The same machine can appear in the policy at two different values: what it would cost to buy new today (reinstatement value), or what it’s worth today in its used condition (actual cash value, after depreciation). The choice isn’t a technicality – at claim time, it decides what you can actually restart with.
- Reinstatement value: the cost of buying new or rebuilding today – this is what actually lets you replace what was lost.
- Actual cash value: reinstatement value minus wear and tear – a smaller sum insured, a smaller premium, a smaller payout.
- The valuation method can differ by asset group; what matters is that it’s a conscious decision, not a default.
The logic of the two worlds
Reinstatement-value cover promises that if the asset is destroyed, the payout matches the cost of buying new – the burned-down hall can be rebuilt, a new machine ordered in place of the wrecked one. Actual-cash-value cover, by contrast, prices in the depreciated condition: for a ten-year-old machine, it pays out the value of a ten-year-old machine. The premium follows suit – reinstatement-value cover costs more because it also pays out more.
The trap appears when the company wants to restart at reinstatement-value cost but is insured at actual cash value: the company then covers the difference itself.
When is which right?
For the building and for operation-critical machinery, reinstatement value is typically the defensible choice: at claim time, the real question is not the residual market value but the cost of getting back up and running. Actual-cash-value cover can make sense where replacing the asset on the used market is realistic, or where the equipment fleet is being phased out. The terms often set an age or depreciation threshold too: for heavily worn equipment, the reinstatement-value payout can be limited – this should be clarified when taking out the policy.
Valuing the three asset groups
For the building, the rebuilding cost is the yardstick – not the market price: details here. For machinery, it’s today’s new purchase price, with the machinery inventory as the basis for the list. For stock, the purchase or production cost is typically the basis – the stock article covers how to handle fluctuation. The system only works once all three groups are entered at a consciously chosen value.
What to actually do
Take out the policy and check: which valuation method applies to which asset group? If the answer isn’t clear, or the contract has run with unchanged sums insured for years, it’s time for a review – price movements alone can cause underinsurance: here’s how the pro-rata rule works. One look a year is what protects you: the annual review.
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