The Farm Insurance Policy: Co-Insurance

By:Robert Moore, Thursday, March 16th, 2023

Legal Groundwork

The need for good farm insurance is well known and obvious to everyone in the farm community.  However, understanding how farm insurance works is not as universal.  Farmers know they need insurance and that the premiums must be paid but they may not be familiar with some of the key concepts of an insurance policy.  One such concept is co-insurance.

A farm insurance policy is a contract between the insured and the insurance carrier.  For the policy to be fair to both parties, the insured must provide an accurate inventory of the assets to be covered, including values.  The insurance carrier then uses the inventory of assets and values to calculate the premiums it must charge to carry the insurance. 

A policyholder may be tempted to suppress the values of the assets in an attempt to keep the premiums lower or, perhaps more likely, may not keep up with the replacement value of property.  In either case, whether intentional or not, the insurance carrier is put into an unfair arrangement as it calculates premiums based on undervalued assets.  Consider the following example:

Farmer bought a tractor five years ago for $80,000.  Farmer believes the tractor has declined in value and includes a $60,000 value on his insurance policy.  a similar tractor today would cost $100,000. Farmer’s insurance policy pays replacement value in the event of damage or loss.  The tractor is lost in a fire.  Farmer expects to be paid the replacement value of $100,000. 

In this scenario, Farmer may expect to be paid $100,000 to replace the tractor but he paid premiums based on a $60,000 value.  It would be unfair to make the insurance carrier pay $100,000 in replacement costs when it based its premiums on a $60,000 tractor.

To avoid the scenario in the above example, farm insurance policies include a co-insurance provision.  This concept is an agreement between the insured and the insurance carrier that a minimum amount of insurance must be purchased to replace property in the event of a loss.  If the policyholder purchases less than the specified percentage, the insurance carrier is not required to payout the full replacement value – making the policy holder a “co-insurer”.  The insurance policy usually requires the insured to purchase insurance on 80% - 100% of the value of property.  Co-insurance generally applies to outbuildings, dwellings, and blanket farm personal property.  Consider the following example:

Using the same example as above, Farmer’s co-insurance provision requires 80% coverage.  The tractor was only valued at 60% of the replacement value so the co-insurance provision in Farmer’s insurance policy is triggered.

The payout calculation for this loss is as follows:

                        Tractor Replacement Value =                        $100,000

                        Co-insurance requirement =                           80%

                        Required amount of insurance =                    $80,000 ($100,000 x 80%)

                        Actual amount of insurance purchased =       $60,000

                        Actual insurance/ required insurance =          75% ($60,000/$80,000)

                        Required payout1 =                                        $75,000 (75% x $100,000)

As this example illustrates, Farmer did not meet his obligation to buy insurance on at least 80% of the value of the tractor.  Farmer reported a value of $60,000 or 75% of the value of the tractor.  By not meeting the 80% co-insurance requirement, Farmer triggered the co-insurance provision and is therefore partly responsible for the replacement cost.   Farmer becomes the co-insured for 25% of the replacement value, the proportion that Farmer undervalued the combine.  If Farmer had valued the tractor at $80,000 or higher, the insurance carrier would have been required to payout the full $100,000 for the loss.  By inadvertently undervaluing the combine, Farmer forfeited $25,000 of insurance payout.

Co-insurance is an important part of a farm policy insurance that most people have never heard of. The co-insurance provision should be reviewed with the insurance agent along with the value of assets to ensure that full payouts will occur in the event of a loss.  It does no good to discover that assets are valued too low after a claim is submitted, any adjustments in value to comply with the co-insurance requirement must be done before there is a loss.

1 Any deductible would also be deducted from the payout.