Functionally Valuing Older Business Property

Businesses that have been successful for decades are usually ones that also consistently take care of their property. While maximizing the use of every asset, this can also raise a coverage issue. Aging equipment may have reached the point where it:

• Is functionally obsolete
• May be a type of equipment that is no longer made, and/or
• Has been replaced with more effective, technologically advanced equivalents.

Such property can be difficult to insure since a typical commercial property policy considers obsolete items worthless. However, a commercial property policy can be modified with a form that may make coverage more practical. One form, called "Functional Personal Property Valuation," changes a policy so that the regular policy conditions on valuing a loss and coinsurance don't apply.

Functional valuation recognizes that the insured firm’s priority is to repair damaged, older equipment or finds an equivalent substitute. A policy with a functional valuation provision is likely to offer the additional option of paying an amount equal to the damaged or destroyed property's market value that it held just before their loss. Other features are requirements that any repairs be done quickly and that any replacement property is at the same site and for the same use of the property that was lost or destroyed. A coverage modification is also likely to add terms with special definitions, such as "replacement" or "functional equivalent," or "market value."

A policy that has been altered to use a functional settlement basis should result in smoother claims handling and a better loss to post-loss transition. Arranging for such coverage may also spur a buyer to identify possible sources for replacing his vulnerable, older property.

If your concern is one that is dependent on older equipment, it may be past the time that you discuss your coverage needs with a knowledgeable insurance professional.

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