The Best Farm Insurance Gone Wrong – The Co-Insurance Gap

The best farm insurance in Ontario? Almost every insurance broker with a shingle on the side of their building will sell it, so as a farm business owner it boils down to this: Does your insurance guy really know his stuff? Especially when it comes to something called ‘Co-Insurance.

Right now, ‘Co-Insurance’ may seem about as exciting as last year’s Academy Awards. But as a farmer who relies on the business for your family’s livelihood, it may be the little known things that sink you.

What is ‘Co-Insurance? Other than being a confusing term accompanied by formulas that appear to have been copied directly off Einstein’s chalkboard, Co-Insurance is that clause in just about every farm and business policy that requires you to value your building assets within a percentage of replacement cost value.

The challenge with farms is making sure your barns and other buildings fall within a specified percentage of their replacement cost value. Without doing your homework, and asking the right questions, you can unknowingly put your farm business at risk – even in the event of a partial loss.

Let’s say you now run the family farm built by your grandfather. You remember the stories of how the neighbours came together, milled the lumber and worked as a team to raise that barn in the summer of ’39. While the barn is now older, it’s still in good shape.

So one day your insurance guy comes along, and you get talking about what would happen if the annual corn-boil got outta control and the barn turned into the county’s biggest marshmallow roast. Your guy says you really should get an appraisal on the barn your grandfather built to find out the current replacement value.  In your mind, you figure the barn is probably only worth the 150k that’s showing on the policy, it is almost 80 years old, but at his suggestion you call the appraiser.

Well, snapping frog legs, the appraisal came back saying it will cost you 500k to replace the ol’ barn. Your insurance guy now tells you that based on the co-insurance clause, you need to increase your coverage to the required 90% ($450k).

You have 2 options: do it, or leave as is.

OPTION 1: LEAVE AS IS:

In this scenario, without realizing it you’re on the hook for a little more than 2/3 of the risk, you also are obligated to absorb 2/3 of the loss. So if you have a total loss and need $500k to rebuild, your insurance company will make you come up with more than $330k. If there was only a partial loss of 90k, you would still need to come up with 60k out of your own pocket.

See why this ‘Co-Insurance’ thing is so important for you and your insurance guy to get right?

OPTION 2: INCREASE YOUR COVERAGE:

In this scenario, you opted to have $450k of coverage on the barn your grandfather built, and in a total loss you get $500k from your insurance company to rebuild. $0 comes out of your pocket!

The key message is this: If you farm insurance guy isn’t obsessed with getting your replacement values on your building nailed down – he definitely won’t be the guy to help you with the more complicated aspects of your farm insurance strategy. The advice you need to accelerate growth and protect it when the unexpected happens.

The few dollars more on your premium to meet your ‘Co-Insurance’ requirements on your policy – hopefully now, that’s a no brainer!