Ensure clients within the engineering and plant industry understand the 'basis of loss' settlement clause

Usually clients within the engineering industry have complex concerns when it comes to insurance claims, due to the nature of their industries. This is understandable, considering that any damage to key items of machinery will have an immediate impact on productivity and profitability. Most clients therefore expect immediate replacement in order for machinery business to commence, in order to mitigate potential financial losses.

It is therefore essential that brokers dealing with these industries ensure that clients are familiar with the “basis of loss” settlement clause under certain plant policies, which is stipulated as either New Replacement Values or Market Values. Jonjon Smit, sales director of CIB, says that the insured will expect the insurer to cover the total cost of replacing or repairing the damaged machine immediately, which might not actually be the case.

Smit explains that in the event of the New Replacement Value clause being used, where the damage to the insured item can be repaired, the insurer will pay only those expenses necessary to restore the damaged plant to its former state of serviceability. “This includes additional costs to dismantle and reassemble plant equipment as well as transportation to the repair facility, within the limit of indemnity stated in the policy schedule. A number of plant repairs are performed in-house, in which case the insurer only pays the cost of materials and wages incurred for the purpose of the repairs, plus a reasonable percentage to cover overhead charges,” says Smit. These charges do not include depreciation in respect of replaced parts.

Many plant accidents result in equipment being uneconomical to repair. If the cost of repairs equals or exceeds the actual value of the plant insured, the insurer will pay the actual value of the item immediately before the occurrence of the loss, including costs for ordinary freight, erection and customs duties, if any, provided such expenses have been included in the sum insured. Smit says that the insurer will also pay any “normal” charges for the dismounting of the plant destroyed, after salvage is taken into account.

The situation would be slightly different had the “basis of loss” settlement Market Value been chosen by the insured. Smit says that in the event of partial damage, where the plant can be economically repaired, the basis of indemnity is that the cost reasonably and necessarily incurred to restore the plant to the same, or similar state of serviceability, existing immediately prior to the event.

“This settlement becomes fairly technical. Whenever possible, used parts will be sourced for the repair, but the insurer contribution to any new parts will be calculated based on the market value of the part in proportion to the New Replacement Value of the plant,” says Smit.

A total loss under this category, where the cost of partial damage repairs equals or exceeds the market value of the plant immediately prior to the loss event, will be regarded as total loss. The basis of settlement will then be calculated as the reasonable market value of the plant, but not exceeding the sum insured stated in the schedule.

Smit says that the broker and insured should sit down and carefully plan the insurance needs in the event of partial or total loss of a plant item to avoid any confusion. “Brokers must ensure that they value the plant and equipment accurately, and must at all times consider the impact of fluctuations in rand dollar exchanges. In addition, costs of landing the plant equipment in South Africa (including customs and additional taxes) and any discounts the insured might have received when purchasing the plant must be considered. Careful planning at the policy inception and underwriting stages can avoid financial liabilities and complex investigations for clients at claims stage,” concludes Smit.