Equipment Appraisal Blog | Understanding Machinery Appraisals

Understanding Insurance Property Loss Equipment Appraisals

Posted by Equipment Appraisal Services on Fri, Jul 25, 2014 @ 04:59 PM

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As accredited machinery and equipment appraisers, we are often contacted by insured companies/individuals and insurance companies when property losses have occurred.

To make sure you understand the two parties and how they relate, the insured is the person or business entity that owns an asset that is covered by an insurance policy. The insurer is the insurance company that pays to the insured for a covered loss.

First, there are a number of reasons that a loss may occur that may trigger an insurance event. While there are numerous reasons, the most common are fire, theft or weather damage. These losses often are not the result of something that the insured had done in negligence.

Second, there are various types of policies and coverage that individuals and businesses can obtain. The two most common types of coverage would be that the insured receives the Actual Cash Value (ACV) of an asset or the Replacement Cost Value (RCV) of the asset.

It is extremely important to understand that these two types of value are not the same.

For example, let’s assume that a manufacturing company purchased a new CNC Horizontal Milling Machine that cost the company $550,000 in 2012. Let’s also assume that due to the current market, inflation, etc., that the cost of the equivalent replacement machine in new condition would be $600,000 in 2014.

Now let’s also assume that the company had a fire in part of their manufacturing facility at the beginning of the summer of 2014. If the insured had a policy that paid at time of loss the equivalent of the Replacement Cost Value, the insured would receive a check for $600,000 so that they could go out and purchase a new machine to replace the one that just went up in flames.

However, if the insured had a policy that paid the Actual Cash Value (ACV) of an asset, then the insured is likely to get a check that is much less.

As appraisers, this is where we are typically pulled into the fold for a machinery and equipment appraisal. Our job as an appraiser is to provide an unbiased opinion of value based on our research of what the subject machine would have been worth minutes before the fire. This means that we would be valuing the CNC machine as a two-year-old machine in used condition. There would be research completed to try to understand the condition and usage on the machine prior to the fire. Since claims often take time to process and sometimes are in dispute for months (or even years), we have to research what the values were at the time of the loss, making them retroactive appraisals.

We all have heard the saying that once you drive the new car off the lot, it depreciates instantly. This often happens to other machines as well. From an appraisal perspective, the insured is only going to get a percentage of what a replacement machine would cost since the machine is in used condition. For illustration purposes only, let’s assume that this specific machine lost 20% of what the insured paid for the machine new in the first year, and then another 10% off of that amount in year two. Doing the math, the machine would have been worth $550,000 x 80% = $440,000 after year one and then $440,000 x 90% = $396,000 after year two. The insured in this example would receive a check for $396,000. Unfortunately, this company would have to go out and buy a new replacement machine at $600,000 to continue operations.

From this illustration, you can see that it is important for a business owner to have a good understanding of their insurance coverage. Though the insured likely paid higher premiums to receive coverage at the Replacement Cost Value level versus the Actual Cash Value level, a company that may have been financially solid at the initial machine purchase could have difficulty receiving credit to purchase a machine two years later when they need to come up with the difference between the amount received from Actual Cash Value and the new Replacement Cost Value.

As individuals or business owners, we often painfully write these checks to insurance companies for our coverage. However, understanding your coverage options and selecting the one that is right for you, might be the difference of your company’s survival.

By: Kipp A. Krukowski, Managing Director, Equipment Appraisal Services

Tags: Equipment Appraisal, Litigation, Expert Witness, Insurance Loss

Equipment Appraisals for Divorce Litigation Purposes

Posted by Equipment Appraisal Services on Sun, Jan 05, 2014 @ 07:18 PM

equipment appraisal divorce litigation resized 600Business assets are treated much the same way as personal assets when going through a divorce.  An equipment appraisal will be necessary to determine the fair market value of the equipment.  When dividing assets there needs to be a method for determining what value you are dividing with your spouse. The court accepted method is to have an appraisal of the business assets completed by a certified appraiser, which will establish what value will be used when distributing the assets. An equipment appraisal will be a means of proving the true value of the tangible assets and provide a solution to conflicts that may arise.
An appraiser will gather information about the equipment at the business in much the same manner real-estate appraisers record information to be used in determining the value of your home.   The appraiser will go to the business location(s) and record make, model, serial numbers, as well as condition of all items to be appraised.  This information along with a series of pictures taken of the equipment will be used to research and determine a current fair market value.  At times, the appraiser will also need to determine orderly liquidation and/or forced liquidation value.
All relevant parties can mutually agree to use a single equipment appraiser or work with separate appraisal companies.
Parties need to be careful on the appraiser that they select for the valuation.  If the appraiser is not a certified appraiser conducting the research and report under the Uniform Standards of Professional Appraisal Practice (USPAP), there may be a number of flaws in the courts eyes.  If the appraiser is a dealer with the ethical requirements of reporting unbiased opinions of value, then the opposing attorney will have a field day during cross examination.  Also, if the appraiser does not have experience in testifying in court, then there is the possibility that they will not maintain their cool or provide thorough responses to questions about their work.  Though experienced and credentialed equipment appraisers who provide expert witness services will often be more expensive than others, their fee is typically a fraction of the overall value of the business assets.  As the saying goes, you typically get what you pay for.

Tags: Equipment Appraisal, Divorce, Litigation, Expert Witness