Here are some helpful articles on understanding machinery valuations – for expert valuations on your machinery don’t hesitate to give The Valuator a call!
The article below was source at Zurich Insider
For businesses that rely on key equipment, underinsurance can have unexpected and severe consequences. Simply using the purchase cost for valuing assets is a mistake made by many, resulting in inaccurate sums insured and inadequate claim settlements.
Valuing assets for insurance purposes requires a particular methodology, so it is important to take care over your approach in order to avoid underinsurance.
How will the policy settle a claim?
The basis of settlement determines how an insurer will calculate a claim settlement. When setting the sum insured, different approaches must be taken, depending on which basis of settlement is specified.
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 customers’ purposes.
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 customers 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.
Valuations for an indemnity basis can therefore be a difficult task for customers to undertake alone, and both under- and overinsurance are distinct risks.
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
Understanding the correct basis of settlement is very important in order too provide suitable sums insured.
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, making it difficult for customers to establish an accurate sum insured.
To ensure your sums are accurate, there is no substitute for regular professional valuations to be undertaken by a qualified surveyor.
Understanding Machinery Appraisals – This article was source at Equipment Appraisal Services
Effective Age of an Asset in Machinery Valuation
Though you can try to determine the value of a piece of machinery, there are a few techniques that don’t really work well. Using standardized depreciation formats instead of considering the long-term viability of the equipment means you may have completely depreciated the assets you are still using on a regular basis, which provides an inaccurate view of your business’ financial outlook. At the same time, basing the value on local sale prices or dealership offerings may also wreak havoc on your financial outlook, as other machines being offered for sale may be of higher or lower quality and maintenance than the machinery you own and need to appraise.
When an equipment appraiser looks at your business’ equipment, he or she is not just looking at the age, manufacturer and model. Because machinery can be kept in a wide range of conditions and levels of maintenance and repair, a much closer approach must be undertaken to determine what the effective age of a machine is as well as the expected remaining useful life from that machinery. But what kind of details are considered during equipment appraisals? Let’s continue on for a look.
How Machinery Valuation Specialists Determine Effective Life
So how do machinery appraisers determine the effective useful life of your equipment? They take a good look at the machinery, to see whether it has had excessive wear and tear or other signs of abuse, such as dents, welded repairs or similar concerns. Other areas they’ll consider is the working environment and how well the machine has been protected from the elements. They’ll take a look at your maintenance and repair logs to ensure that the equipment has received proper care or whether there are outstanding issues that could lead to further problems down the road. They’ll consider the hours meter and whether the degree of wear matches up to what they’d expect from machinery with that amount of use. Beyond the machines you own and hare having appraised, they’ll also take into consideration similar machines they’ve appraised in the area and how long they tend to last, basing your machine’s potential effective life on all these factors.
By knowing your company’s equipment appraisals are accurate and based on solid methodology, you’re able to make better decisions in the future that will benefit your company, such as determining when to plan for expected machinery changes as older assets reach end of life. By having a quality, certified machine appraiser take a good look at your machinery and determining its effective age and potential future lifespan, you have legal documentation of the condition of your machinery for financial or insurance purposes if needed.