Posted On 16 Apr 2019
While reviewing some insurance matters with a very diversified farm client (he grows apples, grain crops and processing vegetables) he turned to me and said “Remember last week when the weather forecast included thunderstorms, high winds and possible hail? Well in the past I would lie awake all night with worry. However, now knowing all my insurance is handled by you I sleep all night long like a baby.”
For most farmers, sitting down to review their many insurance policies and make decisions on insurance coverage for their farms and families is not their favorite chore. For instance, there are so many different areas to review property and liability exposures, understand limitations and exclusions; it can all get pretty confusing.
The National Association of Insurance commissioners (known as NAIC) found in a 2010 survey that 86% of people responding did not understand their liability insurance limitations. More than half of the respondents did not understand how their financial credit scores can affect their insurance premiums.
Jerry Hillard, Director of Farm Sales for Nationwide Agribusiness Insurance Company in Des Moines, Iowa says “Not fully understanding your insurance policy and keeping the policy updated are two of the most common mistakes farmers can make. This leads to paying premiums for coverages you need or missing necessary coverages and not realize the inadequacy until a claim is filed.”
“In general, people think they should look for the cheapest premiums but that’s not always going to give them the best coverage” Hillard says “That’s why farmers need to sit down with their agent and review their insurance policies, coverages and exposures at least once a year. When this is not done the policy and its coverages could become out of date quickly.”
When reviewing insurance policies, experts say, farm families should pay close attention to:
- Valuation: It is what insurance companies pay for the claim or loss to certain covered property. Here are four value definitions commonly used and found in farmowners policies.
- Replacement cost: This pays the actual amount to replace or repair the damaged property at the time of loss with materials of like kind and quality without a deduction for depreciation.
Most insurance companies use a formula taking into account the age of a home or building, types of materials used in construction, quality of materials used in construction, the area you live in based on ZIP Code, as well as any other special or unique features. They will determine a replacement cost per square foot and then multiply it by the total size of the home or building and that will equal the home or buildings full replacement cost.
Example: after an examination of the home or building and completion of a replacement cost estimator it is determined that the per square foot replacement cost equals $150. The home that we are looking at is an 1800 sq. ft. one and a half story split-level home.
$150/sq. ft. replacement cost x 1800 sq. ft. = $270,000 replacement cost.
To have replacement cost coverage on this home in your farmowners insurance policy will require you to ensure a percentage of this final calculation. The insurance company requirement could be 80%, 90% or a full 100% percent of this final calculation. The best way to know what your replacement value on your home is, is to have a qualified building contractor calculate the exact cost to replace your home or a farm building in the event of a total loss due to damage by fire.
Actual Cash Value: This pays the cost to replace or repair the covered property with a calculation to reflect depreciation.
Let us use the same home from our previous example. We have our homes replacement cost estimated at $270,000. We choose to ensure it at an Actual Cash Value for $140,000. We then experience a windstorm that damages a good portion of the roof. We get an estimate from a contractor to fix the roof and the estimate is for $40,000. The roof is 12 years old. The insurance company uses a 3% per year depreciation factor. This calculation would look like this:
$40,000 estimate for repair to roof damaged by wind
-$4,000 depreciation factor, 3% per year x 12 years old
$25,000 actual cash value settlement of claim before policy deductible.
Functional Replacement Cost: This is special policy language most commonly used in the section for farm barns and other structures.
It allows us to insure a barn and have coverage when we do not want to have 100% of the true replacement cost but actual cash value with depreciation is not enough.
Think of an older post and beam barn that is still in good shape and still in use for storage of equipment or supplies or even horses or livestock. The true replacement cost value on a barn of post and beam construction is so high no one would insure it for that value. Now it is in good shape and we want to replace it without a large deduction for depreciation due to its age. We can take the needed square footage x the replacement cost of a more modern pole barn=functional replacement cost.
Utility value: Again this might be used on older barns and structures. It is used when the actual cash value of the barn with depreciation is higher than the value of the barns use.
When using utility value we are most concerned with getting something from our insurance coverage for a total loss. On a partial loss, as in our wind damaged roof example, we would receive little compared to its repair cost. Also, utility value insurance rates will be higher than actual cash value insurance rates. A good comparison of coverage value versus premium cost between utility value and actual cash value will help us make the right decision.
- Machinery, equipment, inventories of farm personal property
- New machinery & Equipment
- Deletion of unused or traded machinery & equipment
- Peak season or reporting farm coverages
These are used to cover fluctuating inventories of supplies like seed or fertilizer, hay or straw. These are also used to cover grain, apples, cabbage or any produce that monthly values decrease over time as you sell down your produce.
- Liability exposures
- Any changes of ownership or formations of new entities like partnerships, corporations or LLC’s. Are these entities named insureds or additional insureds?
- Any changes to scope of operations, any new land added due to purchase or rented
- Any exposures to the general public for example “U-Pick” operations of fruits or vegetables, selling through farmers markets.
- Any new ventures like corn mazes, farm tours or any agri-tourism events.
- Understanding exclusions or limitations in your policy language
According to NAIC, losses from earthquakes, floods or water and sewer line breaks are not reimbursed under many standard Farmowner policies.
Farmers should talk to their agents about endorsements for specific coverages.
- Earthquake coverage can be added by endorsement.
- Sewer back up and sump pump coverage can be added by endorsement.
- A separate national flood insurance policy may be needed.
Also be aware that certain items may have a sublimit in your policy such as:
- Money on hand
These sub limits can be increased by endorsement and customized to your situation.
This is a good checklist to use during an annual insurance review with a farm insurance agent specialist:
- Additions or improvements since last review
- New protective devices (smoke detectors, theft alarms, deadbolt locks)
- New heating units (wood-burning stove, fireplace insert)
- New construction (garages, swimming pools, fencing)
- New major purchases
Farm Buildings (review adequacy of actual cash value vs. replacement cost)
- New construction since last review
- Planned construction in coming year
- Additions or improvements to existing buildings
- New storage units (bins,silos)
Farm Property (review adequacy of inventory limits)
- Additions or deletions from prior review
- Planned new purchases during coming year
- Significant changes in grain, livestock or commodity pricing since last review
- Significant change in volume of sales or other business activity since last review
- New partnerships, joint ventures or other business affiliations
- New acreage acquired since last review
- New acreage acquisitions planned in coming year
- Additional business activities begun or planned
- Boarding of horses or other animals
- If you have employees, any change in number
- Change in ownership, titles of registration of vehicles
- Add or deletion of any drivers
- Use, weight or range of trucks
- Which vehicles should have comprehensive or collision coverage
- Reasonable deductibles for comprehensive and collision coverage
- Lay-up credits for limited use trucks
Life changing circumstances
- Marriage or divorce
- Formation of new business entities
- Children becoming of driving age
We understand the unique risks and exposures facing modern farms and agribusiness. Because each operation is different, we start with a basic package of coverages most operations need; your home, buildings, machinery, equipment and liability. We then form a menu of options to tailor the coverages to the needs of your specific farm operation. We want to make sure you pay premiums only for the protection you need.
We partner with farms and agri-businesses by implementing proven risk management strategies to protect their hard earned equity and income producing abilities.