Farm Property Insurance Strategies

FPP generally falls into three categories:

1. Structures (outbuildings, barns, greenhouses)
2. Equipment and machinery (tractors, mechanized equipment, hand tools)
3. Inventory (feed, seed, and other supplies)

Structures: This includes any structure used for your farm or ranch business, such as packsheds, storage sheds, barns, greenhouses, hoophouses, and cold storage structures. Buildings that are repurposed for an agricultural use, such as a garage converted into a greenhouse, also fall into this category.  Note: The contents within a structure are covered separately unless they are permanent fixtures like electric and plumbing fixtures.

Equipment and machinery: This includes tractors, combines, planters, field equipment, tools (shovels, hoes, wheel plows, etc.), and other farm machinery used for agricultural production. From threshers to mowers, nearly every piece of production equipment you can imagine is covered under this category.  If you use a truck for farm work, you may be able to bundle a commercial auto insurance policy and add it to your overall farm insurance package. If this is of interest to you, check out our Farm Auto Insurance Options guide. Office equipment and computers used for farm management can also fall into this category. But don’t assume post-production equipment like washing, grading, and cooling machinery fits here– that’s something you may need to address separately when you meet with your insurance agent.

Inventory: Think of inventory as the necessary supplies stored on your farm or ranch (i.e. the contents of your structures). This includes seed, straw, hay and fodder, bags of soil, fertilizer, and other farm materials, products, supplies relative to farm operations. Keep in mind that farming supplies are only covered while stored. For example, once a bag of fertilizer or soil has been opened and used, that item is no longer under protection.

Oh crop! You may be wondering, what about the crops in the hoophouse and seedlings in the greenhouse, can I count those as inventory? Unfortunately, no. Because they are grown for a business purpose (aka to be sold) these are not covered by farm property insurance. If you are interested in crop and nursery coverage, read Crop and Livestock Insurance Basics to learn how crop insurance can help protect you from the fallout of lost crops.

What doesn’t count as farm personal property?

Now that you have a grasp on what items are considered FPP (generally, the items used to grow crops or raise livestock) what doesn’t fall into this category? And why ask this question? Because it becomes important once you venture into non-agricultural operations, such as selling your farm products through a retail store location that you own and operate.

If you have found yourself expanding your farming operations to business activities that fall outside of the technical and legal definition of farming, you probably need to take time to reevaluate your insurance coverages. This is because the insurance industry separates farm businesses from other types of commercial business activities given the unique risks associated with farming. Often, farming policies will exclude coverage for what the insurance company considers as incidental commercial business pursuits unless they are endorsed on the policy and accounted for appropriately so an accurate premium rate can be determined.

For example, if you’re operating a farm store, you’ll likely have items of significant value in the store, including display cases, coolers and freezers, custom signage, cash registers, computers, and items purchased for resale. As these items are used in the non-farming commercial side of your business, they generally would not be considered farm personal property. If you have several thousand dollars of local honey, jams, pickles, sauces, and frozen meat from other nearby farms to sell in your store, a loss to this inventory could go unrecovered if you thought you had these items insured under FPP. Since they are not your own farm products that you raised, they will likely be considered business personal property (BPP), which requires commercial insurance. You can certainly add a commercial line of coverage to your policy if you want this. But you may have to ask for it, specifically.  Keep in mind that having an additional policy doesn’t necessarily require you to pay more for your insurance! There are instances where bundling policies together can lower your costs.

Spot the gaps: FPP are the items used by and for your farm or ranch operation. Items used for non-farming commercial activities, such as store registers and canning equipment, are business personal property and NOT typically covered by farm property insurance. Does this impact your understanding of your property coverage? Are there potential gaps in coverage that you may want to fill with a commercial line of insurance? If so, make a note to discuss this with your agent. If not, file this information away for if or when you expand into non-farming activities.

Now that you know what FPP you can typically list for coverage, what covered perils can you expect? Or more simply, what risks can you expect to be covered for?

It depends!

Generally speaking, farm property insurance is there to address loss from things outside your control like tornadoes and hurricanes, lightning strikes and other weather-related events. Even things like theft may be covered, as they may be considered outside your control so long as you locked and secured the premises. But not all bad things outside your control are covered- the policy lays out many instances where the insurer specifically says they will not provide coverage. These are called exclusions. For example, the policy may state that arson is not covered even though loss from a fire is covered. Because covered perils vary across policies and circumstances, this is something you will need to clarify with your agent.

When reviewing your existing policy, ask your agent to clarify covered perils for your listed FPP. Ideally, they will point you to the exact section of your policy that explicitly states this information. Also, when shopping around for a policy, it may matter to you whether one insurer covers your barn from loss or damage from fire but not from hail, while another insurer will cover it from risk of hail but not fire if access roads to the packshed are not gravel or paved. Insurance policies are highly specific, so the questions you ask should be too.

While we can’t give you assurance of coverage (only your agent can do that), we can share a bit of insight into what perils are generally excluded from FPP coverage:

• Water damage, including flood, waves, overflow, water backing up from a sewer or rain, mudslide.
• Intentional/planned loss, such as committing arson to burn the barn down in hopes of a financial payout.

When working with your agent, be sure to clarify which perils are covered and which ones are specifically excluded from your policy, so that you understand what coverage you have and set your expectations accordingly.

Now that you have an idea of what can be covered in terms of FPP items and perils, it’s time to talk about valuation. You know how important your FPP is to your business. For example, you may have significant value assigned to your packshed as a multi-functional space for storage, washing, packing, meetings, and lunch breaks. You couldn’t sustain your business without it, so it is undoubtedly valuable. However, the insured value of your packshed is going to be more objective to the value of the structure itself, with limits set by the insurer. 

How do insured values work?

The insured value of an item is basically the dollar value of insurance that can be received if the item is damaged or destroyed by a covered peril. For example, if a tractor is insured for $50,000 that amount is the insured value. However, the $50,000 insured value can be derived in two different ways, using either replacement cost value or actual cash value. Once you determine with your agent which valuation you want to use, the next decision will be what percentage of that value you want to insure. Let’s break this down in two steps. 

Step 1: Replacement cost value versus actual cash value

If your tractor was destroyed in a fire and it would cost you $50,000 to replace it, then you may want to insure it for its replacement cost value (RCV). Using RCV, your insurance would pay you money to replace the item without deducting for depreciation. 

Doing the math: If depreciation is new to you, think of it as the value of an item or building losses each year because it’s getting older.

Let’s say you’ve been using the tractor for five years and then the fire happens and does its damage. Using RCV, the insurance company would give you $50,000 to buy a tractor of like kind and quality, not a five-year-old one. This is sometimes called “new for old” coverage.  As you might guess given the high value payout, insuring items using RCV is generally more expensive, but the cost may be worth it to you depending on your risk tolerance and if you want to replace an item with one of the same.

Alternatively, you can choose to insure your tractor for the cost of replacement minus depreciation, which is known as the item’s actual cash value (ACV). This means that the cost to replace the item is the cost of replacing the tractor to its before-loss condition. Another way to think about this kind of valuation is that the payout you receive will be calculated by subtracting the depreciation of the tractor from the replacement cost of a new tractor of similar kind and quality. Thus, the older your tractor, the less money you will get for it if it’s destroyed or damaged. If the tractor is insured for $50,000 using ACV, the claim payout will be less than $50,000 to account for depreciation. This means the payout will not be enough to purchase the same tractor, but it will cover a portion of the replacement cost which may be enough to buy a cheaper tractor.

ACV policies generally have lower premiums than replacement cost plans, where the premium is based on a lower figure (thanks, depreciation!), leading to a lower premium amount.

Step 2: Picking your percentage of coverage

Now that we’ve covered valuation in terms of dollar amounts, let’s go over the choices available to you in deciding what percentage of that dollar amount to insure, keeping in mind best practices.

For farm structures and equipment, most insurance companies require that they be insured for at least 80% of the replacement cost. This is commonly known as the 80% rule in the property insurance world, where policies will generally only cover the cost of damage to your property, up to the policy limit IF your coverage equals at least 80% of the item’s total replacement cost. This is because insurers know that partial losses, like a tree falling on a structure, are more likely to occur than total losses, and without this requirement many people would only insure for partial losses to keep premium payments low. Essentially, customers who insure items for values that are too low are penalized and/or do not receive full coverage on their claims. It’s a tough truth, but important to know for accurate planning and budgeting.

Let’s take an example and apply the 80% rule to a farm structure scenario.

Farmer Annie Protects her Packshed

Farmer Annie has a packshed that cost her $30,000 to build. After 5 years of use, it’s now worth $20,000 due to depreciation. After seeing a tornado take out a friend’s barn in a nearby town, she decides to insure her packshed, which is an essential structure in her business. She considers insuring the packshed for 80% of the actual cash value ($20,000), following the 80% rule of thumb. Let’s say that given inflation over 5 years, it would now cost $40,000 to rebuild a packshed of similar kind and quality. 

Let’s now apply a general valuation formula to Annie’s packshed to get an idea of what the actual cash value might be for the packshed:
Replacement Cost ($40,000) – Depreciation ($10,000) = $30,000 ACV

Let’s now see what insuring at 80% value would be:
80 x $30,000 ACV / 100 = $24,000 insured value

You might be thinking, “Hey, $24,000 wouldn’t be enough for Farmer Annie to rebuild the same packshed today due to inflation!” But that’s the point of the actual cash value basis. It is the cost to replace the item to its condition before the loss occurred, not the actual cost to build it brand new (unless it was brand new at the time of loss). For some farmers and ranchers this works great because they don’t have a need to rebuild the structure as-is. They’re satisfied with rebuilding a cheaper structure or they’ll use the cash they were already saving up to replace the aging packshed. On the other hand, others want enough compensation to rebuild the structure as-is to support necessary systems and functions on the farm, with as little debt or supplemental financing as possible.

In doing her best risk management, Farmer Annie needs to decide what her risk tolerance is, and this will inform how much coverage she wants to buy. She does the math, and after much consideration she decides that insuring the packshed for $24,000 is too low for her risk tolerance because the packshed is essential to her business operations, she wants the payout to get her as close to the cost of rebuilding the original design with similar materials as possible, and she doesn’t want to incur debt for part of the rebuild costs. Because of this, she decides to insure the packshed for 100% of its actual cash value, which could then result in a $30,000 payout if a total loss occurred, getting her closer to the full cost of replacement today ($40,000). She feels comfortable with monitoring her savings and profitability to come up with the remaining $10,000, as needed.

A note on packshed contents: Farmer Annie is also considering all the equipment that’s in her packshed– wash basins, walk-in cooler, portable shelving, and other equipment. These contents of the packshed are not typically included in the structure replacement value. They generally have to be accounted for as separate items in the FPP section of her farm policy. However, if she has heating and lighting systems or racks that are permanently installed then they are typically included in the structure value.

These general valuation principles apply to all farm structures, equipment, and machinery. Like with the packshed, the tractor that’s lost in the fire will be valued at a percentage of the cost of replacing it. It’s up to the farmer or rancher to decide how much!

Minding Money: While insurance is a key risk management strategy for protecting your farm personal property, profitability, savings, access to capital, and cash flow planning are necessary components of your overall risk management plan. Insurance can share the cost burden of damages under certain terms, but you still have an important role to play in managing the costs of doing business.

A natural follow-up question here is, how much does this kind of coverage cost?

Generally speaking, at the time of this writing, you can expect to see property insurance coverage at $15 per $1,000 of value (e.g. $30,000 packshed = ~$450 a year to insure it against named perils). Please understand these numbers may change on short notice and there is no substitute for a quote specific to your property.

The Risk of Insuring Too Low

With insured values, it’s important to keep in mind that insuring an item for too low of a value can cause settlement issues if a claim arises.

This is how it happens: 

Farmer Evan Shoots Low

Farmer Evan, Annie’s neighbor, decides to insure his packshed for 50% of the actual cash value because if a tornado takes out the structure, he figures he’ll just build a smaller, cheaper one. This is fine… until the structure is damaged, and he goes to file a claim. After Evan files and the adjuster determines he was not insuring the structure to the correct value (i.e. 80% or more), it triggers a co-insurance penalty on the payout. Evan is now responsible for a portion of the replacement cost to make up for the underinsured value, in this case the difference between 50% and 80% of the packshed’s replacement value. Now having to cover the remaining 30% of the replacement value, Evan becomes the co-insurer. 

The lesson here is that insurance policies require the insured to maintain a certain percentage of the replacement value of their structures to avoid being penalized. This is called the coinsurance provision. This is usually in the 80% + range of actual cash value. Below 80%, most insurers will make customers share the losses, making them the co-insurer.

Tool Tip: If you aren’t sure what value to insure your farm structure, your insurance agent should have construction value software available to help you decide.

So far we’ve got Farmer Annie insuring her packshed for 100% and Farmer Evan insuring for too low at 50%. Let’s take an example of someone in the middle. Let’s meet Rancher Tiffany.

Rancher Tiffany Insures the Basic Essentials

Rancher Tiffany has a barn where she stores hay. The barn also includes stables to sequester sick animals, as well as bathroom facilities for the ranch business. The barn is older, but still in decent shape and serves several necessary functions for her business. Tiffany considers her budget and assesses her risk tolerance for if or when the barn was to be lost in a storm or fire. She decides that she wants to insure the barn for 80% of the actual cash value because she doesn’t feel the need to build the barn back as-is if a total loss were to occur. She wants to follow the 80% insured value rule of thumb to avoid any unnecessary co-insurance payments and feels confident that a payout on 80% of the barn value plus cash on hand would be enough to cover building costs and materials to rebuild a sufficient structure to store hay and host bathrooms and the stables. She doesn’t need all the bells and whistles, just the essentials.

The moral of these stories is that the amount of coverage you get for your farm structures, as well as your equipment and inventory, is dependent on what kind of coverage you need for your farm or ranch business, as well as your tolerance for premium payments and potential penalties.

For this exercise you can work in a spreadsheet document or use pen and paper, whichever you prefer. See example table below for how to set up your priority list.

1.  We will group farm property into three categories: (1) equipment and machinery (including tools), (2) structures (barns, outbuildings, greenhouses), and (3) inventory (feed, seed, supplies).  
2. Starting with equipment and machinery, take a few minutes to list out all the applicable farm personal property on your farm or ranch that you could not run your business without. Items like hand tools can be lumped together, while buildings and large equipment should be listed individually.
3.  Next to your list of items, create a column titled Perils. Now comes the not fun,  yet necessary step of imagining the worst things that could happen to each of your items (e.g. a tree falling on the pack shed roof, a fire in the barn, a greenhouse collapse in high winds, the tractor is stolen, etc.). Get specific here, thinking about the real risks you face on your farm or ranch. Take 10 minutes to note down the anticipated perils for each of your equipment and machinery items. Put a star next to the ones that worry you the most.
4.  Add another column and title it Approximate Replacement Cost. Now take 30 minutes or as much time as you need to calculate the approximate replacement cost of each item. This is estimating your costs to replace or rebuild the item or structure. Reference sales agreements, receipts, and financial statements to identify the original cost of the items. Use a cost calculator to estimate the cost of a similar item if bought new today. Then, note in this column how much it would cost you to replace each item.
5.  Add a final column, titling it Money Source. Take another 5 to 10 minutes to identify the source of funds you plan to use or would ideally use to cover the replacement cost of the item. This can be cash on hand in the business account, savings, loans and debt financing, or through your insurance coverage (either existing or coverage you plan to get). If you already have a farm insurance policy, check your declarations page to see what FPP items you’re already covered for and if the insured values line up with your expectations for that money source. The items where the money source is primarily or only from insurance, then those are likely to be your top priority items for coverage
6. Repeat the steps above with the other categories of farm personal property: structures (barns, outbuildings, greenhouses), and inventory (feed, seed, supplies).
7. You now have a stronger understanding of your priority FPP items and are ready to take the next step! Use this table as a reference for deciding what coverage to get or extend, as you balance your budget against your risk exposure.

Managing Overwhelm: Any of the above steps may feel overwhelming to you at first, if so that is normal! The way to break down overwhelm is by taking one step at a time. Work on assessing one item, then move onto the next. If you don’t finish calculations for everything today that is okay. Make a note on your calendar when you plan to return to finish this process. Give yourself a concrete deadline and make it happen. You can do it!

Which type of coverage is right for you?

If you’ve created your priority list, you’re well positioned to dial in on whether you are more interested in purchasing blanket coverage, scheduled coverage, or a mix of both. Use the exercise below to help you identify whether you’re more interested in blanket coverage or scheduled coverage.

Check the boxes below that apply to you:

• [  ]  I only want to protect specific FFP items, such as my tractor and barn. (A)
• [  ] I want flexibility in what FPP items are covered under my policy, including new acquisitions. (B)
• [  ] I want to keep my costs lower and only pay to insure key FPP items. (A)
• [  ] I am willing to pay a higher price for broader coverage of my FPP items. (B)

Once you’ve checked the boxes, tally up your A and B statements. If you have more A’s than B’s, then you may be more interested in scheduled coverage. If you have more B’s than As’, then blanket coverage may meet your goals. If you checked all the boxes, you may benefit from a mix of scheduled and blanket coverage.

Great work! You’ve created a priority list of FPP items you want to insure, where you’ve identified the potential perils that could lead to damage or loss and the approximate cost to replace those items. You also have an idea of whether blanket and/or scheduled coverage is a better fit for your goals. Now you get to decide where to go from here!