Posted On 11 Sep 2018
The Foundation of your Insurance Program
A good starting point and foundation for building an insurance program for our farms and families is to understand your farmowners policy. Generally the farmowners policy has four parts, or four sections of coverage protection.
- A section for our homes, personal property, and other dwellings.
- A section for farm barns and other structures.
- A section for our farm personal property, machinery and equipment, supplies and other inventory.
- A section for our liability protection both personal as well as for our farms.
Before we can make any decisions about your business, you must understand Perils and Valuation. These terms are used in the first three sections of your policy.
They are the causes of loss or the things that could cause physical damage to our property. Generally there are three groups of perils or causes of loss that you can choose insurance coverage for.
Yes, not everything in life is covered by insurance. All insurance policies are going to have exclusions and exceptions. Make sure you read your policy for a full understanding. Here are a few common exclusions and exceptions, but by no means a complete list.
- Civil Authority- If a government agency comes along and says “hey, you have to move that barn, we are going to build a new highway.” not an insurance claim.
- Earth movement- earthquakes, landslides are not covered. Also, shifting of Earth around your basement that causes the basement wall to crack not covered.
- Intentional acts or neglect, wear & tear-you just cannot neglect your property and expect long-term damage and deterioration to be covered by insurance.
- Ordinance or law- we do not cover or pay for loss or the increased cost which results from the enforcement of the code, ordinance or law.
- Water damage- this includes water from flood, surface water, waves, water backed up from drains, sewers, sump, and water below the ground surface.
It is what insurance companies pay for the claim or loss to certain covered property. Here are four value definitions commonly used and found in farmowners policies.
• Replacement cost:
This pays the actual amount to replace or repair the damaged property at the time of loss with materials of like kind and quality without a deduction for depreciation.
Most insurance companies use a formula taking into account the age of a home or building, types of materials used in construction, quality of materials used in construction, the area you live in based on ZIP Code, as well as any other special or unique features. They will determine a replacement cost per square foot and then multiply it by the total size of the home or building and that will equal the home or buildings full replacement cost.
Example: after an examination of the home or building and completion of a replacement cost estimator it is determined that the per square foot replacement cost equals $150. The home that we are looking at is a 1800 sq.ft. one and a half story split-level home.
$150 / sq.ft. replacement cost X 1800 sq.ft. = $270,000 replacement cost.
To have replacement cost coverage on this home in your farmowners insurance policy will require you to ensure a percentage of this final calculation. The insurance company requirement could be 80%, 90% or a full hundred percent of this final calculation. The best way to know what your replacement cost value on your home is, is to have a qualified building contractor calculate the exact cost to replace your home or a farm building in the event of a total loss due to damage by fire.
• Actual Cash Value:
This pays the cost to replace or repair the covered property with a calculation to reflect depreciation.
Let us use the same home from our previous example. We have our home’s replacement cost estimated at $270,000. We choose to ensure it at an actual Cash value for $140,000. We then experience a windstorm that damages a good portion of the roof. We get an estimate from a contractor to fix the roof and the estimate is for $40,000. The roof is 12 years old. The insurance company uses a 3% per year depreciation factor. The calculation would look like this:
$ 40,000 estimate for repair to roof damaged by wind
-$ 4,000 depreciation factor, 3% per year X 12 years old
$ 25,000 actual cash value settlement of claim before policy deductible.
• Functional Replacement Cost:
This is special policy language most commonly used in the section for farm barns and other structures.
It allows us to insure a barn and have coverage when we do not want to have 100% of the true replacement cost but actual cash value with depreciation is not enough.
Think of an older post and beam barn that is still in good shape and still in use for storage of equipment or supplies or even horses or livestock. The true replacement cost value on a barn of post and beam construction is so high no one would insure it for that value. Now it is in good shape and we want to replace it without a large deduction for depreciation due to its age. We can take the needed square footage x the replacement cost of a more modern pole barn = functional replacement cost.
• Utility value:
Again this might be used on older barns and structures. It is used when the actual cash value of the barn with depreciation is higher than the value of the barn’s use.
When using utility value we are most concerned with getting something from our insurance coverage for a total loss. On a partial loss, as in our wind damaged roof example we would receive little compared to its repair cost. Also, utility value insurance rates will be higher than actual cash value insurance rates. A good comparison of coverage value versus premium cost between utility value and actual cash value will help us make the right decision.