Insurance is all about trust.
After all, who has time to understand everything about all of your policies? They are complicated legal documents and you’ve got a farm to run! That’s why working with an agent you trust, not only to be a good person but also to be an expert in the insurance you need, is so very important.
One of the areas that we find problems in policies that we review for new clients is in the coinsurance clauses. And, while they are a very small part of the whole policy, getting this part wrong could open your farming operation to significant problems.
What is Coinsurance?
Coinsurance is a stipulation, often in various parts of a farm property policy, that insureds must carry a percentage (80%, 90% or 100%) of the full replacement cost at the time of loss in order to be fully covered for any partial loss. It is designed to make sure that farm/ag customers are taking out proper amounts of insurance on their property, rather than underinsuring in the hope that the only claims they will make will be partial losses, below the limit of insurance.
How Does Coinsurance Work?
If you have a piece of mobile agricultural machinery that would cost $100,000 to replace and you have an 80% coinsurance requirement, you must insure that equipment for at least $80,000.
If you followed that requirement and had a partial loss, perhaps damage that needed repair, you could receive the full payout for that repair, less the deductible, pending all other policy requirements are met. Therefore, with a $10,000 claim and a $500 deductible, the payout might be $9,500.
If you didn’t follow the 80% coinsurance requirement, instead insuring the machinery for less than $80,000–say $40,000, making a partial claim would position you for what is known as a coinsurance penalty. Only a portion of the partial loss described above would be covered. That portion is figured according the amount that your insured amount fell short of the required amount. Since you only took out 50% of the insurance required by the coinsurance clause ($40,000 instead of $80,000), this claim would only be covered at that rate, meaning the payout would be closer to $4,500 on the $10,000 loss.
The additional $5,000 that you have to pay out of pocket is the coinsurance penalty because your machinery was not insured at 80% of the full replacement cost at the time of the loss.
The most unfortunate part about this is that it is often a surprise to farm/ag customers who don’t even realize that the coinsurance requirement is not met in their policies until they realize they will only see a fraction of their loss paid out.
That moment when you have a loss is a BAD time to realize that your policy was not sufficient.
What Should You Do About Coinsurance?
Don’t let a coinsurance penalty surprise you! Make sure to update your limit of insurance to reflect the current replacement cost of your property. Having frequent insurance reviews will help you keep it up-to-date.
Consider a Blanket policy. Having a blanket limit of insurance gives more flexibility when meeting the coinsurance percentage. Our recent blog, Blanket Policies Offer Better Coverage, gives some insight into this approach.
Talk with an agent that really KNOWS farm and agriculture insurance.
Having experience insuring commercial properties is valuable but, as with so many issues related to farming, insurance in this field has unique features that must be addressed.
When you can trust that your agent not only has your best interests at heart, but also has the expertise to help you make the best decision, you can breath easy knowing that, if disaster strikes, you’re covered.
Give Compass Insurance Partners a call and we can connect you with our farm/agriculture specialists.