection (RP)

Revenue Protection (RP) offers a comprehensive safety net, protecting against losses from a decline in yield, market price, or both. This policy sets a guaranteed revenue amount per acre, considering expected yield and a projected market price. If the actual revenue (calculated from actual yield and harvest price) falls below this guaranteed amount, the policy pays an indemnity. RP policies often use the higher of the projected or harvest price when determining the revenue guarantee, providing protection against price increases. Whole-Farm Revenue Protection (WFRP) offers a single policy covering all commodities on a farm, providing a revenue safety net for diversified operations.

Covered Perils

Crop insurance policies cover specific events or conditions, known as perils, that can lead to crop loss or reduced revenue. These perils are generally unavoidable and beyond the farmer’s control, offering protection when natural forces or market shifts affect production.

Natural disasters include drought, floods, hail, and excessive moisture. Freezes, hurricanes, tornadoes, and volcanic eruptions are also typically included, as they can damage or destroy crops.

Adverse weather conditions, such as unseasonal temperatures or heat stress, are also covered, as they can affect crop development and yield. Disease and insect infestations are covered if widespread and unavoidable, not resulting from preventable management issues. Failure of an irrigation water supply is covered if it results from a natural peril like severe drought.

For Revenue Protection policies, a decline in market price is a covered peril. Even with expected yields, a drop in commodity prices can trigger an indemnity payment under RP, reflecting the policy’s protection against both yield and price risks.

Policy Exclusions and Limitations

Crop insurance does not cover all types of losses or circumstances. Exclusions and limitations define what is not covered or when coverage may be restricted.

Losses from poor farming practices, negligence, or mismanagement are generally excluded. This includes failure to follow good farming practices, such as improper planting, inadequate pest control, or delayed harvesting. Losses preventable through reasonable actions are typically not covered.

Failure to adhere to policy requirements can lead to exclusions. For instance, if a farmer does not plant a crop by the final planting date or fails to accurately report acreage, coverage may be denied. Damage caused by a farmer’s livestock or theft are not typically covered.

While Revenue Protection policies cover price declines, Yield Protection policies exclude losses solely due to market price fluctuations. YP focuses on physical production shortfalls, not changes in commodity values. Standard exclusions, such as losses due to nuclear radiation, war, or military action, are also typically present.

How Coverage Amounts Are Determined

Determining crop insurance protection involves several factors and calculations that translate policy choices into potential indemnity payments. This process establishes the guaranteed level of production or revenue and outlines how losses are assessed for a payout.

A central component in determining coverage is the Approved Production History (APH) for a crop on a farm. This represents the farm’s historical average yield, typically based on four to ten years of production records. The APH serves as the baseline for calculating the guaranteed yield for Yield Protection policies and is a factor in establishing the revenue guarantee for Revenue Protection policies.

Farmers select a coverage level, expressed as a percentage, which dictates the portion of their APH or revenue to insure. Common coverage levels range from 50% to 85% of the APH, in 5% increments, influencing the protection and premium. A higher coverage level means a smaller deductible and greater potential indemnity, but a higher premium.

The price election is another factor, determining the value per unit (e.g., per bushel) used in calculating guarantees and indemnities. For Yield Protection, farmers choose a price election, usually between 55% and 100% of the projected price established by the Risk Management Agency (RMA). For Revenue Protection, a projected price is set before planting (typically based on commodity futures market averages), and a harvest price is determined closer to harvest. The revenue guarantee is then based on the higher of these two prices, ensuring protection against pre-planting price drops and post-harvest price increases.

The guarantee calculation varies by policy type. For Yield Protection, the guaranteed yield is the APH multiplied by the selected coverage level. The indemnity is the difference between the guaranteed yield and the actual harvested yield, multiplied by the price election. For Revenue Protection, the guaranteed revenue is the APH multiplied by the coverage level and the higher of the projected or harvest price. An indemnity is paid if the actual revenue (actual yield multiplied by harvest price) falls below this guaranteed revenue.

The structure of insurance units impacts coverage and payouts. Farmers can choose between optional units, which insure individual fields or sections separately, allowing claims on specific damaged areas. Alternatively, enterprise units combine all acres of a single crop in a county into one unit, potentially leading to lower premiums due to geographic diversification and a higher subsidy. However, enterprise units require losses across the entire combined acreage to trigger a payment, offering less protection for localized damage.