1 September, 2021

How to avoid underinsurance on farms

Despite bushfires in Perth, this summer has paled in comparison to the catastrophic bushfires of the 2019-20 Black Summer.

For Australia’s farmers, that’s a good thing, as underinsurance on farms remains a significant problem in rural Australia, according to ARGIS farm underwriting manager Peter Morsley.

“Farmers are often underinsured, and this was especially evident in NSW after the recent fires. While it’s an ever-present issue, it is also one that comes to prominence again after every major rural catastrophe,” he says.

The Insurance Council of Australia has previously estimated that up to 80% of bushfire-affected property owners could be underinsured.

Why are farms underinsured?

According to Mr Morsley, there are two main reasons behind underinsurance on farms.

The first is that farmers choose to insure their property, assets and business for less than the replacement cost, playing the odds that they won’t incur a total loss in order to make premium savings. But this can represent a false economy, especially if they do suffer a total loss.

“With fencing and livestock, farmers will sometimes take a small nominal sum insured, thinking that they’ll only ever lose a small proportion unless there’s a major fire,” he explains.

However, during Black Summer, many farms lost all of their fencing, with replacement costs as high as $22,000 per kilometre in some affected states.

Mr Morsley says the other common form of deliberate underinsurance he sees some farm clients opt for is to remove the contents section from their policy.

“But at ARGIS, our farm contents section includes automatic cover extensions such as livestock and goods in transit, farming interruption, and firefighting costs, all of which can be quite important in the event of a loss.”

The second reason for underinsurance on farms is a lack of awareness of the true replacement cost of homes, buildings and equipment. Mr Morsley says this most commonly occurs when people use market value to determine the sum insured when it comes to their dwelling.

“Market value is not the same as the rebuilding cost. The removal of debris and demolition needs to be factored in, and in bushfire-prone areas, having to rebuild to new building standards commensurate with their bushfire attack level (BAL) rating can add significantly to costs, as can demand surge, increasing the price of builders and tradespeople after a major catastrophe. These are the sorts of things that add to rebuild costs but aren’t always factored into the sum insured.”

The implications of underinsurance

While some policies include underinsurance clauses, which limit the proportion of the sum insured they will pay out in the event of underinsurance, ARGIS chooses not to do this.

But the consequence, Mr Morsley explains, is that it does not necessarily collect the premiums it requires to cover its risk exposure. “That puts upwards pressure on premiums, and then premiums rise and clients can’t afford them, leading to further underinsurance. It’s a vicious cycle.”

The importance of brokers in preventing underinsurance

Mr Morsley says that when it comes to buying farm insurance, advice from a well-informed broker is vital.  
He says that to help make sure the sums insured are accurate, brokers and their clients need to consider each renewal on its merits, getting new replacement cost valuations if required.
Brokers should also remind their clients to keep an up-to-date asset schedule, and to contact them any time it changes – not just at renewal – so that a mid-term adjustment can be made.
Brokers can also educate their clients on the risks involved if they want to knowingly underinsure, and explain the impact that underinsurance can have on future premiums.

Here to help

For advice or guidance about the right level of cover for farm buildings and assets, or for general enquiries about farm insurance, you can contact the ARGIS team or call us on 1300 794 364.



The information contained on this website is intended for insurance intermediaries only. The insurance product referred to on this website can only be purchased through a broker. SGUAS Pty Ltd t/as ARGIS Insurance (ABN 15 096 726 895, AFSL 234437) (‘ARGIS’) acts under a binding authority as agent for the insurer of the product, HDI Global Specialty SE – Australia (ABN 58 129 395 544, AFSL 458776).
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