“The machine is already at zero in the books – what should I insure it for?” This sentence is one of the costliest misunderstandings among SMEs. In a claim, it is not the accounts but the policy conditions that decide: the insurer pays at new value, at depreciated value, or proportionately because of underinsurance, and the three outcomes can differ by millions of forints. As a broker, I see that everyone has heard the terms, but few know which one applies when. This article looks at it from the claims settlement side: what determines how much you receive for a ten-year-old lathe, old office furniture or a used server – and where a company already loses out when taking out the policy.
- According to the guidance of MABISZ (the Hungarian insurers' association), new value is the cost of acquiring a new asset that is the same or has similar parameters, and depreciated (actual) value is the current value of the used asset, calculated with technical depreciation; book value is an accounting category that runs down to zero within a few years, which is why most insurers will not insure on that basis.
- Business property insurance can generally be taken out at new value by default, but policy conditions pay actual value for assets with significant technical depreciation relative to new value – according to MABISZ typically 30–50%, varying by insurer – for assets that are fully written off or taken out of use, and in a total loss.
- Under Section 6:460 of the Hungarian Civil Code (Ptk.), if the sum insured is lower than the value of the insured interest, the insurer pays the loss in the proportion of the sum insured to the value – in the MABISZ example, a building insured for half its value receives only half of the loss even in a partial loss.
Three values, three outcomes
The MABISZ (Hungarian insurers' association) guidance on property and engineering insurance distinguishes four concepts of value. New value is the cost of buying a new asset that is the same or, failing that, has similar technical and economic parameters. Depreciated (actual) value is the current value of the used asset, i.e. its value taking technical depreciation into account. According to the guidance, market value cannot be the basis of the sum insured for buildings, because the cost of reinstatement is priced not by the market but by the construction industry. Book value, in turn, is an accounting category: it does not show what the asset is worth, it can run down to zero within a few years, and that is why most insurers will not write a contract on it. A ten-year-old, fully written-off lathe is at zero in the books, perhaps a third of the new price at depreciated value, and today's manufacturer's price at new value. Which one counts in a claim is decided jointly by the settlement rule in the policy conditions and the sum insured given when the policy was taken out – of the basic terms, these three are the ones that turn into money in a claim.
When is depreciation applied?
According to the MABISZ guidance, a property insurance contract can generally be taken out at new value by default: for repairable damage, the insurer pays the cost of the repair, and for replacement, the price of a new purchase. There are two situations in which it switches to actual value. One is a total loss, where reinstatement is out of the question for technical reasons or because it would be uneconomic. The other is significant depreciation: according to the guidance, for fixed assets with technical depreciation of 30–50% or more relative to new value, and for fixed assets that are fully written off or permanently taken out of use – the threshold varies from insurer to insurer – the insurer pays at actual (depreciated) value. So under many policy conditions, the machine that is “already at zero in the books” already fails on this rule, not only on underinsurance. This is where most SMEs lose out: under many policy conditions, the seven-year-old server, the ten-year-old machine and the twenty-year-old furniture are above the threshold, so despite a sum insured at new value, the payment is the depreciated value – which melts away quickly for IT equipment. Some policy conditions contain a further stipulation: the difference between new value and depreciated value is paid only once actual replacement or reinstatement has been proven, within a specified deadline. These rules are set out in the claims settlement chapter of the policy conditions and differ from insurer to insurer; when requesting quotes, this is one of the lines worth comparing instead of the premium.
Underinsurance: the trap of proportional settlement
Under Section 6:460 of the Hungarian Civil Code (Ptk.), if the sum insured is lower than the value of the insured interest, the insurer must pay the loss in the proportion that the sum insured bears to the value of the asset. The MABISZ guidance on underinsurance illustrates this with an example: a building with an actual value of HUF 150 million was insured for HUF 75 million, so in a total loss the insurer pays at most that amount, and in a partial loss 50% of the loss amount in every case – the formula: indemnity = loss amount × (sum insured / actual value). This is what a company insuring at book value learns the hard way: even with a HUF 5 million burst-pipe claim, only half arrives if the machinery was declared at its written-down value. According to the guidance, insurers typically also apply the underinsurance rule to the individual benefit limits; an exception may be where the indemnity limit is independent of the size of the sum insured – typically first-loss covers with a fixed limit, where there is no proportional reduction. From case law, a decision of the Budapest Regional Court of Appeal (Fővárosi Ítélőtábla, 6.Pf.20.519/2023/4) also established that proportional settlement does not apply in a total loss, where the sum insured is the upper limit of the benefit – so a partial loss is the case that really hurts. According to the MABISZ guidance, most insurers do not enforce the consequences of underinsurance if it does not exceed 10%; in addition, some Hungarian policy conditions offer an “underinsurance waiver” clause for larger discrepancies – how wide a band this covers varies from insurer to insurer.
How do you set the sum insured correctly?
For buildings, the starting point is the rebuilding cost, not the purchase price and not the market value. For machinery and equipment, it is the new purchase price – if the model in question is no longer available, that of a new machine with similar parameters. The same applies to IT and office equipment, with an itemised inventory. For stock, it is the purchase or production cost, with seasonal fluctuations handled by a stock clause under the policy conditions or by declaring the peak stock. According to the MABISZ guidance, the insurer may apply indexation based on the official price index of the KSH (Hungarian Central Statistical Office), which it notifies you of before the renewal date – it is worth accepting an offer that proposes indexation, but indexation does not deal with changes in the value of assets for other reasons (expansion, a new machine), so getting the sum insured right is a non-transferable task of your company – for a larger machinery purchase or an expansion, reporting changes also belongs here. Among the common mistakes when taking out a policy, an underestimated value comes first because it looks cheap when you take out the policy and only shows its price in a claim.
In a claim: what does the loss adjuster look at?
The loss adjuster establishes the value at the time of the loss: on the basis of invoices, year of manufacture, technical condition, today's price of a similar new asset and the degree of depreciation, in line with the policy conditions and the insurer's methodology. That is why keeping purchase invoices, machine logbooks and maintenance records is so valuable – without them, the adjuster estimates, and the estimate rarely errs in the company's favour. If the settlement statement is unclear, ask in writing for the calculation: what new value, what depreciation and what underinsurance ratio were applied, and on the basis of which clause of the policy conditions. In a dispute, the insurer's complaints procedure is the first step; the Financial Arbitration Board (PBT) is for consumer disputes, so a company is typically left with the court route – the MNB (Hungary's central bank and financial supervisor) does not decide individual claims disputes. I help where I can in interpreting the settlement statement on the basis of the policy and the policy conditions.
What should you do now?
Take out the policy and check at what value the buildings, machinery, IT and stock are listed – if you see book value, underinsurance is almost certain. Find the depreciation threshold and the total loss rule in the policy conditions. Draw up a simple inventory at new purchase value and review it once a year. If you let me know before the renewal date, I prepare a comparison of quotes tailored to the settlement rules – new value, depreciation threshold, underinsurance waiver, limits; setting the sum insured and keeping the inventory remain with the company.
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Sources
- MABISZ (Hungarian insurers' association): Information on underinsurance
- MABISZ: Information on property and engineering insurance and business interruption insurance (value concepts, depreciation threshold, limits)
- Hungarian Civil Code (Ptk.) – Act V of 2013, Section 6:460 (underinsurance)
- Generali – Claims settlement information (quoting Ptk. Section 6:460, depreciation according to the MABISZ methodology)
- Kártérítési és Biztosítási Jog (Damages and Insurance Law): Decisions not published elsewhere 2024/2 (Budapest Regional Court of Appeal 6.Pf.20.519/2023/4 – underinsurance in a total loss)
