Equipment Appraisal Blog | Understanding Machinery Appraisals

How is actual cash value determined by a certified equipment appraiser?

Posted by Equipment Appraisal Services on Tue, Oct 03, 2017 @ 11:36 AM

appraising medical equipment

If you're thinking about having equipment appraised, you may have heard any number of appraisal types tossed around. One type of calculation that is commonly used is actual cash value. But what is this appraisal type, how is it performed and in what situations is it the best option to consider? Here's a quick look at these questions and how they apply to your machinery assets.

How is actual cash value determined by a certified equipment appraiser?

When it comes to determining actual cash value, many people are a bit confused over how this figure is calculated. It doesn't help that over the years, the court system has defined it in several different manners. Some people think it's the same as fair market value. Others think that it's replacement cost minus depreciation. Others think it's a hybrid of the two.

But what's the difference between these two approaches? Replacement cost minus depreciation can work in some situations, but not in others. A piece of machinery is lost in a fire, and the cost to replace it is $50,000. Depreciation on the original equipment would have been $5,000, so the equipment is valued at $45,000. Using fair market value, the same equipment may be older and fully depreciated. Using replacement cost minus depreciation may only provide a value of $5,000, but if the equipment was well maintained, it may still deliver years of reliable service. At this point, the value of $5,000 may be unrealistic for replacement in a loss.

Obviously, calculating actual cash value is a difficult process, with contradictory precedents depending on the state where the equipment or company is located and where you're going through legal or insurance issues. Despite the vague definition of actual cash value, many legal, financial, tax and insurance organizations still use it, leading to potential disputes between the customer and the company. Hiring a certified equipment appraiser to provide you with an appraisal report on the actual cash value of your equipment can help your side of the debate. 

In a number of court cases, the report or testimony of a certified equipment appraiser has made all the difference between a poor value and a fair value for equipment. A certified appraiser goes through an extensive educational process that includes learning which appraisal methods are applicable to which situations. Because they are taught proven methodologies that have been tested in legal, financial, insurance and tax circles, the reports they generate hold up well to scrutiny and are considered more reliable and accurate than a number of other sources you may be tempted to use in your situation.

A certified appraiser has the knowledge, experience and ability to help you fight a poor estimate of actual cash value. They've been trained to know in what situations different rules must be applied to determine a fair value for your equipment. When you work with a certified appraiser, you'll realize significant benefits for your machine values.

When you have actual cash value calculated on your equipment, you're gaining good insight into what your machinery is worth. However, if your appraisal isn't performed by a certified equipment appraiser, you may not be getting accurate information or an appraisal report that will hold up in financial, insurance, tax and legal circles. Make sure the appraiser you use is certified to ensure that your documentation will stand up to strong scrutiny in the future.

Tags: Insurance Loss, actual cash value, fair market value

How is replacement cost new different than other appraisals?

Posted by Equipment Appraisal Services on Tue, Sep 26, 2017 @ 02:03 PM

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When we've been discussing equipment appraisals in the past, we've discussed a number of ways in which machinery may be appraised. But one type of appraisal we haven't gone into depth with is replacement cost new. Because it's only used in certain circumstances, it's a type of appraisal that many people are still unaware of. Here's a quick rundown of how it's different and a situation where it's commonly used.

How is replacement cost new different than other appraisals?

When you purchase insurance on your machinery, it's important to know what type of insurance you have in place. Replacement cost is a commonly used variety, but will only cover the replacement of the machinery with similar machinery. This can backfire for many equipment owners, especially when the equipment has been customized to their operation, such as an extruder that has been customized to their exact needs. An insurance adjustor may not understand the find differences between the types of equipment, dragging your claim out.

For that reason, many people will insure their equipment for replacement cost new. When a technical company in North Carolina had an office flood, they lost a significant portion of the equipment in their computer lab. The insurance company didn't understand that the equipment had been bought over time from a number of sources to ensure the company could work with the wide range of systems their clients were using. Because they had replacement cost insurance, they had to fight with the insurance company for many months to reach a settlement, as the insurance company didn't understand the current value of those machines to the business.

In another example, a company had a break in where several key pieces of equipment were stolen. Because they had replacement cost new coverage on the equipment, they were able to get compensation that allowed them to replace the stolen machinery with equivalent new machinery. This made it much easier for the shop to get back into working condition without too much lost production. Some of the machinery was much older, so finding the same equipment used would have been very difficult and very time consuming for the business. Because of the coverage they had on the equipment, they could find machinery that met a minimum set of specifications and be reimbursed for the purchase of that machinery by the insurance company. For example, an old bandsaw used in the shop provided resawing capability at 3 HP could have been replaced with a new resawing 3 HP bandsaw.

The difference between these two businesses is fairly clear. Both lost older machinery that was difficult to replace. However, one spent months trying to prove the value of the machinery in their business while the other merely had to shop for new equipment that met the same needs in the business. This had a huge impact on the productivity of the business and the amount of time the company's owners had to spend on growing the business versus chasing the insurance adjuster's latest numbers.

When you need to make an insurance claim or otherwise need to know the replacement cost new of your equipment, it's important to work with a certified machine appraiser who has experience in your industry. Why? It's important that they know why particular features and capabilities are vital to keeping your operation moving. They also have the knowledge of how to calculate this machine value accurately, which is important to your claim or need when you've had an equipment loss.

Tags: Insurance Loss, replacement cost new

Disaster Recovery: How a Metalworking Equipment Appraisal Helps You Get Through

Posted by Equipment Appraisal Services on Wed, May 03, 2017 @ 10:37 AM

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Working in metal fabrication can be a tough enough job, with times of plenty and need, difficult work and exacting specifications to meet. But when disaster strikes, it can become even harder to keep your head above water. Whether it's a shop fire, a natural disaster or a theft from your business, it can seem as though you've only gone through one disaster just to deal with another one: insurance company demands for value documentation. Here's some information on how a metalworking equipment appraisal can help you through the process.

Disaster Recovery: How a metalworking equipment appraisal helps you get through

When you have a disaster in your shop, proving the value of the equipment that has been affected can just add to your burdens during a difficult time. Having an equipment appraisal on hand provides you with a wide range of benefits, not the least of which is being able to immediately document the value of said machinery to your insurance company or a court of law, depending on the situation. 

But what if you haven't had the opportunity to get an appraisal performed prior to the loss? You're not necessarily just stuck with whatever the insurance company or court decides to grant you. Certified equipment appraisers are trained to develop equipment valuations in a wide range of circumstances, even when the equipment has already suffered significant damage or has been stolen. By going back to the date of the loss and studying the documentation you have available, an equipment appraiser can provide you with an appraisal report that can document the estimated value of the machinery, which is especially helpful if your insurance company or the other party in a lawsuit is trying to lowball the value of your metalworking machinery.

How does this work? The equipment appraiser will look at your original purchase documents, photos, records of maintenance, repairs and updates made to the machinery and uses that documentation to develop an estimated value for the equipment.

But how is this more accurate than your insurance adjuster's final figure? Equipment appraisers spend all day appraising equipment, often specializing in a particular type of equipment. An insurance adjuster, on the other hand, must determine values for a wide range of items, from houses and medical claims to liability and structures. They don't know metalworking equipment nearly as well as a certified equipment appraiser does.

Though you can wait on getting a metalworking equipment appraisal until after you've had a disaster, having one on hand ahead of time can help speed the process along with your insurance company or court case. But make sure you're working with a certified equipment appraiser who has experience in the metalworking industry. By doing so, your appraisal report will be prepared using standardized methodologies that have been proven to hold up in legal and insurance circles.

Tags: Insurance Loss, metalworking equipment appraisal

Need an Insurance Loss Settlement? Equipment Appraisals Get You There

Posted by Equipment Appraisal Services on Tue, Sep 06, 2016 @ 12:00 PM

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Did you know that 25% of businesses that go through a disaster or loss never open their doors again? This is primarily due to insufficient insurance or not being able to prove the value of equipment and other items that were lost. How do you protect your business against this kind of unexpected problem? An equipment appraisal can go a long way towards ensuring you have sufficient insurance to protect against a loss or proving equipment value for an insurance loss settlement. Here's how:

Need an Insurance Loss Settlement? Equipment Appraisals Get You There

Determining Insurance Coverage

When you're buying business insurance, you want to make sure your equipment is being covered for its actual value. Why? Many people rely on tax return depreciation as a quick guide to machine value, but the actual machinery value may be much higher or lower than what the standardized depreciation value allows.

If it's overvalued, you may be paying too much for premiums while not receiving the full amount you've paid for during a loss. If it's undervalued, the insurance company may balk at paying you the full value during a loss because you didn't pay for sufficient coverage. A machine appraisal can go a long way to provide proof of value for your equipment and help you decide how much coverage you need to cover business losses during a fire, flood or other disaster.

Dealing with a Loss

But what about when your business suffers a loss? During that stressful time, you want to reach a settlement as quickly as possible so that you can get new equipment and get back into the swing of things. When you do have a loss, can you prove what your equipment was actually worth? Having proper documentation complete by a certified machinery appraiser available for your insurance company helps to prove the equipment's value and goes a long way in an insurance settlement. It ensures that you'll receive a settlement that is both accurate to your loss as well as speeding up the process. Why? Because a certified appraiser's report uses a specific methodology and approach to determine equipment value. 

But what if you haven't had a machine appraisal performed before the loss? Fortunately, appraisers are often able to go back in after a loss and determine equipment values at the time of the loss by taking a solid look at the condition of the machinery, the market at the time of the loss, any repair and maintenance logs that are still available and similar information. Because this type of valuation is difficult, you'll want to make sure the appraiser you're working with is certified, has experience in equipment appraisal and specifically has experience in post-loss machinery valuation. 

By having a machinery valuation performed before you have a business loss, you can make the insurance loss settlement process go much more quickly and smoothly. But when determining your equipment values, make sure you're using a certified equipment appraiser who has a certification in or significant experience in machinery valuation. Why? Because documentation from a certified appraiser holds legal weight and will hold up in court if your insurance company is reluctant to pay out.

Tags: Insurance Loss, settlement

Reasons for Retrospective Appraisals

Posted by Equipment Appraisal Services on Tue, Feb 23, 2016 @ 10:00 AM

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Oops! When you've made a donation, are involved in litigation or have had an insurance loss, there's nothing quite as concerning as realizing that you needed to have equipment appraisals performed after the fact. How do you fix this problem? In this article, we'll discuss retrospective appraisals and how they can help you get the documentation you need to fix these troublesome problems. Here's how:

Documenting Donations

One of the most common areas where retrospective appraisals are used is in donations to non-profit or not-for-profit organizations that were not properly documented at the time. Especially when you're looking at taking a tax break for the donation, you need to have documentation to take the deduction. If the documentation was not prepared at the time of the donation by an equipment appraiser, it can be really difficult to otherwise prove the value of the equipment you donated. But at the end of your business year, your accountant informs you that they need you to provide supporting documentation for your donation. If you're stuck in this bind, you can still save the deduction by having a retrospective equipment valuation performed by a qualified machinery appraiser.

Proving Litigation

Another area where retrospective valuation can come into play is in litigation. One example of this is when going through a divorce where you need to buy out your spouse's interest in the business or prove that you're not hiding assets. Your spouse  may claim that you're undervaluing equipment that you've sold to keep things solvent while the transition is underway, because they want to get everything they can out of the buy out. A retrospective equipment valuation helps prove that your equipment was worth a particular amount prior to being sold, documenting that you were not hiding or undervaluing business assets.

Insurance Loss

When you've suffered a loss that sets your business back, it's upsetting when you realize you don't have documentation of your equipment values. Whether you're dealing with the fallout of a storm, a fire or a theft, documenting the value of your equipment is a vital part of the claim process. If you didn't have a machinery valuation performed ahead of time, you may be having a difficult time proving what the equipment was actually worth, especially when the equipment was customized or has unusual features that your insurance adjustor isn't familiar with. A retrospective machine appraisal helps prove the exact value of the machinery when the loss took place.

Tax Issues

What about when you're dealing with a tax agency? Equipment can lose value quickly at times, especially if it is in a struggling industry or when technology quickly changes. When a tax appraiser doesn't have a solid grip on the value of the machinery you own and just uses accounting depreciation, it's difficult to prove your side of the appeal without documentation. A retrospective valuation helps prove that the machinery was worth looking at market conditions, the condition of the equipment and similar elements that affect your machinery's final value.

If you find yourself needing to do the time warp to prove equipment values, a retrospective equipment appraisal can help document past value. At Equipment Appraisal Services, our job is helping you document equipment values, even after the fact. Please contact us today for help with your retrospective machine appraisal.

Tags: Litigation, Insurance Loss, donation appraisal, retrospective appraisals

Actual Cash Value, Stated Amount, Replacement Value: The Differences

Posted by Equipment Appraisal Services on Thu, Oct 08, 2015 @ 09:00 AM

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When you're working with financial terms, it can seem like a maze of confusing and often contradictory terminology is employed to keep you in the dark. One of the issues many business owners run into is determining the difference between stated amount, replacement value and actual cash value, and how having one type of value in a machinery and equipment appraisal can prevent you from collecting after a loss. Though a machine appraiser is almost always happy to help explain the differences, here are the basics to help keep you informed and your equipment appraiser getting the job done.

Stated Amount

Using the stated amount means simply that instead of basing your insurance policy premiums on the actual value the equipment appraisers determine, the policy owner is responsible for reporting the equipment's value. After you specify the value, the insurance company adjusts your premium according to your valuation. Though this works well if you have equipment that changes hands frequently, it can also cause problems if there is a loss and you've undervalued the machinery. Once the loss has occurred, the claims adjustor figures out the equipment's value when the loss happened, and if the insurance company finds the equipment has been covered using a much lower machinery valuation than the market will bear, certain clauses may come into effect that will reduce the insurance payment significantly, leaving you in a bind.

Replacement Value

Replacement value refers to how much it would cost to replace the equipment. It doesn't take depreciation into account with equipment values, but instead looks at what it would cost to replace the machine's capability. Though that sounds great, you'll pay a higher premium for replacement value in insurance situations. Why? When equipment appraisals are performed, the insurance company knows what the equipment value itself is and wants to pursue a claim based on that machinery valuation. But if you take good care of your machinery, it can be difficult to find similar equipment. Therefore, the insurance company wants a higher premium, because you're replacing a piece of equipment with a lower machine appraisal with one that would have a higher machinery valuation.

Actual Cash Value 

Actual cash value can save you a lot of money on insurance premiums, especially if your equipment is fairly average, easy to come by and won't be hard to replace by purchasing additional used equipment. Because actual cash value deducts depreciation, your insurance company isn't as worried about paying out more than the original equipment valuation, so they can offer a lower premium. Though a few courts have translated actual cash value to represent fair market value, the most common legal interpretation is replacement value minus depreciation. If you're not expecting to take a loss and think it will be relatively easy to replace your equipment, having actual cash value will help you with that process.

To get the best possible result from your machine valuation, it's important to work with a reputable appraisal service specializing in machinery and equipment appraisal that can provide you with highly trained equipment appraisers. By finding out the proper value of your machinery, you don't need to worry about problems with the insurance company, because a valuation performed using the Uniform Standards of Professional Appraisal Practice by a machine appraiser certified through the American Society of Appraisers provides legal documentation to your claim for the value of the machinery or equipment that has been lost.

Tags: Equipment Appraisal, Insurance Loss, actual cash value

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