07/28/2013 3:45PM

Yearling insurance protects owners’ investments


Hope springs eternal in the Thoroughbred business – particularly during yearling sales season, as potential owners arrive on the auction grounds with checkbooks at the ready, scrutinizing prospects in the hopes of spotting racing’s next superstar.

But hand-in-hand with the pursuit of reward comes risk, particularly with young horses constantly exposed to new environments and experiences. And thus, many owners seek out insurance to protect themselves and their new purchases.

“The purpose of buying insurance on Thoroughbreds is to protect your investment,” said Anya Sheckley, who runs Hammertown Insurance out of Pine Plains, N.Y. “Many people have experienced the unfortunate situation of buying a horse, often for a substantial amount of money, and then losing that horse to an unexpected injury or illness. Insurance pays you back for the value of the horse you have lost.”

Purchasing yearling insurance on a 12-month plan can prove economical during the first year of ownership. Rates for horses of racing age are more expensive. If a colt purchased at the Keeneland September yearling sale makes his first start in June of his 2-year-old season, his first three months as a racehorse still would be covered under his yearling rate.

“It would be wise to insure a yearling out of the sale because you’re first going to be transferring the yearling to a training facility,” said Joe Browne Nicholson, owner of Nicholson Insurance Agency in Lexington, Ky. “[The policy] includes the transportation, the breaking of the yearling, and training as a 2-year-old. It’s the most economical premium rate there is ... The premium rate for a yearling is about two-thirds the rate of a racehorse. If you buy full mortality coverage on a yearling, possibly a racehorse, and that horse begins racing before September of 2014, then you’re enjoying the benefits of the policy at a much-reduced rate.”

Owners who intend to buy at public auction may consider securing a “fall of hammer” policy before the sale – that is, a policy that takes effect as soon as the hammer falls on a winning bid.

“Since your ownership in a yearling purchased at a yearling sale takes place at the fall of the hammer, coverage to protect your risk should take place then too,” Sheckley said.

“For existing clients with active policies, the yearling purchases are usually automatically covered at the fall of the hammer. For new clients looking to purchase and insure yearlings, we recommend speaking to an agent prior to the sale to set up the fall-of-hammer coverage. It will not be necessary to reveal the details of the horses you intend to purchase. [Stating] that you intend to purchase horses at a particular sale and for a general range of value is usually enough information for an agent to assure a client that coverage will be in effect with the fall of the hammer.”

Nicholson also advises fall-of-hammer coverage, particularly considering the hectic environment of a sale.

“Definitely, that’s the best way to do it,” he said. “It takes the element of question out of the process, so the buyer doesn’t have to look around for me at the sale or call the office later. God forbid if something were to happen [to the horse] between the sale pavilion and the barn.”

Typical yearling insurance plans are full mortality policies, covering losses due to accidental injury, illness, or disease, although some owners opt for non-comprehensive coverage addressing specific risks, such as fire or transportation. Plans also may include coverage for colic surgery or other emergencies. The value of the horse for the purpose of the policy typically is based upon the sale price.

“Horses purchased at public auction are usually assigned a value of the purchase price or RNA price,” Sheckley said. “Horses purchased privately are generally insured for the sale price ... It is always acceptable to insure for less than the full value of a horse but never acceptable to insure for more than the horse is worth ... Not all policies are equal.

“In any insurance policy, it is important that the insurance company values the horses based on agreed value, not fair market value,” Sheckley added. “This means that the amount you will be paid in the event of a loss is the amount showing as the value on the declarations page. Additionally, it is important to be educated to any exclusions in the policy and any special requirements regarding vaccinations and care.”

The process of valuing a homebred is based upon different criteria.

“We use stud-fee multiples – usually, two times the stud fee is a good rule of thumb,” Nicholson said. “It also depends upon the siblings. We could go higher [if siblings are racing well]. Maybe if the conformation is exceptional, we could go higher also. But two times the stud fee is a good rule of thumb.”

While a horse purchased at public sale will have already undergone an extensive veterinary analysis, an exam and additional health documentation typically are necessary when insuring a homebred or private purchase.

“For private purchases, health documentation will be necessary in order to bind coverage on the horse,” Sheckley said. “Depending on the value of the animal and prior history of injury or illness, either a veterinary certificate – a standard insurance exam done by a veterinarian – or a Declaration of Health – a health statement provided by the owner, boarding farm, or trainer of the horse – will be needed. Generally speaking, horses acquired at public auction will not need any additional health documentation.”

Ultimately, decisions on insurance coverage must be made by owners on a case-by-case basis, weighing the risks they are willing to take, the amount they intend to spend, and the potential losses they are able to absorb.

“Although most people insure for 100 percent of what they pay for the horse, that’s not mandatory,” Nicholson said. “They could insure for half the value or three-quarters of the value if they wanted to save premium dollars. But at the same time, they would be taking that risk. A person should ask how they would feel, financially and emotionally, if something were to happen to that horse and that horse was not insured. Would they shrug it off, or would they be financially harmed beyond what they are willing to endure? It’s a personal decision.”