Agreed Amount Clause

An agreed amount clause is a property insurance provision in which the insurer agrees to waive the requirement for coinsurance. As a condition for activating or including an agreed value provision in a policy, insurers will require a statement of property values signed by the policyholder.

This arrangement is common for commercial and other properties.

How an Agreed Amount Clause Works

A signed statement of values or actual cash value is required for the agreed amount clause. This statement specifies the insured property's monetary value. The amount equal to the replacement cost minus depreciation at the time of the loss is referred to as the actual cash value. It is the monetary value for which the property could be sold (which is always less than what it would cost to replace it).

Actual cash value is calculated by subtracting depreciation costs from replacement costs, with depreciation determined by determining the remaining percentage of life after establishing an expected lifetime.

The value listed on the statement will serve as the foundation for determining policy coverage. The policyholder agrees on this amount in advance and cannot later contest the amount of coverage. Once the statement is approved, the insurer will suspend the coinsurance clause in the policy for the policy's one-year term.

Many types of insurance, including healthcare, property, and flood insurance, include a coinsurance clause. However, its application does not apply to all policy types.

Coinsurance in property insurance refers to the amount of coverage that an insurance company will underwrite. Typically, this is 80%, but some insurers may require 90% or 100% coverage, depending on the building's value, location, and the likelihood of a loss occurring during the policy period. Furthermore, people have a tendency to underinsure their properties or cover them only to the amount for which they are most comfortable paying the premium. As a result, insurance companies will require that a policy cover a specified percentage of the structure's value.

In general, insurance companies will waive coinsurance only in the case of minor claims. In some cases, policies may include a waiver even if the policy is totaled. Policies that postpone the coinsurance clause, on the other hand, will cost more.

Because co-insurance policies require policyholders to pay deductibles before the insurer will bear any costs, policyholders bear more costs at the outset. If a loss occurs, the insurer will assess the property based on the agreed-upon value under the agreed-upon amount clause. These clauses are especially useful in the event of total property loss. In addition, if the policyholder wishes to renew the agreed amount clause, they must submit an updated statement of value before the policy expiration date.

It is important to note that the absence of coinsurance for this type of policy means that if coverage is insufficient to cover a loss, the policyholder is responsible for making up the difference. This can happen if a policyholder undervalues the property in the value statement.

Example of an Agreed Amount Clause

Assume you own a building that you've insured on a replacement cost basis with a $1 million limit and a $1,000 deductible under your policy. However, according to your statement of values, the actual replacement cost of your building is $2 million.

If a windstorm damages the façade by $100,000, your insurer will compare the agreed-upon value of your building—$2 million—to your policy limit. Your insurer, however, will not cover your entire loss because you underinsured your building. Instead, your insurer will pay 75% of your losses, less the $1,000 deductible, for a total of $74,000 ((100,000 x 0.75 - 1,000).