Valuation Clause

Some insurance policies include a valuation clause that specifies how much money the policyholder will receive from the insurance provider if a covered hazard event occurs. This clause specifies a fixed amount to be paid in the event of an insured property loss.

Valuation clauses can be written in a variety of ways, including replacement cost, actual cash value, stated amount, and agreed value.

Understanding Valuation Clauses

Any policy that includes a valuation clause should be carefully reviewed to determine when a benefit payment is required. A policyholder should also conduct a regular review of the property's listed dollar value. Values that do not keep pace with the reasonable cost of living, inflation, or changes in local building codes may not adequately protect the policyholder.

Valuation clauses are based on a variety of factors about the specific property as well as individual budget requirements.

Determining the cost of insurance-covered items is a necessary but time-consuming step in obtaining insurance coverage. The policyholder can better determine the level of coverage they need if they know how much an item is worth. In addition, policyholders should base coverage on the maximum foreseeable loss. In some cases, the insurance provider may expect the insured to use a full reporting clause to update the value of items covered by the policy on a regular basis.

In addition, before underwriting, the insurance provider may request a review by an appraiser or specialist to determine the value of a property. This is especially true when the policyholder is purchasing insurance for classic, antique, customized, or one-of-a-kind property, as well as historic structures or items. An appraisal may also be required if a policyholder is attempting to obtain insurance in an amount greater than the assessed value of a property.

Actual Cash Valuation Clause

The most common method for calculating property benefit values in a homeowners policy is actual cash value (ACV). This value is based on the cost of restoring a piece of property, such as a boat, car, or home, to its pre-loss condition. The insurer will take into account the property's depreciation. Depreciation determines how much of an asset's useful lifespan value remains and affects the policyholder's benefit value in the event of a covered loss.

The Valued Policy Law is another factor to consider when developing an ACV policy (VPL). Arkansas, California, Florida, Georgia, Kansas, Louisiana, Mississippi, Missouri, Montana, North Dakota, New Hampshire, Ohio, South Carolina, South Dakota, Tennessee, Texas, and West Virginia all have policy laws that are valued.

In the event of a total loss, insurance providers must pay the full, listed face value of the policy, without regard for the depreciated actual cash value, under this regulation. The law requires that the full face value of the policy be paid, even if the value at the time of loss is less. However, if there is concurrent causation for damage, the insurer may make a reduced payment.

Replacement Cost Valuation Clause

The replacement cost is the cost of repairing or replacing a property to the same or similar level of quality as the original property. These prices may change as the market price changes. Property depreciation is not taken into account in replacement cost coverage. However, unless a policy includes a law and ordinance provision, it may not provide sufficient coverage to cover all of the costs of rebuilding a property.

To allow for changes to the state building code, the law and ordinance clause will increase the replacement benefit amount by a percentage. This provision is critical in the event of a covered hazard that destroys 50% or more of the property. Most local building codes require structures that sustain damage totaling 50% or more of the insured value of the home to be demolished and rebuilt to current codes. Furthermore, policyholders should be aware that coverage only applies to the damaged portion of a structure.

Other Valuation Clause Types

Stated Value

The stated value amount is most commonly found in automobile coverage and refers to the maximum value of an item placed on the property by the policyholder at the time the contract is written. If you sell the property, this is the price you would ask a buyer to pay. However, most stated value policies include language that allows the insurer to pay the lesser of the stated value or the actual cash value in the event of a loss.

Agreed Value

An agreed value policy will use an agreed amount provision to specify the value of the insured property. The clause, which should be located in the policy's damages section, should define what will happen to the property in the event of a total loss. The agreed-upon value could be a fair-market value or another amount agreed upon by both the insurer and the insured.

Market Value Clause

A market value clause is a policy provision that defines the value of the covered property at market value rather than actual or replacement cost. For example, such a clause would limit the amount a policyholder could receive for the loss of an asset to the amount they could receive if they sold it on the open market.