​Businesses worldwide are experiencing the effects of the highest inflation rate in a generation. WA local governments need to consider inflationary pressures when valuing both their property and motor assets so that they can be confident that if disaster strikes, your protection will be adequate to appropriately respond.

In Australia, inflation is growing at its fastest pace in 30 years, the cost of living and increases in construction costs are all over the news. The Australian Bureau of Statistics (ABS) has reported that over the twelve months to the March 2023 quarter, the Consumer Price Index (CPI) rose 7.0%.  For Q2 this year, the CPI was recorded at 5.6%, which is still above the Reserve Bank of Australia's (RBA) target range of 2 to 3 %. Construction and equipment costs are still very high; making it essential for local governments to consider asset re-evaluation.

Case study: Shire realises the importance of asset re-evaluation after major financial loss

The Shire was undertaking clearing and loading of trees and general foliage clean up on 6 July 2022 with a 2016 Caterpillar 432F 4X4 backhoe. During operation, the protected machine's engine suddenly stopped working and did not start.

The incident

A large tree branch had struck the front and undercarriage engine bay of the machine. It fractured and broke the engine oil lubricant pressure switch/sender that is fastened to the engine oil filter housing. This led to an oil leak resulting in the complete emptying of oil lubricant from the engine; resulting in catastrophic engine failure.

The machine was in a good condition prior to the incident. At the time of assessment, there appeared to be no significant evidence of pre-existing damage.

Declared value

The damage sustained to the machine included the front grille panel, front surround panelling, air condenser, cooling pack and complete engine assembly.

The Shire had declared the machine for $90,000 and it was expected that the actual repair costs would be significantly higher due to higher costs of parts, freight costs and additional damage being discovered. This meant that the expected repair costs would exceed the declared value, making the machine uneconomical to repair and an economic total loss for claim purposes.

The current market value of the machine was around $110,000-$120,000, $30,000 more than declared by the member.

The issue of undervaluation is affecting many members at the moment as the second hand market for vehicles has skyrocketed and combined with supply chain issues worldwide, vehicles and machinery are more valuable than they were in pre-COVID, 2020, times.

Outcome – Settlement breakdown

The member decided to retain the damaged equipment, members are entitled to do this if they wish however it means that we must deduct the salvage value from the settlement. Generally the member will do this if the asset has parts that can be utilised as part of their maintenance arrangement.

Lessons from this case

From a claims perspective, we were able to settle on the declared value the member had elected on their asset register.

The issue is that inflation and economic conditions continue to deteriorate and local governments should carefully consider if leaving contingency is valuable vs potential impact of a loss.

This is a great example to remind members to review their declared asset values across the board. In this instance, the impact was only $30,000 but if this was for a major building asset, the impact could have been in millions.