When Mike Kocher bought some new machinery, he knew he'd have to up his property and casualty insurance. But the Crawford County, Ohio, farmer didn't stop there. He realized the value of used machinery, inputs and grain—and the bins and buildings that hold them—all have gone up.
"I sat down with my agent and went over each item and decided how much I should insure it for," he says. "It took about 45 minutes, and it probably is one of the most important things we can do."
Gary Douglas, president of Nationwide Agribusiness Insurance Company in Columbus, Ohio, couldn't agree more. "Unprecedented grain price fluctuations and sometimes much higher values are having a significant impact on insurance needs," he says.
He gives this example: Two years ago, corn brought about $2/bu. If corn rallies back to last summer's $5/bu., "a farmer with just two 10,000-bu. bins, insured at a 2006 crop price, could be underinsured by as much as $60,000."
Compounded loss. You wouldn't lose just that $60,000, either. Because property insurance has a provision called coinsurance, any claim would be reduced as well, cautions Joel Jacobson of Nationwide Agribusiness.
Most policies require that you insure at least 80% of the value. In the example above, assume you insured the full value of the grain in 2006—$40,000. If you didn't increase your coverage to cover $5 corn's value of $100,000 (or at least the $80,000 coinsurance level), here's what could happen: Say you have a partial loss on that grain—$30,000 worth. That's less than your coverage, so you might well think you are going to collect $30,000 from your insurance company. Wrong. The settlement is based on the coverage that was bought ($40,000) divided by what should have been bought ($80,000), or 50%. You would get a check for only $15,000.
Other pitfalls. Don't forget the higher value of the bin or buildings, adds Bob Betzelberger, who sells insurance in Delavan, Ill. "It's easy to overlook these capital items because they don't usually have changes that would make you think about their value from year to year," he says.
"Base your values on what you could buy or sell an item for, not on a tax schedule," Jacobson adds.
Make sure your liability insurance is adequate as well, cautions Jim Chambers, vice president for reinsurance at Grinnell Mutual Reinsurance Company in Grinnell, Iowa, which works closely with 295 farm mutuals in 11 Midwestern states. "As net worth rises, more is at stake if a large lawsuit settlement is made against you.
"With property insurance, you have a pretty clear idea what a loss will cost you," he notes. "With liability, no one knows how much is enough until after the loss. If a life or lifelong injuries are in-volved, who knows how much that might total up to—not to mention the legal expenses."
- February 2009