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It is critical that you get your PAR Sum Insured right

Understanding the correct basis of settlement is very important in order to 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 our clients to establish an accurate sum insured. For this reason, we email a monthly spreadsheet of the plant insured to ensure that you our client has accurate sums insured for your plant.

There are three bases of determining sums insured, namely:

1. New Replacement Value (“NRV”)

Reinstatement basis: This basis of cover 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.

NRV requires input from your dealer / supplier as to the new replacement value and average applies if the sum insured is less than the cost to replace the new item which includes VAT and delivery costs.

Since values need to be updated regularly makes it difficult to establish and maintain the NRV.

2. Agreed Value (“AV”)

AV is a value agreed between the insurer and insured. AV does not attract Underinsurance (Average).

AV 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.

In a total loss the Insurer will pay the Agreed value and if the insured has suffered Partial damages then the insured will deduct depreciation (between 15%-20% per annum) on new parts. To counter the depreciation, you can claim used or secondhand Parts.

The basis of insuring AV has the following challenges these being that the insurer will not pay more than the Market value even if a value has been agreed resulting often in over insurance and betterment is applied if old parts are not available. Valuations for an indemnity basis can therefore be a difficult task for you as both under and over insurance are distinct risks.

3. Market Value (“MV”)

The sum insured must be equal to the market value of the item and average applies if underinsured

MV 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.

Valuations for an indemnity basis can therefore be a difficult task for you as both under- and over insurance are distinct risks.

MV takes into consideration the actual condition of item of plant, hours operated, conditions the item of plant has operated under and what is the market willing to pay for the machine. For this reason, in the event of a claim the Loss Adjustor will determine a percentage which will be deducted from the purchase of new parts as depreciation is calculated into the settlement. In a total loss the Insurer will pay the Market value prior to the loss. In a total loss the Insurer will pay the Market value as per the indemnity basis method. Should the insured have suffered Partial damages then the insured will deduct depreciation (between 15%-20% per annum) on new parts. To counter the depreciation, you can claim used or secondhand Parts.

The basis of insuring MV can be a difficult task for you as both under and over insurance are distinct risks.

Not everything is covered

The following are the main exclusions typically found on a CAR policy:*

•  Loss of or damage due to electrical or mechanical breakdown, failure breakage or derangement, freezing of coolant or other fluids, defective lubrication or lack of oil coolant
• Third party liability unless shown on the schedule
• Consequential loss or liability of any kind
• Normal wear and tear
• Use for a purposed not designed for

Always remember to scrutinize your policy wordings for the full list exclusions.

You can bolster the standard cover

PAR is best suited for plant and machinery used on site only (not registered for road use). If plant is registered for road use, then you should ensure that Third Party Road Risk is added onto that specific item of plant.

The following extensions can typically be added to a PAR policy:

• Third Party Road Risk Liability
• Construction Site Liability Cover
• Recovery costs – extraction and towing
• Hired in plant – cover for your legal Liability that may arise from the Plant that you hire.
• Continuing Hire Charges – cover if plant has been hired and is accidentally damaged
• SASRIA – special risks cover, including riots, terrorism, war, etc.
• Windscreen damage / loss