Farm Insurance Policies Part #3 - Claims and Payouts
In the event of a property loss or a liability incident, the insured and the insurance carrier cooperate to determine the type of coverage and the extent of coverage required by the insurance policy. As a practical matter, an insured is well-advised to thoroughly document the loss event. This may include written notes, pictures and/or retained documents.
The insured should notify law enforcement if any laws were broken in causing the loss event. This notification should be promptly followed by notice to the insurance company and include a general description of the events and the property that is damaged. This notice does not usually need to be in great detail, but a simple explanation of how the damage occurred, when the damage occurred, and what property was damaged. Additionally, it is important for the insured to take reasonable steps to protect the property from further diminishing in value. Essentially, the insured should not allow the property to be completely destroyed if the insured party can salvage any of the value.
After notification is provided, the duties and responsibilities of the insured are not over. For a property loss, the insured party should complete an accounting of the damaged property. The accounting may include quantities, costs, values, and the specific amount of loss claimed. An accounting serves multiple purposes. First, it causes the insured to identify all property subject to loss and the extent of the loss in an organized manner. An accounting also provides a summary to the insurance carrier so that the carrier may begin the claim process more expeditiously. The insurance provider will likely conduct an investigation into the claimed loss and an accounting will assist the carrier in its investigation. Last, in the event the insured disputes the insurance carrier’s determination related to the loss, the accounting will make the process of challenging the insurance carrier’s payout easier.
Obviously, insurance is obtained for the financial protection it provides to the insured in the event of a loss event. Thus, the amount one receives from their insurance carrier is likely one of the main considerations when reviewing or shopping for a new policy. Essentially, insurance payouts are calculated based on two different mechanisms, the replacement value or the actual cash value. These two payout methods create the basis for the amount of money an insured party will receive for their loss.
Replacement value, as the name suggests, means that an insured party will be paid the amount it will cost to replace the lost items and/or structures. Essentially, a policy utilizing replacement value will pay the smaller amount of restoring the items to their condition at the time of damage or the cost of replacing them with items of the same condition. This method can provide a more stable and higher amount of payout in certain circumstances.
The other means of determining an insurance payout is by using actual cash value. Generally, because most items depreciate over time, the amount paid under this method is commonly lower than the replacement value method. Under the actual cash value method, the insured will be paid the value of the item’s depreciated value rather than the amount it will cost to replace.
The difference between these two payout methods is an important consideration when analyaing insurance policies, especially with the recent rise of inflation. Consider the following example:
A new tractor was purchased in 2020 for $300,000. The tractor is now worth $200,000 due to depreciation caused by wear and tear. The same model tractor is selling new today for $350,000. In this situation, someone who has a replacement value insurance policy would receive the $350,000 necessary to repurchase the same/similar model. On the other hand, someone covered under the actual cash value method would only receive the $200,000 amount.
The above example is a simple explanation of the difference between replacement value and actual cash value payouts. Many smaller calculations can make the difference more nuanced. Be sure to work with your insurance agent to determine the payout for specific losses.
An insurance policy will typically include a limit on the payout. The insurance carrier includes the limit to protect itself from unusually large claims or unforeseen claims. For example, using the above scenario, the insurance carrier may have included a limit of $300,000 for the payout. In that event, the owner would have only received $300,000 for the payout rather than the $350,000 for the replacement value payout. Limits to payouts are an important term in insurance policies, be sure review the limits carefully to ensure adequate coverage for farm assets.
Appealing Coverage Determinations
After submitting a claim, the insurance carrier will typically send a letter stating the extent of the coverage or a denial of coverage. The letter will also include instructions on how to appeal the determination. If the insured does not believe the coverage or denial determination is correct, they can appeal the determination. The notice of appeal is sent to the insurance carrier and will initiate the appeal process. Be sure to meet all deadlines and follow the instructions for appealing carefully. A missed deadline or a misstep in filing the appeal can extinguish appeal rights. The matter must typically be appealed to the insurance carrier before taking the matter to arbitration or litigation.
If the insurance carrier denies the appeal, then litigation and/or arbitration may be the next step in obtaining the claim. At this point, hiring an attorney is often warranted. An attorney experienced in working with matters related to insurance and insurance carriers can provide valuable insight and counsel in an insurance claim appeal. Some policies may require arbitration to resolve a dispute. Arbitration is a private dispute resolution process where a person or persons hear arguments from both parties then issue a decision. Arbitration can be more expeditious and less costly than litigation. Matters taken to litigation are decided by a court. Litigation may take longer and be more expensive than arbitration but also may provide more appeal rights.
In addition to appeals to the insurance carrier, complaints about the conduct of insurance carriers can be submitted to the Ohio Department of Insurance. The complaint should explain the matter in some detail. Including photos or other supporting evidence with the complaint is often a good idea. The agency will review the complaint and, if warranted, conduct an investigation into the matters provided by the complaint. The agency may reach out to the carrier to encourage a resolution of the matter identified in the complaint. All insurance carriers conducting business in Ohio are subject to the rules and regulations of the Ohio Department of Insurance.
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