China has become the world’s largest agricultural insurance market. Agricultural insurance, as a modern economic institution, has improved the economic development of Rural China but has challenged rural governance. This paper empirically examines the impact of agricultural insurance on farmers’ cooperative behavior and finds that agricultural insurance significantly reduces the degree of discussion, participation, and contribution of farmers to collective irrigation. Heterogeneity analysis suggests the negative impact of agricultural insurance on cooperative behavior mainly occurred in northern China. Agricultural insurance compensating for declining revenue has a stronger effect on farmers’ cooperation than compensating for declining quantities and prices. Farmers’ perceptions and willingness to enroll in agricultural insurance also affect cooperative behavior. Furthermore, this paper finds that agricultural loans can alleviate the adverse effects of agricultural insurance on farmers’ cooperative behavior. This paper analyzes and tests the impact mechanism of agricultural insurance weakening farmers’ cooperative behavior from the aspects of farmers’ interdependence, social capital, agricultural dependence, labor outflow, and income heterogeneity. The policy implication is that by differentiating agricultural insurance promotion, cultivating new social capital, and developing rural financial services, such as agricultural loans, agricultural insurance and rural governance could be improved in a coordinated manner.