When insurance companies underwrite marine insurance, one of the important criteria used is depreciation. Depreciation refers to the reduction in value of material over time; in this case the lower value of a boat. But while the concept of depreciation is understood, trying to quantify deprecation is a more delicate if somewhat inexact science. This briefing will help you understand the role depreciation plays in underwriting insurance policies and more specifically how depreciation is calculated for marine insurance.
Marine insurance policies
Marine insurance protects your boat or watercraft and yourself against damages arising out of an unexpected loss. The major sections of a boat policy typically include liability coverage, medical payments, uninsured boat owners coverage, commercial towing assistance and physical damage coverage.
Physical damage coverage
This section provides coverage in the event of any damage to your boat caused by the perils named in the policy which generally include collision, fire, theft, windstorm, lightning or vandalism. Most policies will cover not only the boat itself but its machinery and auxiliary equipment, outboard motors, trailer and your personal belongings on the boat. You need to decide whether you want physical damage coverage based on Actual Cash Value or Agreed Amount Value.
*Actual Cash Value policies will pay for replacement costs less any depreciation at the time of your loss.
*Agreed Amount Value polices mean that you and the insurance company have agreed to a set value amount for your boat when you first take out the insurance policy. You would be paid this amount in the event of a total loss, by replacing the older items for new ones without taking depreciation into consideration in a partial loss.
Insurance policies with Actual Cash Value are designed to return you to the same financial position as you were in at the time of the loss; not to make a profit by obtaining new equipment for old.
In the same way, Agreed Amount Value policies are to ensure that your replacement goods cover the agreed upon value. This value is usually the actual amount that you could get for selling your boat on the market.
Items subject to depreciation
Often, Agreed Amount Value policies will insist on Actual Cash Value for items prone to wear and tear through normal use including sails, protective canvas covers, trailers, most outboard motors, batteries, dinghies, lower drive units and outdrives. These items are subject to exposure to the water and to various weather elements. As a result, depreciation is considered inevitable.
How premiums are calculated
Insurance companies rely on pre-determined depreciation schedules when underwriting marine insurance polices. Depreciation schedules take into account various factors of a particular boat; the year built, the make and model of the watercraft, where it is generally used (salt or fresh water), how it is used (pleasure or business) and the number of hours used. These calculations are then held against the insured goods to arrive at a value the insurance company believes truly reflects the typical wear and tear and resulting deprecation values.
Classic and antique boats
Classic and antique boats are quite different from their modern counterparts. A classic or antique boat may not depreciate at the same rate as a newer boat and in fact may appreciate depending on the materials and market value. Antique Boat Insurance policies tend to cover the actual value of the boat and any applicable equipment and do not usually take depreciation into consideration.
Consulting with an insurance broker or agent who specializes in marine insurance is required when you are insuring any type of watercraft beyond a canoe or boat with a very small outboard motor. Knowing how depreciation may affect your boat is an important part when shopping for marine insurance policies. Your boat is a serious investment and should be well protected to keep you sailing on smooth waters for years to come.