Why is My Insurance Agent Trying to Sell Me a Blanket?September 3, 2015
I get it. You called your agent because you needed to buy a piece of paper and a promise (an insurance policy) and you probably weren’t too happy about that to begin with. Now, part of the policy includes a ‘Blanket’. Why in the world do you need that?
All kidding aside, ‘Blanket’ is a common way to referring to your Unscheduled Farm Personal Property Inventory. (Note: On a Business policy your Blanket may cover both Buildings and Personal Property.) If you have equipment to insure, you have several options. In this blog we will talk about three of them, and the benefits of each.
Understanding the Benefits of Unscheduled Farm Personal Property Inventory Coverage
Scheduled Farm Personal Property
On a Farmowners Insurance Policy, the cheapest and easiest-to-understand way of insuring your farm equipment, including combines and forage harvesters, is on a Scheduled Farm Personal Property Inventory form. You simply list the items you want to insure, and then you will need to assign a value to each. You want this value to accurately reflect the actual cash value of that piece of equipment, since that’s how you will be paid if it suffers a loss.
You will pay a certain amount per thousand dollars of insured value. For example, a $10,000 tractor scheduled at a $4/$1000 rate, would cost $40 to insure. This coverage will protect your tractor wherever you take it, even if it is removed from your farm premises. This is a big difference between farm policies and business policies as business policies will usually only insure your Business Personal Property within 100 feet of the insured premises.
Your second option is an Inland Marine Coverage. This is rarely used on Farmowners Policies because both Scheduled and Unscheduled Farm Personal Property coverage acts similar to Inland Marine coverage. Commercial Business Insurance policies possess a greater need for Inland Marine coverages because of limitations placed on where Business Personal Property is covered.
The advantage of Inland Marine coverage is that it is usually the most liberal coverage available for your equipment in the sense that it covers the most causes of loss. Inland Marine Insurance is written using a lot of underwriter discretion and rates can vary greatly between carriers. However, Inland Marine Insurance usually will be written at a higher rate per thousand than either Scheduled or Unscheduled Personal Property coverages.
Blanket Farm Personal Property
The third, and often the best way to provide you with farm equipment insurance, is through a Blanket, or Unscheduled Farm Personal Property coverage. Blanket coverage is a little harder to understand than Scheduled FPP coverage, but having a good grasp on it may help save you premium dollars and avoid underinsured losses.
Blanket Farm Personal Property coverage does not assign a value limit per piece of equipment, but instead looks at a farmer’s whole inventory. If the farmer has his loss segregated, meaning all his equipment is not under the same roof, thus making a total loss unlikely, he can reduce the coverage limit down to 80% of the value of his inventory and still avoid any coinsurance penalties. This way he is only paying a premium on 80% of the value.
For example, $100,000 of inventory insured at $80,000 saves $100 of premium at a $5/1000 rate. (Formula: 100-80=20, 20 X $5=$100). I advise clients to go no lower than 85%, and 90% is better. Reducing the insured amount can help to offset the slight increase in rate per thousand of Blanket Farm Personal Property Insurance versus Scheduled FPP (usually this increase is less than $1/1000).
Benefits of Blanket Coverage
Although it can be slightly more expensive, Blanket coverage provides you with significant benefits that I believe make the coverage well worth it.
Still Have a Covered Claim for Unlisted Assets
The first, and most significant benefit, is that you will still have a covered claim even if you forget to call your insurance agent and add your new tractor to your policy, and as long as the limit of coverage on your policy does not fall below the 80% requirement you will not be assessed a coinsurance penalty at loss time either.
For example, a farmer has $100,000 of Blanket Farm Personal Property Inventory insured at 90% ($90,000), she buys a new garden tractor for $10,000 and forgets to call her agent to add it to the policy. The following month, the shed that she stored the tractor in, burns down destroying the tractor. She calls her agent to see if the loss is covered. Now, her farm inventory equals $110,000 and she still only has $90,000 of insurance. However, 90,000/110,000= .81%, so the farmer still meets the 80% threshold for coinsurance and, since she was not required to schedule each individual item, she will receive $10,000 for the loss of her new tractor. If this same farmer had her Farm Personal Property on a Scheduled basis, her loss would be uninsured because she did not specifically list the new tractor on the policy.
The above example also highlights one reason why it is important to give a buffer and insure the inventory at greater than 80% of its value. Had this farmer only insured to 80%, the addition of the new tractor would have made her limit of insurance lower than 80% of total inventory value and she could have been assessed a coinsurance penalty at claim time.
Claim Payment Could be Higher
Another benefit of choosing Blanket Farm Personal Property coverage over Scheduled FPP is that your claim payment could be higher if you have Blanket coverage.
For example, let’s assume the same farmer from our previous example has a 1979 John Deere 4440 with 7,500 engine hours. She has the tractor Scheduled on her policy for $25,000. After losing the tractor in a fire, she goes to the implement dealer and finds another JD 4440 of like kind and quality. The problem is the price of the replacement tractor is $30,000. Because she only scheduled her tractor for $25,000, that is the most she will receive from her policy. In this scenario, she may have to pay a substantial amount out of pocket to replace her equipment.
Now let’s assume she chose to cover her equipment inventory on a Blanket basis. How does this change her scenario?
Assuming she again has an FPP inventory totaling $100,000 insured at 90% ($90,000) she now has some flexibility in item value at claim time. For example, if the farmer gets to the dealership lot and she finds that it will actually cost $30,000 to replace the tractor, her $90,000 blanket limit will cover her. Even though she may have calculated her total inventory value with the JD4440 considered at $25,000, adding another $5,000 to her actual inventory amount makes it $105,000.
Since the limit of insurance on her policy is 85% of this total inventory value ($90,000/$105,000=85.7%) she will be able to receive $30,000 to replace the tractor and also avoid a coinsurance penalty. In this scenario, she was indemnified and did not have to pay for more of the loss out of her own pocket like she did when she was insured under a Scheduled Farm Personal Property form. This example highlights yet another reason to insure your blanket inventory for more than 80% of total value.
The flexibility of Blanket or Unscheduled Farm Personal Property Insurance provides significant cost and coverage benefits to insureds, and agents selling blankets to their customers are indeed doing a good deed.
Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.