The sum insured you set can influence multiple aspects of your insurance, including premium and potential claims payout. As the sum insured for your equipment is set by you (and not the insurer), it is important that sums insured are reviewed with your broker at renewal to ensure your equipment is adequately covered for its current market value, says Jacinta Fryer from UAA.
For example, you may have purchased a machine at a fire sale or an auction, and the price paid was an absolute bargain, but if the unit needed to be replaced with the exact same item tomorrow, how much would it really cost in the market?
To get an idea of the current value of your equipment, consideration should be given to its age, make, capacity and hours, as well as any permanent attachments or modifications made to the machine. Your experience in purchase or sale of your equipment plus any machinery trader websites may also assist with establishing your sum insured.
The nominated sum insured will also determine:
• the premium payable per machine
• the maximum amount that will be paid in the event of a loss
• excess applicable in the event of a claim – usually calculated as a percentage of the sum insured (however subject to any minimum excess applicable)
As the premium payable for a machine is influenced by the nominated sum insured, if this value is not reviewed there is potential that premium is being overpaid (i.e. if the current market value is in fact much lower than nominated). Conversely, if the current market value is higher than the nominated sum insured, premium is being underpaid which may result in claims settlement being reduced or a policy benefit not being applicable at all or applied in a reduced capacity.
When it comes to settlement of a claim, claims typically fall within two categories – repair or total loss. The sum insured of your machine effects both categories.
Your sum insured is the maximum indemnity payable for damages to your machine. UAA utilises independent qualified and experienced machinery assessors with a trade background to determine the cause and severity of the damages. Utilising the experience levels of the assessor, the assessor will determine if the machine can be safely and adequately repaired within the indemnity levels or if the vehicle is an economic total loss, meaning the cost of repairs outweigh the total loss value of the machine, or the machine is a statutory total loss and cannot be safely repaired.
When determining if the vehicle can be repaired or if it is an economic total loss, UAA’s independent assessing panel will seek to obtain the market value of a machine immediately before the incident. This is provided through independent and certified valuation firms. Once obtained, the assessor will appeal to the market for salvage tenders, being the value of the machine in its damaged state. In order to be a successful repair, the costs of the assessed amount must be less than the market value of the machine immediately before the incident, less its salvage value in its damaged state.
If the item can be successfully repaired for less than its total loss value, the machine is considered a repairable option. If the costs of repairs outweigh the total loss value, the machine is considered to be an economic total loss.
Of course, machine values can change over time for a number of reasons (e.g. supply restrictions, increased demand, inflation, depreciation). UAA’s insurance product allows for scenarios where there may be a difference between the sum insured and the market value immediately preceding a loss:
• Market value plus
• Appreciation in value
• Replacement provision
• Average clause
However, these benefits, and the extent to which they could apply, depend on the nominated sum insured being accurate at renewal.
Market value plus is an automatic benefit included within UAA policies. As UAA insureds set their own sums insured, if the market value of the machine is determined to be less than the sum insured, UAA deploys a free additional benefit within its policy. This policy benefit means that in the event of a total loss, if the Market Value immediately preceding a loss is determined as being at least 85 per cent of the Sum Insured, the settlement amount will be the amount you’ve nominated as the sum insured. If the market value of a machine is determined by the valuer to be less than 85 per cent of your declared sum insured, the settlement amount will be the market value and add an additional 15 per cent on top.
Unless an alternate indemnity basis is elected, equipment insured with UAA includes this free benefit without a requirement for a valuation certificate. This is an excellent allowance provided by UAA, however this could mean that the over insurance of your machine does not see the expected return of the sum insured at a total loss settlement. On the contrary, other insurers may only pay up to the market value of equipment in the event of a total loss.
Appreciation in value –this policy provision allows for circumstances where the value of equipment increases during the period of insurance, but the sum insured was adequate at the beginning of the period. In this instance, claim settlement could be increased by up to 25 per cent above your nominated sum insured (scenario 1). If the nominated sum insured was not adequate to begin with, this benefit may not be applicable (scenario 2).
Replacement benefit –where a machine is within two* years of age and is deemed a total loss, UAA may replace the item with a new machine. Claim settlement could be increased by a maximum of 15 per cent above the nominated sum insured for a new replacement machine.
*increased to three years in Nov 23 policy wording.
Average clause – If a machine has been significantly under-insured (the sum insured is significantly below the market value), claim settlement for repairing a machine may be reduced proportionally due to this under insurance, meaning that whilst a machine is technically repairable, the value of the sum insured requires UAA to economically total loss the machine.
UAA would then consider two factors – a total loss payment to the insured or the application of the average clause as noted in the policy, meaning reduced indemnity.
The average clause applies a calculation to settlement which in its simple forms means that for a machine that has been under insured and is only an economical total loss by nature of its sum insured, UAA would contribute a percentage of the repair, representing the percentage of the partial insurance of the machine.
Over insurance can create a perception of additional security if the machine were to be deemed a total loss, however settlement will always be determined using aforementioned principals.
UAA has seen an increasing trend in the number of machines being total lossed as a result of inadequate insurance. This not only has an effect on the settlement amount of your claim, but also flows onto potential financial impacts – given the scarcity of readily available replacement machines. Supply chain issues are still prevalent in both the parts and purchase sector of our industry.
To maximise policy benefits available with UAA, the nominated sum insured for every machine should be as accurate as possible at the beginning of every policy period. This leads to a smoother claims process with both UAA and our Insureds aligned on the value of the machines insured.
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