01 / The meaning
What it means.
Accounting depreciation allocates an asset’s cost through financial records. An insurance valuation may use a different method and serve a different purpose. A machine with a low book value can still be expensive to replace and install. Conversely, an indemnity settlement may consider its condition immediately before damage rather than fund an entirely new replacement.
Replacement or reinstatement wording may limit when depreciation is deducted, but can impose requirements about replacement, timing and the type of property. Cash settlements and obsolete equipment can introduce other calculations. Businesses should avoid assuming that a tax depreciation schedule establishes either the sum insured or the claim amount. Maintenance records, age, capacity and evidence of comparable equipment help explain the asset being valued.
02 / Put it in context
A practical example.
Hypothetical example: a workshop’s ten-year-old compressor is damaged. Its accounts show little remaining value, but a replacement costs substantially more. The insurer assesses the policy’s settlement basis and the facts before determining any amount.
This example illustrates the term. It does not predict a claim outcome.
03 / Read the detail
What to check.
- Identify whether settlement uses indemnity, replacement or another basis.
- Separate tax and accounting figures from insurance replacement estimates.
- Check conditions applying to obsolete assets and cash settlements.
04 / Start a useful conversation
A question for your broker.
Would age and condition reduce this settlement, and under which policy provision?
05 / Connect the terms
Keep the meaning in context.
06 / Apply it to your business
Related insurance guides.
Further reading
Read the source guidance alongside the relevant policy wording.
General information only. This does not take into account your objectives, financial situation or needs. Before acting, consider whether the information is appropriate for you. Cover is subject to insurer acceptance and the policy terms, conditions, limits and exclusions. Read the Financial Services Guide and the relevant PDS (where applicable) and/or policy wording before deciding.
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