Getting the sum insured right is critical to ensure you’re paying the right premium and
getting the cover you expect, explains insurance expert Ben Rickard
Generally, if something is road registered or is mechanically propelled on wheels, it should be insured on a vehicle policy. This includes trailers. There are exceptions for heavy equipment, where specialist cover called ‘contractors, plant & machinery insurance’ exists. The right policy needs to be in place according to the type of machine, usage and cover benefits required.
Most commercial vehicle and contractors’ plant and equipment insurance policies cover the ‘market value’ or ‘present value’ of the vehicle. This means the value of the vehicle at the time of the loss after taking into account its age and condition. This is not the same as the book value allowing for depreciation, which is more for accounting purposes. You may depreciate a vehicle differently to what it is actually worth if it were sold on the open market. If you get this wrong, it can be a big problem and may not be what you expect.
This is particularly important for vehicles that can appreciate in value, which is increasingly common. Market values can be worked out by looking at the prices of comparable vehicles on online auction sites, speaking to your local dealer or by obtaining a professional valuation.
If there is a total loss claim, the insurer will obtain an independent valuation and use that as the basis for settling the claim. You can request additional valuations if you are not happy with their one. This can be the case if a vehicle is rare or has been modified.
Some vehicle policies (such as Builtin’s) will cover the market value regardless of the ’sum insured’ noted on the policy for that vehicle, while others will only cover up to the lower of either the sum insured or the market value.
In those cases, having a sum insured lower than the market value may result in a lower premium (since the premium is based on the sum insured) but, if you have a total loss, your settlement from the insurer won’t be enough to buy a similar replacement vehicle. However, if your sum insured is more than the market value, you could be paying too much in premium.
You can also request an 'agreed value', where the insurer will pay out the amount shown on the policy. Typically, they will require a written valuation before providing agreed value cover on commercial vehicles. The policy may also have fine print that says the cover will revert to market value if the agreed value is more than 20% above the market value at the time of the loss.
Mobile plant, tools, and equipment
Items that aren’t mechanically propelled on wheels can be insured for their ‘replacement value’. This means the amount it would cost to replace it with a new one, regardless of its age or condition. The replacement item usually needs to be as close as possible to the model that it is replacing. For this type of cover, your sum insured needs to be the total replacement value of all the insured items with no depreciation taken into account. Some items, usually those above a certain value, will need to be individually noted on the policy, while others can be bundled under the total sum insured as ‘unspecified items’.
Some policies may only provide replacement value cover on items that are less than two years old. Others (like Builtin’s) will cover them for full replacement regardless of how old they are. Insurers will expect you to insure the total amount of your plant and equipment, ie, your maximum possible loss, not just a portion of it, even if the likelihood of a total loss is low.
Trailers are road registered so can’t be insured under this type of policy. Nor can ride-on or self-propelled lawnmowers.
Leased equipment
Landscapers will be required to insure any hired or leased equipment, which can usually be done one of two ways:
Take the ‘damage waiver’ the hire company offers. This usually means insuring each piece of equipment as you hire or lease it.
Add an extension to your existing equipment/contractors plant insurance to cover leased or hired equipment. You can either add specific units or take a blanket cover, which will cover all hired items subject to certain limits such as annual hire fees and the maximum value of any single hired piece of kit.
Landscapers who regularly hire or lease equipment will generally find the second option the best. Additionally, some commercial vehicle insurance policies include automatic cover for hiring in vehicles, provided they are of a similar kind and used for a similar purpose to those already insured on the policy.
Stock
If you hold high levels of stock that you want to insure, this is usually covered for its ’indemnity value’. This is similar to market value as it takes into account the age of the stock and covers stock at your cost price, without any profit margin that you might apply to it when selling it at retail value (ie, the market price).
In a nutshell
Getting the sum insured right is critical to ensure you’re paying the right premium and getting the cover you expect. Market/present value is different from your book value and working it out is different than just applying depreciation.
Take the time each year to review your sums insured and adjust them as needed. Mobile plant and equipment can be insured for replacement value in some cases, but if it is mechanically propelled on wheels it needs to be on a vehicle or contractors, plant and equipment policy, which are both market value policies.
For more information visit builtininsurance.co.nz, email Ben Rickard at ben@builtin.co.nz or call him on 0800 BUILTIN.