Simplified Laws Guide to Taxation and Legal Concern “Insurance is a subject matter of solicitation” – have you heard this sentence? All insurance advertisements carry this line. It means insurance is a product that needs to be asked for by the consumers. So, the customer/consumer has to identify and choose the right product which fits into his needs.
Are we really choosing the policies”? Maybe individuals spend time in choosing Mediclaim/life insurance. But when it comes to insuring the assets such as building, plant and machinery, equipments of the company, no effort is made to ascertain the details of the policy, its coverage, etc.
In this backdrop, one of our senior panellists Sri B L Narayan has written this article on the different methods of insuring the assets. According to me, this is the basis on which the insurance is done. Hope this article will be of help to you.
Methods of insuring assets – There are two methods, namely
- Market Value basis
- Reinstatement value basis
Market Value Basis
Under a market value policy the sum insured will be the Market value of the property, which is the depreciated value of the property. The value of the building and plant and machinery will depreciate over a period of time and generally the insured will choose the sum insured as per the gross block value in the balance sheet. The treatment of the claim will also be on the same basis, loss amount will be arrived at after applying depreciation on the loss assessed. So the insured will receive the claim after depreciation. Thus if the property has to be reinstated to it’s original condition, the insured will need to incur the additional cost to bring the property to it’s original condition over and above the amount paid by the insurer and will not be fully indemnified or compensated. In this method the insured gets “old for old”
Reinstatement Value Basis
In the reinstatement value basis the sum insured must represent the present day reinstatement or replacement cost of the building or machinery. Claims also will be paid for the actual cost of such replacement or repairs – without applying depreciation. Therefore the insured will be able to reinstate or replace his property without incurring additional cost as the claim amount paid will be adequate to do this. Thus in this method the insured gets “new (property) for old”.
General Practice
A fire policy is considered to be issued on Market value basis unless it specifies that the policy is issued on re-instatement value basis. Hence it is necessary to request the insurance company to issue the policy on Reinstatement value basis if one desires so. This has an important bearing on how the loss will be assessed and paid by the insurance company.
Suggestion
Considering the advantages, it is advisable to insure the property on reinstatement value basis. However the caveats are that the sum insured must represent today’s cost of such property, and the policy must have the reinstatement value clause inserted in it.
Bottom-line
So, the bottom-line is that every company has to spend quality time in analysing the features of the policy, the claim process, the cost and benefit analysis, before taking up asset insurance policy.
In subsequent articles we shall discuss how to select the sum insured and understand how a wrong selection of sum insured can lead to financial ruin in the event of a loss and the policy taken will not be even worth the paper on which it is written.
Read : What can be done if an employee runs away with company’s money?
