How to assess farm values and avoid being underinsured

Underinsurance is a persistent problem in farming and rural businesses.

This means not only that the full cost of replacing a building, livestock or other assets will not be met, but also that in many cases a process called averaging will be applied, further reducing any payout from the insurer.

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There are several reasons for underinsurance, say advisers:

• Cover levels being assessed on market value rather than replacement value
• Lack of awareness of the impact of inflation, especially on the cost of building products and services and some machinery
• Failure to monitor fluctuations in values in a policy year and/or to inform insurers of these
• Fear of higher premiums if higher and suitable levels of cover are chosen.

Buildings and second-hand machinery are two commonly underinsured categories, and farming’s financial challenges over the past 12 months have led to a tendency for some farmers to try to make savings by undervaluing or by self-insuring – taking the whole risk themselves – says Grant Hartley, head of farm at North Yorkshire broker McClarrons.

While there is a general awareness that costs have risen, Grant says many business owners and managers are unaware of the extent of the rise.

Rebuilding costs have soared since the supply chain complications caused by the Covid pandemic, with the impact of Russia’s invasion of Ukraine and general inflation adding to this.

The general advice from brokers is to get a professional rebuilding valuation every three years.

Sam Webster, a farm executive with McClarrons, highlights the large increase in second-hand tractor values in recent years.

She suggests getting a dealer to value kit to make sure replacement values are correct.

Similarly, the insured sums for hay, straw, other fodder, crops, livestock and stocks such as fertiliser need to reflect the cash required to replace them.

As a result, fluctuations in value need to be monitored through the policy year and brokers or insurers informed of significant changes.

Sam says: “People don’t always think of doing this within the policy year, but it’s important and, if necessary, catch ups can be held more frequently than just the annual review with your broker or insurer and may help keep track of things.”

She advises using a spreadsheet to list assets and their values and make changes as they occur. Workshop items and tools can be difficult to replace, especially older items, she notes.

McClarrons is currently running an information campaign on underinsurance, having seen the impact it can have on farms and other businesses. This follows a similar campaign in 2022.

It’s not uncommon for significant changes to be made without informing insurers or brokers, says Grant.

“That might be a new shed, or, for example, we recently became aware of a solar rooftop installation at the 11th hour. It’s really important to keep your broker informed about what’s going on.”

So, at renewal, look ahead and incorporate what might be planned for the coming year. 

Farming policies cover only the business of farming, so any new venture should be notified and considered separately, even if it is only a minor activity.

Employers and public liability

Underinsurance can also occur in employer’s liability cover – it is important to define who is an employee and to cover casual and seasonal workers too, as well as family members and any unpaid helpers.

“Contractors under your instruction and using your tools would also need to be covered,” says Grant.

Business interruption cover

Insurance to cover the loss of profit or income after an event such as a fire, flood or theft is referred to in several ways, including business interruption, consequential loss or loss-of-profit cover.

Many businesses now have this type of cover, which like others is designed to put the insured back in the same position they would have been if the event had not happened.

However, business owners and managers often fail to appreciate how long it can take to get back into production after a loss. A 12-month indemnity period may be standard but is unlikely to be sufficient, says Grant.

“Eighteen months would be the minimum for an arable business, while intensive pig and poultry operations may need a three-year indemnity period, he says.

“You have to consider how long any investigation might take, the clean-up operation, getting planning permission, professional fees and regaining contracts or finding new ones, then there is the actual production time before any sales are made.”

Bridget Slade is a loss control consultant with Securus Risk Advisers and frequently sees underinsurance on farms.

Her role is most often to assess risk for the broker iFarm, but she also carries out assessments for farm businesses.

A chartered surveyor and fellow of the Central Association of Agricultural Valuers (CAAV), her main area of work is in carrying out full risk surveys, which includes assessing building values alongside the health and safety and general risk management of a business.

Bridget advises careful checking of insurance schedules to ensure that everything needing cover is catered for, and at the correct valuation.

“I find a lot of out-of-date historical valuations on farms, often where retail prices index has been used to increase values annually, but this is inadequate because prices have gone up so much.

“Underinsurance is a nasty shock when there is claim, and often means that there is not enough cash to replace a building.”

She warns against using a rebuilding value that is lower than commercial rebuilding values, on the grounds that farm staff will be used to do at least some of any rebuilding work.

“Insurers will not take this approach, and so it risks underinsurance and averaging being applied.”

Her further advice includes:

• Extensions to buildings and other changes should be notified before or at the time they are constructed but are sometimes forgotten – other examples are additional concreting to yards and solar panels added to roofs.
• Check machinery values with auctioneers who hold regular sales.
• When assessing rebuilding costs for insurance purposes, demolition and disposal costs are high and need to be included, alongside the cost of dealing with any asbestos, replacing the floor (often overlooked), planning fees and professional costs. Concrete costs have soared.
• Rebuilding costs are affected by location – farms that are remote and/or difficult to access will be subject to higher construction and other costs.