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Putting a value on plant and machinery

12th September 2016

Insurance policies can specify different bases of settlement. It is therefore essential that the applicable basis is known before valuing assets.

In the UK, either an indemnity or, more commonly, reinstatement basis is generally used for items of plant and machinery. Other bases of settlement do exist, such as an agreed value basis, but are less common for most purposes.

 

Indemnity basis

An indemnity basis reflects the traditional principle of insurance: to return the insured to their position prior to the loss – no more, no less.

An indemnity basis will cover either:

– Cost of repair, less an allowance for wear, tear, depreciation and all relevant forms of obsolescence

– Cost of a replacement with a similar machine, giving regard to its age and condition and all relevant forms of obsolescence

 

A settlement on this basis is therefore unlikely to fund the full cost of a new replacement asset, so you should be particularly conscious of overstating sums insured.

The purchase cost should be avoided, as the value of plant and machinery can rapidly depreciate once in operation. A reasonable starting point is the current market value of the asset, taking into account age and condition.

Difficulty arises where a current market value is not easily determinable, particularly if the asset is no longer being produced or actively bought and sold.

 

Reinstatement basis

Reinstatement is now the most common basis of settlement used in the UK insurance market. This basis departs from traditional principles, as a claim settlement will result in an improvement to the insured’s position.

Reinstatement will cover either:

– Cost of repair, with no deductions made for wear, tear, depreciation or other forms of obsolescence

– Cost of replacing the asset with a new item of similar type, capacity and utility (i.e. ‘new for old’)

The sum insured on a reinstatement basis should include the full cost of completely replacing an item of plant or machinery with a new item of similar type, capacity and utility. In addition to the purchase cost, this sum should include factors such as freight and installation costs.

If the item is readily available for purchase, then determining an appropriate sum insured should be relatively simple. However, difficulty arises if machinery is old or no longer in production. In those circumstances, the cost of an alternative piece of equipment of a similar nature and capacity must be identified.

 

Getting your sums right

The approach taken to valuations will produce quite different results, with reinstatement sums insured being notably higher than those on an indemnity basis. Approaching a valuation from the wrong starting point is likely to result in either over or underinsurance.

Plant and machinery are also particularly susceptible to fluctuations in value.

For a no obligation commercial insurance review please contact Horner Blakey Insurance Brokers on 020 7929 0108.

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