How much am I covered for? Will I be able to replace my building if something happens? Why weren’t my grain bins fully covered? These are a few of the questions that farmers are always asking us, and they primarily all come down to the explanation of actual cash value vs replacement cost.
Actual Cash Value (ACV)
It is the cost to replace the property at the time of loss minus the depreciation. This coverage is common among older barns because it allows the farmer to cover the property for a lower amount. This results in a much lower premium, however at the time of loss there will not be enough coverage to completely replace the barn. The main goal of insurance is to protect you against catastrophic loss and prevent putting the farm out of business. With that being said, we believe that you must find a fair balance between what you are comfortable paying & how much you are covered for. ACV is not a negative thing, as long as you understand how much you are covered for.
Replacement Cost
This replaces the damaged property with materials of like kind and quality without depreciation. This is typically how your house is insured. The advantage of this coverage is knowing that your building, barn, or grain system will be replaced with similar material up to the limit set in the policy. A farmer recently asked why his 5-year-old grain bin was not fully covered when it was destroyed in a storm. This was due to him having ACV on the grain bins instead of the full replacement cost. The reason most farmers are not fully covered is that replacement cost can be much more expensive. We look to put newer structures on replacement cost and older structures on ACV if the farmer isn’t comfortable paying the higher premium.
The most important part is being educated on the topic. Farmers need to be aware of the coverage their policy has. If you currently don’t know how you are covered in an event of a loss, give your agent a call.