Farm Forestry New ZealandStumpage contracts or selling forestry rights
Tiffany Robertson, New Zealand Tree Grower August 2020.
Many of you may see the benefit of selling some of your assets and retaining others and it may be a good way to free up capital during these uncertain times. However, caution should be taken when any offer is made and when considering any contract. In terms of forestry insurance, we often see contracts where a land owner has sold the land but retains ownership of the trees until they are harvested or alternatively sells the rights to harvest the trees but retains the land.
When engaging in this type of agreement, good advice is imperative. It is recommended that you always obtain a legal review when entering into such a contract but also review any insurance implications. There are several aspects you need to consider.
Risk and clarity
First and foremost, you need to determine who retains the risk of financial loss if the trees are destroyed. Any contract entered 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 after the trees are felled, or after the logs have left the skid site. The insurance should mirror that risk transfer point.
The contract should also be clear on insurance implications. What levels of insurance cover should be purchased? What perils are covered? For example, when considering the trees themselves, is it reasonable the cover is just for fire or should it be broader and include wind and other problems such as earthquakes? What happens if the loss is caused by something which is not insured, difficult to insure or perhaps too expensive to be commercially practical to insure, such as disease in the forest?
As large forestry losses across the world affect the forestry insurance market, you should discuss with your broker or insurer what is available for you to be insured against in your forestry location. For example, cover for forestry located on an island may be difficult to obtain, mainly due to the cost of salvage.
Forestry rights contracts
Another area that needs to be considered and determined in forestry rights contracts is a very clear understanding on liability risk. Liability in contracts such as these can be complex and it will depend very much on the circumstances which caused the loss. However, in simple terms everyone should have liability insurance for their respective rights and interests.
There are two policies which may be used − public liability and statutory liability. Hopefully all of you will have public liability insurance to cover claims from third parties where you are legally liable to pay for damages. The policy also pays for defence costs. But for other problems such as a fire, are you legally liable? Most liability insurers would say that you are not, unless there were some extenuating circumstances. These might include the careless placement of debris such as slash.
If you are held liable by your neighbours, the policy will defend you and most insurers will carry this out to protect your relationships, but they will not pay if you are not legally liable. Often people sort these problems out without involving insurance.
It is more likely that a statutory liability policy would respond if the claim was brought by a statutory body such as a local council bringing a claim under the Resource Management Act. However, an individual such as an affected neighbour, generally cannot bring a statutory prosecution as they would be relying on bringing a claim for damages which, as noted above, usually relies on negligence.
These events may not sit easily under insurance and forest owners will want to be sure that they always have best practices in place to minimise the effects. No one wants angry neighbours and potentially uninsured clean-up costs.
Be careful what you sign
One other aspect to consider is when entering into contracts around cutting rights, or indeed any contract, you should be careful not to extend your liability beyond that which exists in normal law. For example, avoid signing any agreement to indemnify anyone else because liability insurers may deem this as being a contractual liability which is not covered.
Getting a legal review and good advice around insurance and contracts is recommended. We would also recommend reviewing your current limits of cover and ensure that you have no exclusions which may void your policy when it comes to harvesting and forestry rights.
Tiffany Robertson is Senior Account Manager – Specialist in Forestry and Horticulture for Aon insurance.
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