What would happen if a key piece of machinery failed and your company’s production came to a halt? For manufacturing companies across the U.S., this is a very real concern. And yet many business owners and executives can’t say for sure whether their full equipment replacement costs would be covered. If that sounds familiar, you aren’t alone.
What Are Equipment Replacement Costs?
Most business owners understand the importance of having commercial property insurance, including specific coverage for key pieces of machinery or equipment. However, did you know that certain fine print could leave you vulnerable to major out-of-pocket expenses – despite having coverage?
Commercial property policies may be written to cover the equipment replacement costs or its market value (aka actual cash value) – which results in very different levels of coverage.
Equipment replacement costs are always higher than the equipment’s market value. That’s partially because market value takes depreciation into account (meaning it measures the property’s value based on what you would get if you were to have sold the equipment as-is). But it’s also because market value doesn’t cover expenses associated with the logistics of replacing the equipment, such as engineering, installation, and employee training.
What Steps Should I Take to Ensure Coverage?
First and foremost, it’s imperative that you know whether your policy covers the actual equipment replacement costs or solely the market value. You can ask your insurance broker, and they will be able to explain it to you.
However, if your company relies on machinery and equipment to operate, then there are additional steps you should take (other than simply understanding your current coverage).
Schedule regular insurance-to-value consultations. While some business owners can get away with simple insurance check-ups every year or two, manufacturers whose operations are dependent on specialized machinery or equipment should have regular insurance-to-value consultations with their broker. That’s because, unlike cars or other types of general property, customized manufacturing equipment can actually grow in value as modifications or updates are made. And that needs to be considered in the replacement cost total valuation.
Create a contingency plan. Having coverage for equipment replacement costs is an essential step, but the reality is that highly customized machinery and equipment can often take months (sometimes years!) to reproduce. Some equipment may not be able to be replaced at all. So, you should start thinking about a contingency plan now – before you actually need it.
- Start by making a list of key equipment (which will also be helpful as you review your coverage needs with your insurance broker).
- Take an inventory of the spare parts you have.
- Identify multiple repair contractors and vendors who could produce spare parts.
- Research whether there are any rental equipment options that could support production.
- Evaluate the possibility of temporarily outsourcing your manufacturing.
- Talk with your insurance broker about Business Income Insurance to cover losses associated with an interruption in your operations.
Let’s Make Sure You’re Covered for Equipment Replacement Costs
At Swarts, Manning & Associates, we provide a unique perspective on all of your commercial coverage options, and we help to determine which carrier best fits your business needs. We strive to find you the broadest coverage at the best available rate. Give us a call to get started: (833) 878-2820.
Each week, Swarts, Manning & Associates covers relevant topics for your business. Stay tuned to hear more discussions about managing your insurance and industry-specific tips.
