Coinsurance is in place because it gives the insurance company a way to protect themselves by making sure you put an accurate value on your property. They do this by requiring you to have buildings insured for a certain percentage of the total replacement cost. This number is typically 80 percent.
Example
You have a barn that has a replacement value of $400,000. The insurance company will require you to insure that barn for at least $320,000.
Let’s say, however, that you are insured for $250,000 (62.5% of the total value). A storm comes through that causes $100,000 worth of damage. The insurance company would take your insured value of $250,000 & divide it by the minimum required amount of $320,000 = 78%. They would then multiply the loss of $100,000 by 78%. This would leave a payout of $78,000 minus your deductible of $2,500. Your out-of-pocket exposure is $24,500. The insurance company uses coinsurance as a penalty for not insuring property accurately.
Reviewing Values
If you have concerns regarding coinsurance, reach out to your agent & ask him to do a statement of value on each of your buildings. Or reach out to us below and we can review your coverage. We specialize in risk management for farm operations. We want to make sure you are well educated so that you can make informed decisions regarding risk on your farm.