Valued Policy Law (VPL)

In the event of a total loss, valued policy law (VPL) requires insurance companies to pay the full value of the policy to the insured. Valued policy law does not take into account the insured property's actual cash value at the time of loss; instead, the law requires total payment.

A valued policy differs from an unvalued, or open, insurance policy in that the value of the property must be proven after a loss by the production of invoices, estimates, claims adjusters, or other evidence.

Understanding Valued Policy Law

A total loss occurs when an insured property is destroyed or damaged to the point where it cannot be recovered or repaired for future use. A total loss frequently results in the maximum settlement possible under the terms of the insurance policy.

In general, insurance policies use one of two methods to calculate the value of a loss: actual cash value or replacement cost.

• Actual cash value is the most common standard for determining the amount of insurance needed, the amount of loss to be paid, and the amount upon which any coinsurance or similar requirement will be based. Actual cash value is defined as replacement cost less depreciation at the time of loss. The broad evidence rule, which states that the determination of the actual cash value of a loss should include all relevant evidence an expert would use to set the value of the property, including replacement cost less depreciation and fair market value, is rewriting this definition through case law and state legislation.
• Replacement cost means that the company will pay the cost to repair or replace, after application of the deductible and without any depreciation.

In general, the amount stated in policy declarations must be the dollar amount paid to the insured at the time of loss, according to valued policy laws. If the insured item's value at the time of loss is less than the amount of insurance, the insurer has no recourse to contest full payment. Furthermore, in most valued policy states, any policy provision that is inconsistent with the valued policy law is deemed null and void.

These laws do not apply in every state in the United States. Arkansas, California, Florida, Georgia, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, West Virginia, and Wisconsin are among the states with valued policy laws.

Valued Policy Law Controversy

Hurricane Katrina compelled the Louisiana insurance industry to examine the Valued Policy Law; few policyholders were paid their full coverage amount due to interpretations of the valued policy law. Some insurers argue that the law does not apply because certain losses were caused by a non-covered peril (flood), that other losses were caused by "mixed causation" - a combination of a covered peril (wind) and a non-covered peril (flood), and that the total loss was offset by other sources such as the National Flood Insurance Program and FEMA grants.