New-for-old value

What it means

New-for-old value is a basis for calculating an insurance payout under which the insurer pays what it costs to acquire a new item of the same kind and quality at the place and time of the loss, with no deduction for wear. For a building it is the cost of building the same building; for a machine, the price of a comparable new machine.

The opposite is current value, where the insurer deducts wear and age from the new value. The difference can be large: a five-year-old machine insured at current value may get half the payout, while a new machine costs as much as five years ago, or more.

New-for-old cover is more expensive because the sum insured must match the price of a new item, not the net book value. Policy conditions often restrict new value for older items, for instance once wear passes a certain threshold.

How it works in practice

When setting up a company’s property insurance, we recommend basing the sum insured on current replacement cost, not the accounts. A building fully depreciated in the books still has a value that will have to be restored after a loss.

The sum insured must be updated regularly, especially as construction and equipment prices rise. If it is too low, underinsurance arises and the insurer reduces the payout in proportion, even for partial damage.

An insurance payout is income in the books and the net book value of the destroyed asset an expense. With new-for-old cover an accounting gain often arises because the payout exceeds the book value. That gain is taxable and should be factored into plans to replace the asset.

What to watch out for

The most common mistake is assuming new-for-old cover always pays the price of a new item. The terms often require the item actually to be replaced, and otherwise pay only current value. For old items new value may be excluded altogether.

The second risk is an inaccurate list of insured property. If the policy covers “office equipment” as a single amount that is never updated, a fire reveals that new equipment costs more than the sum insured, and the payout is cut.