Valuation of assets for insurance purpose

WDV or Depreciated Value basis of insurance: is defined as (estimated cost of reinstatement (material + Labour) + escalation during the policy period)-depreciation for age.

• Generally, Buildings, furniture and fixture, Machinery brought 2nd hand and new are valued under this.
• For machinery the depreciation and usage is calculated from date of manufacture not from the date of purchase, for machinery the reinstatement cost is taken as estimated landed cost (including all taxes and duties as applicable).

Reinstatement Value basis of insurance is defined as: estimated cost of reinstatement + escalation during the policy period.

• Generally, buildings under construction, building and machinery are valued under this.
• Market Value basis of insurance is defined as: is generally used for stock or inventory and is applicable to manufacturer, wholesaler, and trader.

Now coming to the second part of your question that why and when Reinstatement values or Escalation clause is used, Here it goes

Why & when Reinstatement values are to be used?

As a landlord you will want to protect your assets, one way to do this is through property insurance. When it comes to property insurance there are two separate valuations to use which dictate the amount of insurance.

• These are the property market value and its reinstatement value, and it is essential you see these as two different values.
• The Property Market Value refers to the amount you will receive if you sell your property, whereas, the Reinstatement Value relates to the demolition and rebuilding costs of your property.
• If you rely only on your property’s market value and an expert reinstatement valuation is not carried out, you cannot be sure that the correct sums insured are in place – you could end up under insured.

Why & when Escalation clause is used?

An escalator clause is a clause or phrase in a contract or lease agreement that effectively allows for an increase in the agreed price to cover unexpected costs arising from fluctuations.

• It Covers fluctuating costs
• This simply means that should inflation increase more than planned, for example, these added costs are covered by the contract.
• It is accepted practice to insert escalator clauses into construction contracts, rental agreements and personal insurance and business insurance agreements.