Actual Cash Value vs Replacement Cost
Do you know how much you are really insured for? Do you have a co-insurance clause?
Did you know that most farm insurance policies have a co-insurance clause? And that you could be penalized for being underinsured during a claim.
Watch the short video to learn more or keep reading below.
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Actual Cash Value
Actual cash value (ACV) is a method insurance companies use to determine the value of an insured item in the event of a loss. It represents the current market value of the item at the time of the loss, taking into account depreciation and wear and tear.
For example, if you have a farm insurance policy that covers your grain system, and it is damaged during a windstorm, the insurance company will typically determine the actual cash value of the grain bins by considering factors such as age, condition, and replacement cost. The insurer may also factor in any deductions or limitations outlined in the policy. This amount can be considerably less than the cost of replacing or repairing the grain system.
Replacement cost on a farmowners insurance policy is a coverage option that provides reimbursement for the cost of replacing damaged or destroyed property with new property of the same kind and quality.
For example, if a hog barn on your farm is damaged in a fire, the replacement cost coverage will pay for the cost of building a new barn, without considering depreciation or wear and tear. If the cost of rebuilding the barn is more than its current value, the replacement cost coverage will pay for the full amount required to replace it, subject to the limits and deductibles specified in the policy.
Coinsurance on a farmowners insurance policy is a clause that requires the policyholder to insure their property for a certain percentage of its replacement cost value. The coinsurance clause helps ensure that the policyholder is carrying enough insurance coverage to adequately protect their property in the event of a loss.
For example, if the coinsurance requirement on a farmowners policy is 80%, and the replacement cost of a barn is $1,000,000, the policyholder must carry at least $800,000 in coverage for that barn. If the policyholder fails to meet the coinsurance requirement, they may be penalized in the event of a claim, which means they may not receive the full amount of their claim. If you are insured for $600,000 in this example, the insurance company will pay out $450,000 for the barn.
The barn was underinsured by 25%
$800k minus $600k = $200k
$200k divided by $800k = 25%
75% of $600k = $450,000
In summary, coinsurance on a farmowners insurance policy helps ensure that the policyholder is carrying enough insurance coverage to adequately protect their property and works in conjunction with replacement cost coverage to provide full reimbursement for the cost of replacing damaged or destroyed property, up to the policy limit.
We recommend carefully reviewing your coverage options and selecting the one that best meets your needs and budget. I like to ask the question; would you replace the building if there is a total loss? If yes, then you need replacement cost unless you are comfortable paying a large amount out of pocket.
Another thing to consider is partial losses, for example, the siding on your barn gets torn off & needs replacing. ACV would pay out a depreciated amount on this loss. Give your insurance professional a call and find out exactly what coverage you have then set up a plan for future losses.
If you enjoy this type of relationship with your insurance professional where it's based on education and insight, then please give us a call. We'd love to work with you.
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