Companies’ assets such as contents and stocks are insured against certain events within the property damage insurance for a value given by the insured to the insurance company. Setting the sums insured for your contents and your stock is one of the most important considerations. It determines the amount you receive in the event of a claim and serves as a basis for your premium calculation.
The question is to know how do I calculate the total value of my contents and stocks. Which value shall I give to the insurer? There are a certain number of different values: market value, initial purchase value, book value, actual cash value, replacement value… What is the rule in property insurance in respect of the sums insured for your contents and your stock?
I – What is the goal of the property damage insurance?
Before going into detail about the sums insured, it is important to understand the goal of the property damage insurance. The goal of the property damage insurance is to indemnify the insured party so that it will be in the same financial position before the loss and after the loss with no improvement. Therefore, an easy answer to the previous questions would be to say that you must calculate how much it will cost to replace your operation if it will be entirely destroyed.
This calculation is very easy when you have bought all your equipment, furniture as new (without any discount) and you are just starting your operation. The total value to insure will be the money you have spent on your operation. When your equipment is older, the calculation becomes more complex.
II – What value shall I give to my insurer for my content?
First, it is important to know that the sum insured for content must include the total value of the machinery, plant, equipment, furniture, shelving, racking, fixtures and fittings, and all other contents belonging to you or leased by you.
In Hong Kong a typical policy will provide the replacement cost value for your contents. What does it mean? What is the definition of the replacement cost?
The replacement cost value is the amount necessary to replace, rebuild or repair damages with similar materials, without considering depreciation.
Replacement value is opposed to the actual cash value. Actual cash value is the value of your property when it is damaged or destroyed. Actual cash value is equal to the replacement value minus the depreciation.
Lets take an example
You have bought an equipment 5 years ago. This equipment’s life span is 10 years and it is now worth as new USD 100,000. After 5 years of usage, the equipment’s actual cash value is then USD 50,000.
When insuring on replacement value (at the date of the loss), the insurer will indemnify the insured to buy or repair the equipment without applying a depreciation coefficient or what we can call wear and tear coefficient (50% in our case above).
Actual cash value insurance will be a cheaper solution however, replacement cost indemnification offers better protection to the insured.
There are some limits to the replacement value clause. As instance, if you don’t want to repair or replace your damaged equipment, the insurer will deduct some wear and tear and will not reimburse the full replacement value of your equipment.
In case you have specific high-value items (work of art), we recommend declaring them separately and asking your intermediary for some recommendations on how to insure them.
III – What value shall I give to my insurer for my stock?
The sum insured for the stocks must represent the value of all stock and material in trade belonging to you. It includes the materials and components, the goods in the process of manufacture and of course the finished products.
Value for stocks is easier to define as stocks are bought to be sold or transformed in a short time hence there is no discussion about the depreciation coefficient. The insured amount should reflect the cost to the insured to replace the items without the anticipated profit (so not the retail price).
- Raw material = the market cost of the material (including transport cost)
- Semi-finished goods (work in progress) = the costs of the raw materials and all manufacturing costs
- Finished goods = manufacturing cost of the finished goods
Also, remember to cover yourself for the highest level of stock you may have through the life of your policy (including seasonal variations). The sums insured for your stock should represent the maximum value at any one time, which means the highest value a complete loss of all your stock could cost you to replace.
IV – Conclusion
To calculate the value of your contents and stocks for your business insurance in Hong Kong, it is important to keep in mind the following elements:
- Do not under insure the value of your content and stock. If you have some question, ask your intermediary for advice
- Replacement value offers better protection that actual cash value.
- Reevaluate every year. Consider how your business might have grown or change since the policy started
- Declare specific high-value items separately
Still having question about the insured value, please send us an email with your contact details.