Understanding “Market Value” Applying to Plant and Equipment

Why do we use “market value”, how is it established and what are the potential issues?

Firstly, some policies define market value as the cost of replacing lost or damaged plant and equipment with plant and equipment of similar type, age, condition, and capacity. If installation and/or commissioning costs are required, these would also be included in addition to the plant and equipment (material) costs. Some policies say it is the cost of replacing the damaged plant for the amount a willing buyer would pay a willing seller for it on the open market. These definitions specify, what we know as, “indemnification” – i.e., putting an insured back in the position they were in before the loss or damage occurred. No more and no less.

Standard tables of age versus depreciation cannot be applied to plant and equipment – as it sometimes can be for some property – in arriving at an indemnity value. The market value for plant and equipment depends upon plant type, its use/environment, maintenance, age, and prevailing market conditions. For example, V8 diesel Toyota Land Cruisers are currently very sought-after because a model/engine change is imminent and all new ones available are accounted for. A new Land Cruiser (retailing for $120k) has a potential resale market value of circa $170k. Older, second-hand Land Cruisers have similarly increased in value. On the other hand, a bobcat or forklift used for four years in a salt mine, could be virtually worthless because the harsh working environment is highly corrosive and rapidly degenerates metal and rubber components. That same bobcat or forklift (with similar hours) used in a dry-goods warehouse, could have a very high market value if it was well maintained and cared for.

How MECON establishes “market value” for plant and equipment

So we can say that market values can significantly fluctuate for a number of reasons. However, market value will need to be established for total losses as well as average application. Establishing market value can be a difficult process for an insured. Often, their view of the plant’s value will be subjective whilst an insurer is looking objectively at it. Some insurers are guided by assessor’s advice, others by machinery dealers. MECON uses registered valuers. We do this because they have no vested interest in the outcome of the valuation, except for their professional standing as valuers. Their valuations are legally valid, they consider all qualitative information, and they are constantly in-touch with market forces affecting values.

To remove subjectivity, we are happy for clients, who may dispute a registered valuer’s valuation, to provide a registered valuer’s valuation of their own choosing. This process inevitably produces a transparent, fair and reasonable outcome for our clients and removes potential conflict of interest with other types of valuing.

What are the potential issues with assessing market values?

Potential issues with assessing market values can be:

  • Appreciating values (MECON’s policy automatically allows for this)
  • Average application
    • Client has under-estimated market value.
    • Clients low insured value is still outside 85% average (per MECON policy).
  • Assessor or machinery dealer have a conflict of personality or interest.
  • Insufficient qualitative detail accompanying a claim, leaving the insurer to make assumptions.
  • High levels of depreciation mean sum insured is far higher than market value, giving client unrealistic expectations of insurance payout.

Using “Agreed Value” sums insured removes the potential for disparity between market value and the sum insured – unless the environment promotes appreciation of value (such as with V8 Land Cruisers currently). To obtain agreed value cover from MECON, a client must provide a registered valuer’s valuation current at inception/renewal.



Questions?

If you would like to learn more about this topic or discuss your specific sitaution, please contact MECON.

 

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