Insurance valuation is based on the agreed upon cash or replacement value at the time the policy is issued. The premiums paid will be based on a percentage of that value. When a claim is made, that value normally represents the maximum that can be expected.
There are a number of problems involved in establishing that value and correcting it over the life of the item.
Construction costs are rising, which means that buildings and machinery will likely have a higher replacement cost. New technology may mean that replacement will not even occur on the same basis. Examples are construction techniques for older buildings made of brick or rock. These types of buildings, if damaged in an earthquake, may not be replaceable in the same style.Computer equipment more than a few years old may not be replaceable. Production line equipment, printing presses, and other machinery may dictate a number of different replacement possibilities.
Insurance policies can be written with many different types of coverage. This is not intended as an insurance analysis; however, the asset accountant should be aware of the replacement cost prior to establishing the insurance coverage. At the time of loss, it will be necessary to provide proof of loss. Property records that substantiate the existence and location of assets are needed. It is also important to have recorded and maintained the record of the asset values. An assessment of deferred maintenance, as well as a record of maintenance expenditures on major items, will support that proof of loss. This also points out the need for security and redundancy or backup of asset records. If a building is destroyed, the accounting records should be available at another location.