Running a farm means dealing with plenty of risks, from unpredictable weather to rising costs. But one risk that often catches farmers off guard is hidden inside their insurance policy: the co-insurance clause, sometimes called the underinsurance clause.
This clause is especially relevant for farm insurance in Tasmania, where rising building and machinery costs mean many farmers are unknowingly underinsured. If your sheds, plant, or equipment aren’t insured for their true replacement value, the co-insurance clause can leave you badly out of pocket when you make a claim.
What Is the Co-Insurance Clause in Farm Insurance?
The co-insurance clause is designed to discourage underinsurance. It requires you to declare the full replacement value of your farm assets. If you don’t, and you insure them for less, insurers can reduce your payout in proportion to the level of underinsurance.
This applies even if your claim is for a partial loss, not a total rebuild.
Real Examples of Underinsurance on Farms
Example 1: Machinery Shed
A farmer has a machinery shed that would cost $600,000 to rebuild. To save money, they insure it for $300,000.
When a storm causes $120,000 of damage, the farmer expects to be covered. But because the shed was only insured for half of its true value, the insurer applies the co-insurance clause and only pays 50% of the claim. The farmer receives $60,000, leaving a $60,000 gap.
Example 2: Dairy Infrastructure
A dairy worth $1.2 million is insured for $800,000. A fire causes $400,000 of damage. The insurer determines the farm was insured for two-thirds of its replacement cost, so the payout is reduced to around $266,000, leaving the farmer to fund the rest.
Why Farmers Are at Risk of Underinsurance
- Building costs and materials have increased sharply in recent years.
- Labour shortages drive rebuild costs higher.
- Many farmers don’t update their sums insured regularly.
What might have been adequate cover five years ago could now fall well short of today’s replacement costs.
How Farmers Can Avoid the Co-Insurance Penalty
- Get updated valuations – Base sums insured on current replacement costs, not market value.
- Review policies annually – Construction and machinery prices change quickly.
- Use a farm insurance broker – An experienced broker can structure policies and advise on sums insured to reduce the risk of penalties.
Final Thoughts
The co-insurance clause is one of the most common reasons farmers in Tasmania and interstate get less than expected from their farm insurance claim. By insuring sheds, equipment, and buildings for their true replacement value, you protect yourself from shortfalls that can cripple cash flow when disaster strikes.
Farm Insurance FAQs
1. What is the co-insurance clause in farm insurance?
The co-insurance clause is a feature in many farm insurance policies that can reduce claim payouts if your property is significantly underinsured. Typically, it only comes into effect if the sum insured is less than 80% of the asset’s full replacement value (some policies use 90%). This means you need to declare the true replacement cost of farm buildings, sheds, and equipment, not just an estimated or partial value to avoid a reduced payout.
2. How does underinsurance affect farmers in Tasmania?
Underinsurance can leave farmers thousands of dollars out of pocket. For example, if a machinery shed worth $600,000 is only insured for $300,000, a storm damage claim of $120,000 might only pay out $60,000 under the co-insurance clause.
3. Does the co-insurance clause apply to partial losses?
Yes. Even if your farm suffers partial damage — like a fire in one section of a dairy or storm damage to a shed roof — the payout can be reduced if your policy shows you were underinsured overall.
4. How can I avoid being caught out by underinsurance?
Farmers should review sums insured every year, update valuations to reflect current building and labour costs, and work with an insurance broker who understands rural risks. This helps ensure your farm insurance in Tasmania truly covers the cost of replacement.
5. How is the co-insurance penalty calculated?
Most farm insurance policies use a simple formula:
Payout = (Sum Insured/Actual Value) × Loss Amount
For example:
- A machinery shed’s actual replacement value = $600,000
- You insure it for = $300,000
- A storm causes $120,000 worth of damage
The insurer applies the formula:
Payout = (300,000/600,000)×120,000 = 60,000
So instead of receiving $120,000 to fix the shed, you only get $60,000 because you only insured half the true value.
Have more questions? Get in touch at:
toma@mclardymcshane.com.au
