Underinsurance in farm policies:
False economy or valid strategy?
The rising cost of insurance is an issue for most farmers. Severe weather has resulted in increased claims cost for most farm insurers and consequently premiums are on the rise.
Insurance might seem unaffordable or expensive but ask yourself: Can you really afford not to insure?
Price is often the starting point for insurance; however, it shouldn’t be. A well-structured insurance policy can provide peace of mind as well as make good financial sense. You can extract good value from your insurance policy if it is structured correctly in the first place. Get your insurance broker working with you to review your coverage, sums insured, strip out unnecessary covers for risks that you are happy to carry yourself, and then look at the alternatives in the market.
It is tempting to reduce sums insured to reduce the cost of insurance, but it is important to understand the consequences if you do that. Ask your broker.
Even if you believe the chance of a total loss is minimal or non-existent, there is generally little value to be obtained by underinsuring assets. Policies can be structured to provide you with cover that does not compromise quality. There is no benefit obtained by overstating sums insured either, particularly motor items. A review of sums insured should be done at least annually but there is nothing stopping you from doing that midway through your policy period if you choose.
It would be very difficult to justify underinsuring important farm assets or home buildings (and to a lesser extent contents). Doing so to save premiums could well be false economy and may result in significant economic losses. There are obvious consequences when a building is underinsured – the sum insured may not be enough to rebuild or replace a damaged building. But there are some which are not as obvious. Speak to your broker about the impact of underinsurance.
Example: You have a shed which would cost $100,000 to replace. You insure it for only $50,000, hence underinsuring it, because you think it’s unlikely it could be totally destroyed, or you’d be content with a $50,000 payout if it was. The shed is then destroyed by a fire or a storm (or the repair cost exceeds $50,000). You would either have to find the difference between the sum insured and the replacement cost OR build a much smaller shed (up to $50,000). If you choose not to replace or rebuild the shed, then most policies allow for the insurer to make an allowance for depreciation if they choose to make a cash settlement. If your shed is old, or perhaps not in great condition, then the amount you receive may not necessarily be the sum you insured it for. For instance, if the depreciated value of the shed was determined to be less than $50,000, then you would not receive the full sum insured.
How much risk are you prepared to take yourself? It is important you consider your own risk tolerance. Consider any assets you don’t wish to insure – they may no longer be required, or they may be in poor condition.
Take advantage of insurer wordings that provide for “blanket covers” and seek products with high limits. These are often not subject to co-insurance and provide important cover for lower valued buildings which may not have been previously insured or which may be underinsured. It also protects you (to some degree) should you unintentionally not insure a building.
Consider different policy benefits. There are a number of products in the market which provide significant additional policy benefits. Some provide additional cover, and some benefits negate the need to insure in other areas. Again, your insurance broker is best placed to advise you once you have comprehensively reviewed your asset schedule and discussed your farming business.
The cost of insurance is important but should only be considered once your insurance requirements have been reviewed and discussed in full with your insurance broker. Then your policy can be structured correctly with the right cover and finally premium quotations obtained.
A careful farmer with well-maintained buildings and assets, who has a history of not claiming the small stuff, is more likely to be considered a better risk and more likely to attract a more competitive premium, than one who considers their insurance premium to be an investment which requires a return.
There is no substitute for an accurate, well-planned and relevant insurance programme. It provides peace of mind. Your insurance broker is the expert who helps you to achieve this.
Ausure advisers are specialists in working with Farm and Agribusiness clients and are able to offer a holistic insurance solution for everything from Farm Property, Liability, Crop, Livestock and Weather Protection right through to Home & Contents and Motor Insurance.
Would you like an experienced insurance broker to review your individual insurance requirements or provide further information? Please call Ausure on 1300 587 225 or visit ausure.com.au to find your local Ausure adviser.
By Grant Brokenshire, Ausure Rural & Distribution Manager