1. Forms
2. FP
3. FP-05-21

What the form is

The FP 05 21, titled "Replacement Cost – Mobile Agricultural Machinery and Equipment," is an endorsement to a farm insurance policy. Its primary function is to change the basis of loss settlement for covered mobile agricultural machinery and equipment from Actual Cash Value (ACV) to Replacement Cost (RC). This means that in the event of a covered loss, the insurer will pay the cost to repair or replace the damaged or destroyed item with new property of like kind and quality, without a deduction for depreciation, subject to policy terms and limits.

Classes of business it applies to

This endorsement is specifically designed for agricultural businesses that own and operate mobile machinery and equipment. This includes, but is not limited to:

• Crop farms
• Livestock operations
• Dairy farms
• Orchards and vineyards

Real-world examples: A farmer with a relatively new tractor or combine would benefit from this endorsement. If a three-year-old combine, insured to its replacement cost, is destroyed by a covered peril like fire, this endorsement would allow the farmer to receive the amount needed to purchase a new comparable combine, rather than its depreciated value. Without this endorsement, the settlement would be based on the FP 00 30 form, which typically provides Actual Cash Value.

Special considerations

• Scheduled Property: For replacement cost valuation to apply, the mobile agricultural machinery and equipment must usually be specifically listed and described on the policy declarations.
• Insurance-to-Value Requirement: A common condition is that the property must be insured to at least 80% of its full replacement cost at the time of loss. If not, the insurer might only pay a proportionate share of the loss or revert to an ACV settlement.
• Newer Equipment: This endorsement is most beneficial for newer or well-maintained equipment where the difference between RC and ACV is significant. For older equipment, the additional premium for RC coverage may not be cost-effective.
• Repair or Replacement: Payment on a replacement cost basis is often contingent upon the actual repair or replacement of the damaged property. The insurer may initially pay ACV, with the remaining recoverable depreciation paid once the item is repaired or replaced.

Key information for agents and underwriters

• Agents: Agents should identify clients with significant investments in newer mobile agricultural equipment and explain the benefits of RC coverage versus ACV. It's crucial to ensure accurate scheduling and valuation of the equipment to meet the insurance-to-value requirements and avoid underinsurance. Discussing how the RC provision works, especially the requirement to actually repair or replace, is important for managing client expectations.
• Underwriters: Underwriters need to verify that the scheduled equipment is eligible for RC coverage (e.g., age and condition may be factors). They must confirm that the limits of insurance reflect at least 80% (or the policy-specified percentage) of the current replacement cost of the machinery. Proper documentation of the equipment's description and value is essential for accurate rating and risk assessment. They should also be aware that this endorsement modifies the standard valuation provided in the FP 00 30 form.