Posted on: March 28, 2024

Nurturing Growth: Tackling Underinsurance in Agriculture

Fire and flood catastrophes can often alert farmers they’re underinsured. It can often hit as a double shock.

Not having the right level of coverage is more common than you might think. For example, up to eight in 10 bushfire-affected properties may be underinsured, according to the Insurance Council of Australia.

Why are farms underinsured?

Farmers may underestimate the insurance coverage for their properties because:

  • They choose to take the risk by covering their property, assets, and business for below their replacement cost. The incentive may be a lower premium and the expectation a disaster event would only impact part of their farm.
  • They decide not to insure their contents not realising the scope of insurance policies. Some contents policies could also cover goods in transport, livestock, firefighting costs, and farming business interruption.
  • They opt for the market value for the policy’s coverage for the sum insured or replacement value. These costs can escalate due to rising costs of building materials and labour as well as supply chain disruptions. As well, they may not take into consideration new building regulations or codes.

What are the implications of underinsurance?

If you underinsure, your payment for the damage would be in proportion to your percentage of underinsurance. Some policies allow a percentage of tolerance, however outside of this tolerance you may have to contribute proportionately to the cost.

Another issue is if you’ve got a blanket machinery breakdown policy but haven’t updated us, as your broker, about all eligible items. Insurers might consider you’ve underinsured in that case, so they’ll limit the payout accordingly.

Costs of removing debris after an event destroys all or part of a farm building can cost tens of thousands of dollars, depending on your farm’s location. It’s important to consider this when you take out a policy.

Your farming operations could be hampered if you haven’t appropriately insured your buildings, equipment, and machinery. Be sure to include all your assets, including these everyday ones farmers often forget to list:

  • Irrigation/drainage systems and pumps
  • Power poles, lines, pumps, and electrical cabling
  • Water and fuel tanks
  • Feed silos
  • Telephone lines
  • Driveways

Playing the odds

Taking a chance with underinsurance assumes you have the funds or access to other resources to get by. But disasters and catastrophes are unpredictable and may hit a large region, meaning others you’re relying on as a backup could also be affected. Recovering from the disruption to your business could place a heavy financial burden on you and your family.

It’s worth repeating that farmers may assume a disaster, such as a bushfire, will only take out part of their farm. The Black Summer bushfire of 2019-20 saw many properties lose all their fencing. In some states, it cost $22,000 per kilometre to replace those fences.

Avoiding underinsurance

Use these tips to ensure your farm has the right coverage:

  • Organise an independent valuation, ideally every three years, rather than use generic online tools
  • Maintain a current asset schedule and update us, as your broker, when you’ve made major purchases or every six months,
  • Factor in extra costs such as demolition, debris removal, and meeting modern building codes, and
  • Consider lifting your excesses if you need to slim your insurance premium

We can help you prevent underinsurance

Underinsurance is a false economy.  Also, be aware that not all sum insured values on your policies will automatically increase – index – each year. While insurers index the sum insured for domestic buildings annually, don’t assume indexation has kept up with inflation.

Doing a health check of your existing policies means we can check if there are policy gaps. We can customise your cover to exactly what you and your farming need – no more, no less – and prevent your risk of underinsurance. Let us help you get the balance of risk management, resilience, and insurance right.

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