Date: April 2020
Inland marine contractors equipment coverage and inland marine miscellaneous personal property coverage are written on an actual cash value basis. This means that at the time of the loss, payment is based on the depreciated value or current market value of the scheduled item.
In other words, coverage pays to replace the damaged equipment with equipment of similar age and physical condition, not a brand new version of it.
For example, if a personal vehicle is seven years old and it is deemed to be a total loss (generally an item is considered a total loss when the cost to repair exceeds the value) as the result of a covered claim, the comprehensive or collision coverage pays the insured the current cost of a similar model that is seven years old, rather than the cost of a new vehicle.
Are You Overinsured?
Members may confuse the value originally shown on the inland marine schedule with the item’s current market value or actual cash value. Typically, a unit is put on the schedule when it is new. When adding coverage for the new unit, MCIT members are asked to show the value of the item. Usually this is the purchase price of the unit. Over time, an item decreases in value or physically depreciates.
When the value shown on the schedule exceeds the current market value or depreciated value, the item may be overinsured.
Example (using fictional values): A new grader purchased for $300,000 is added to the contractors equipment schedule at the time of purchase 10 years ago. The item’s value remains at $300,000 on the current schedule. The current market value of the grader is $150,000. Today, a tornado strikes the highway garage. The grader is damaged, requiring repairs estimated at $275,000. The cost to repair the grader exceeds its current value, so it is deemed a total loss. The actual cash value of the grader is $150,000 at the time of the loss, not the $300,000 shown on the schedule. The item is overinsured.
How Is Actual Cash Value Determined?
MCIT recommends that members implement a procedure periodically to review their contractors equipment and miscellaneous personal property schedules to be certain the values shown on the schedules reflect the current market values, rather than the original purchase price.
The market value should reflect an item of like kind and quality. For example, a heavily used item would have a lesser market value than a rarely used item that remains in like-new condition.
It is important to understand that the contribution cost for actual cash value coverage is based on the scheduled value. As such, members with overstated values on the schedule pay for more coverage than what they can ultimately collect in the event of a significant claim.
Assigning Market Value
To determine an item’s current market value, members can check local newspaper classified ads or recent auction results for current selling prices, or they can check with a local dealer. There are also websites that deal in used contractors equipment. Examples of websites include:
Members can contact their MCIT risk management consultant toll-free at 1.866.547.6516 to address questions concerning actual cash value.