Musicians Can Master These Insurance Coverage Basics

Every musician knows about tempo, pitch and chords. But the smart ones also understand the difference between “stated value” and “replacement cost.” A few also totally get how important “diminished value” coverage is. And “ACV?” Better run!

Insurance terms?

Yep.

Honestly, understanding some quick basics is the only way avoid hitting a sour note after your vintage guitar, custom violin, instrument of rare antiquity or road-worn saxophone suffers a ding, damage or total ruin. Ultimately, you want to make smart choices about your instrument insurance. So, let’s break down these terms — stated value, replacement cost, diminished value and actual cash value coverage — and why they matter.

Stated value vs. replacement cost

• If you select coverage based on stated value, you and your insurance company agree in advance on how much your instrument is worth at the time coverage limits are accepted by your agent and insurance company.

For especially valuable pieces, such as rare or vintage instruments, this is best done based on expert appraisals. Once stated value is approved, this becomes the cap for any loss payments. However, there may be potential payment differences based on market fluctuations. 

• If you overstate the value, you’re only paid the actual market value at the time of your loss (not the stated number). For example, let’s say your 1965 Fender Stratocaster is stolen. Even if you’ve insured for at a stated value of $20,000, if current market value at the time of the loss has dipped to $17,000, that’s all you’ll be paid.

• If values rise and you haven’t updated the policy, you could be underinsured. To reduce this possibility, be sure to schedule a routine appraisal review with your insurance company when you first accept the stated value. This will allow you to adjust before the policy renews.

• As it implies, replacement cost coverage pays what it would take to replace your instrument with one of like kind and quality, without factoring in depreciation.

This can be a great option for modern, mass-produced instruments that can be easily replaced. And it offers a predictable payout — remember, still only up to your insured limit — because it’s automatically tied to current retail prices. That means if your upright Yamaha piano is lost in a house fire, you’d be paid what it costs to buy a new similar model Yamaha upright, even if that cost has risen since you first purchased it. (Note that this too is misleading unless your policy has some level of inflation-guard protection.)

However, replacement cost coverage is not always suitable for unique or collectible instruments — think a guitar previously owned by B.B. King — because no direct replacement exists.

Understanding diminished value coverage

Part two of smart insurance selection is recognizing that even if your instrument can be repaired, the repairs may end up diminishing its overall market value. This drop in resale or appraised value is called “diminished value.”

Let’s say a vintage violin with a pre-damage stated value of $50,000 is accidently dropped. Although a musical instrument insurance policy would pay for repair by a reputable luthier to restore the violin’s structural integrity and sound quality, the new market value could still drop, perhaps in this example to $40,000. 

Without diminished value coverage added to the policy, the violin owner would bear this $10,000 loss. With this added protection, the difference between pre-loss and post-repair value would be paid — a truly crucial upgrade for high-end or rare instruments.

Actual cash value coverage? Nope!

Musicians should be wary of actual cash value, or ACV, coverage. Many insurance companies offer this — sure, it’s typically less expensive, but ACV only pays up to the value of the instrument at the time of loss or damage. Depreciation and wear and tear are factored into the payout amount. (Anderson Insurance does not recommend ACV and it’s one of the benefits of working with us!)

Which coverage should you choose?

Now that you understand these insurance terms, you can have an informed discussion with your insurance provider. You’ll want to review your specific situation and individual instruments when you select your policy, but generally these guidelines apply:

• For gigging musicians or hobbyists with modern gear, replacement cost is often sufficient.

• For collectors or vintage instrument owners, stated value plus diminished value coverage provides more comprehensive protection.

• For touring professionals, you may find a combination approach works best with replacement cost for modern instruments and stated value for specialty instruments.

And one final reminder: Whichever route you do choose, be sure to set dates for both a formal annual policy review and any appropriate appraisal updates when your first set your policy terms. They’re dates that are simply too important to overlook and risk forgetting.