Machinery/equipment breakdown: how to calculate the correct insured amount

Introduction

In an SME, your machines and equipment are more than just assets: they determine the continuity of your business, your deadlines, and your competitiveness. But a major breakdown or accidental damage can bring a production line to a standstill and lead to significant direct costs. Machinery breakdown insurance aims to offset these costs, provided the insured amount has been correctly defined. In this article, structured for managers and CFOs, we explain how to calculate this amount, avoid underinsurance, document your choices, and reliably manage the risk.

You will know by the end of reading:

• what is the insured amount for the equipment?

• how to determine it methodically,

• what pitfalls to avoid,

• What questions should you ask your insurer to secure your coverage?

What is machinery breakdown insurance and what is the insured amount?

Machinery breakdown insurance: objectives and coverage

Machinery breakdown insurance covers accidental damage to machinery and equipment essential to your business, caused by internal failures or unforeseen events (mechanical breakdown, falls, short circuits, human error, etc.). It complements traditional multi-risk insurance policies because it specifically targets this technical risk.

Define the insured amount

The insured sum , in an insurance contract, is the maximum amount that the insurer agrees to pay in the event of a claim . In the context of machinery and equipment, it should ideally correspond to the replacement value of these assets when new .

If this amount is too low, there is underinsurance : in the event of a claim, the compensation is reduced proportionally to the difference between the insured amount and the actual replacement value.

How to calculate the correct insured amount

1. Accurate inventory of machines and equipment

Start by drawing up a detailed inventory of all the assets to be insured:

• fixed and mobile machines

• technical installations,

• production-related electronic equipment.

For each item, document the make, model, year of acquisition, capacity, and intended use. This document management work is essential for a reliable valuation.

2. Determine the replacement value

The insured sum should be equal to the replacement value when new , including the additional costs necessary to put the equipment back into operational use:

• replacement purchase price,

• shipping and customs fees,

• installation and commissioning costs.

This approach goes beyond simple book value (net or depreciated value), which does not reflect what it would cost today to replace equipment.

3. Adjust for additional costs

Depending on the contract, you can include or exclude certain charges:

• clearing and salvage costs,

• dismantling/reinstallation costs

• taxes and duties related to import.

These additional items must be explicitly listed in your calculation sheet to avoid omissions in the event of a claim.

4. Take into account franchises and limits

The insured amount is linked to your financial commitments and risk tolerance. A higher deductible reduces the premium but increases the amount you will have to pay in the event of a claim. This parameter should be chosen with your financial advisor using numerical scenarios, simulating various levels of financial impact.

5. Periodic review and update

The value of machinery changes over time (industrial cost inflation, technological innovations). An annual review of the insured amount is a good management practice to prevent your coverage from becoming obsolete.

Methodological case studies

Case 1: Replacing a hydraulic press

A small manufacturing company identifies a critical hydraulic press. In its inventory, it notes its current specifications and checks the cost of an equivalent machine on the market today. It adds the installation costs estimated by the supplier to determine the insured amount. It documents this assessment and re-evaluates it annually.

Case 2: Integration of a new machining line

When a new line is installed, the CFO updates the inventory and recalculates the insured amount, including delivery, calibration, and commissioning. This calculation is recorded in the policy renewal file, which facilitates negotiations with the insurer.

Guidelines and checklist

What needs to be documented:

• List of equipment with full description.

• Purchase invoices and current replacement quotes.

• Estimated costs of delivery, installation, testing.

• Maintenance history and machine status.

• Selection criteria for including/excluding ancillary components (tools, software).

• Justification for the deductibles chosen.

Stage	Key action	Related document
1. Inventory	Inventory the machines	Inventory sheet
2. Estimation	Calculate replacement value	Supplier quotes
3. Adjustment	Add additional costs	Internal document
4. Franchise arbitration	Define risk level	Financial simulation
5. Review	Annual update	Annual Report

Common mistakes and how to avoid them

Confusing book value and insured sum

The net book value often underestimates the true replacement cost. Prefer the new replacement value documented by current quotes.

Forget about additional costs

Failing to include installation logistics or calibration costs may reduce the actual compensation.

Do not review the insured amount

Ignoring updates can lead to outdated coverage if market costs increase.

Questions to ask your insurer/broker

1. On what basis do you determine the insured amount for my machines?

2. Do you include installation and calibration costs?

3. How do you manage embedded electronic or software components?

4. What is the clause in case of underinsurance and how is it applied?

5. Which franchises do you recommend based on my risk profile?

6. How often should the insured amount be reviewed?

7. Can you simulate the impact of different deductible levels on the premium?

8. What documents do I need to provide to justify the insured amount?

9. How do you handle extensions as business interruption losses related to machine breakdown?

10. What are the timeframes and conditions for an interim update of the insured amount?

Conclusion

Calculating the correct insured amount for your machinery and equipment is not a mere administrative formality; it's a structured risk management approach. By relying on accurate inventories, current replacement values, and clear documentation, you ensure your SME's ability to absorb a major loss without financial strain. Then, proceed to the internal documentation phase and proactive negotiation with your insurer.