When a molding machine is destroyed by fire, how is the measure of indemnity calculated?

The measure of indemnity calculated for the destruction of a molding machine by fire follows the principle of indemnity, which seeks to restore the insured to the same financial position as before the loss occurred, without providing profit from the situation.

In this case, the correct approach is to consider the cost of a new replacement less an amount for wear and tear. This reflects the actual depreciated value of the machine since it accounts for the condition and usage of the asset prior to the loss. The wear and tear are essential factors to consider because they reflect the reduction in the asset's value over time due to usage, which is a key component in accurately determining the indemnity.

Determining indemnity based solely on the cost of a new replacement does not take into account the depreciation, potentially resulting in an unfair advantage for the insured. Similarly, using the original purchase price or adjusting it for wear and tear without recognizing the cost of a new replacement would not accurately reflect the current value of the machine at the time of the loss.

Thus, the correct method of calculating indemnity addresses both the need for fairness in restitution and the depreciation factor.