When discussing insured value and how a boat insurance policy will pay, most people think about a total loss. This is important but the majority of claims are partial losses. Depending on how your policy responds, you could pay several thousand dollars above your deductible.
A boat insurance policy has two different ways to pay in the event of a partial loss. One is to replace the damaged items without deducting for depreciation. The second is to depreciate the damaged items.
Depreciated Value is defined as Replacement Cost less depreciation. Most boat insurance companies use a non-published depreciation schedule that applies to partial losses. For example, the depreciation on a stern drive might be 7% per year, whereas the annual depreciation on canvas might be 15%.
Each insurance company will apply Replacement Cost and Depreciated Value differently. Some boat insurance companies do not provide replacement cost coverage for partial losses. If the boat is insured on this policy form, then no matter the type of loss, the replacement parts are subject to depreciation. If the part costs $2,000 and is subject to 20% depreciation, you would be paid $2,000, less $400 depreciation, less your deductible.
Most boat insurance companies provide replacement cost for partial losses until the boat (or items) reaches a certain age. The age will vary with each insurance company. Once a boat or item reaches that age, all partial losses are settled on an actual cash value basis.
The boat insurance companies that provide replacement cost for partial losses usually name specific items that are subject to depreciation regardless of the age. Canvas, sails, cloth, trailers and plastics are examples of specifically named items. These items generally have a limited life span. They also name specific items that are subject to depreciation based on the item’s age. Outboards, stern drives and internal machinery are examples of items that change from replacement cost to depreciated value when they reach a certain age. Most insurance companies go by the age of the item to deduct depreciation. However, each insurance company has different specifically-named items and different ages which determine whether those items will be on replacement cost or depreciated value.
It’s helpful to know that most companies will apply a reduced depreciation if you agree to replace with a remanufactured unit. A stern drive is a good example of an item that can be replaced with a remanufactured unit. This can save thousands of dollars in depreciation.
Replacement Cost for a partial loss is what you want when available. A depreciated value can cost you several thousand dollars. United Marine Underwriters represents several boat insurance companies and we will be glad to discuss how they apply depreciation.
Below are two examples to help explain how replacement cost vs. depreciated value work.
Example 1 is an 8 year old stern drive boat with a $500 hull deductible that hits a submerged object. The replacement cost to the stern drive is $8000.
Insurance company A provides replacement cost coverage until the stern drive is six years old. They will apply 60% depreciation (7.5% per year) to the $8000 replacement drive and then apply the $500 deductible. Insurance company A will pay $2700 ($8,000 less $4,800 depreciation, less $500 hull deductible).
Insurance company B provides replacement cost coverage until the stern drive is 10 years of age. They will pay $7500 ($8000 less the $500 hull deductible).
Example 2 is a boat with a $500 hull deductible that suffers wind damage to the fly bridge enclosure. The fly bridge enclosure is 2 years old and the replacement cost is $5000.
Insurance company A provides replacement cost until the fly bridge enclosure is three years old. They will pay $4,500 ($5,000 less the $500 hull deductible).
Insurance company B provides replacement cost but specifically names canvas as a depreciated item. Insurance company B will apply 20 percent depreciation to the replacement cost. They will pay $3,500 ($5000 replacement cost, less $1,000 depreciation, less the $500 hull deductible).
