Why Insurers Undervalue Equipment and Inventory Losses After Commercial Water or Fire Damage

Damage caused by water or fire can be catastrophic for a business. Most business owners reasonably assume their commercial insurance coverage means they are protected from losses caused by water or fire. Yet insurance companies routinely use various tactics to significantly undervalue insurance claims for business personal property. If you are facing an underpaid commercial equipment and inventory claim, it’s crucial to consult with a property damage attorney who can best advise you regarding your options.

Key Takeaways:

• Insurance claims under a commercial property insurance policy generally fall into one of three categories: the building, business personal property, or business income. Damage to equipment and inventory is typically covered as business personal property. Insurance adjusters evaluate claims for these losses differently than other elements of a claim for water or fire damage.
• Commercial insurance companies often pay actual cash value depreciation for specialized equipment, even when no active secondhand market for it exists. This can result in an insurance payout that is well below the actual cost to the business to replace the items.
• Commercial insurance companies use several tactics to drive down equipment and inventory valuations, including using generic estimating software to evaluate claims for specialized equipment and disputing whether equipment that powers on is actually damaged.
• Commercial insurance companies may dispute whether inventory damaged by smoke, soot, or water is a total loss, claiming it can be salvaged. This valuation can reduce the insurance payout and is particularly common in claims involving sensitive inventory like food, electronics, or chemicals.
• Thorough documentation is critical in commercial insurance claims, and insurers may discount or deny coverage for items that lack appropriate evidentiary support like inventories, receipts, and appraisals.

What Is Business Personal Property in an Insurance Claim?

Commercial insurance policies typically categorize coverage into three categories: the building, business personal property (BPP), and business income. Equipment, inventory, machinery, furniture, and fixtures typically fall under business personal property. Insurance adjusters often evaluate BPP claims differently than claims for damage to the structure, applying a more aggressive depreciation calculation or requiring more documentation than many businesses can provide.

Why Insurers Depreciate Water- and Fire-Damaged Equipment So Aggressively

When evaluating claims for water- or fire-damaged property, most insurers pay actual cash value rather than replacement cost value. It’s essential to understand the difference between them:

• Actual cash value (ACV) reflects the property’s value at the time of the loss and accounts for depreciation.
• Replacement cost value (RCV) refers to the cost to repair or replace the damaged property with an item of like kind and quality, often without deducting for depreciation.

While ACV formulas account for wear and tear, they do not address the sudden loss of an item that was functioning before a loss caused by water or fire damage, which can result in an underpaid commercial equipment and inventory claim. Machinery and electronics can look salvageable on the outside but may be corroded or contaminated on the inside. This damage is not visible during an inspection. Yet insurers often depreciate these items based on age rather than recognizing the fact that they were suddenly lost, which undervalues the actual cost of replacing the damaged item.

Common Reasons Insurers Undervalue Equipment and Inventory Claims

One way insurance companies make money is by paying the lowest possible amount on a claim, even if it is covered. Common tactics insurers use to drive equipment and inventory valuations lower include:

• Using generic claims-estimating software that relies on regionally averaged pricing databases that can fail to price specialized or custom equipment accurately.
• Treating heat- and smoke-damaged equipment as undamaged because it still powers on, even when its reliability, accuracy, safety, or performance has been compromised.
• Valuing only the replacement cost while omitting the cost of specialized labor, calibration, or installation to bring it back into service.
• Lowering the valuation because the business lacks original purchase records, rather than accepting the current replacement cost as sufficient evidence.

Although the above tactics often result in underpaid commercial equipment and inventory claims, this is not to say that every commercial insurance claim is being undervalued in bad faith. Many undervaluation errors stem from the limitations of insurance valuation tools in accounting for specialized or custom equipment. An experienced commercial property damage law firm can present alternative evidence to safeguard against undervaluation errors.

Total Loss or Salvageable? How Insurers Decide in a Claim

After water damage or a fire, insurers may claim equipment or inventory can be cleaned, restored, or partially salvaged rather than treating it as a total loss. This is most common in claims involving specialized equipment or sensitive inventory like food, electronics, pharmaceuticals, or chemicals. This argument can significantly reduce an insurance payout, and result in an underpaid commercial equipment and inventory claim, even when inventory is no longer sellable or safe to use. Nonetheless, many businesses accept the insurance payout with little negotiation or without seeking a second opinion.

How a Commercial Property Damage Lawyer Can Help

Applying ACV instead of RCV, undervaluing the replacement cost of equipment or inventory, and claiming items are salvageable when they cannot be used or sold can significantly reduce an insurance payout after water damage or a fire. These tactics are not limited to businesses; they also affect Condominium Associations and Homeowners Associations in claims for damage to clubhouse equipment, landscaping equipment, and common-area furnishings.

The experienced commercial property damage lawyer team at Saka Bryant, P.A., represents Florida Condominium Associations, Homeowners Associations, and businesses in property damage claims, including those involving underpaid commercial equipment and inventory claims. We are committed to ensuring insurance companies uphold their contracts and pay policyholders the compensation they deserve. Contact us online today or call 754-283-8030 to schedule a free, confidential, no-obligation consultation to discuss your options and learn how we can assist you.