Agreed Value: Combating Coinsurance

In this article, we will be discussing how Agreed Value affects the Coinsurance Clause on property insuring policies, and how Stated Value works on your auto policy. Please be familiar with Coinsurance, Replacement Cost, and Actual Cash Value before reading this article.

The Coinsurance Clause is a safeguard that keeps property properly valued. You can insure your home for its full worth with Replacement Cost (RC) valuation, or you can insure it for its depreciated worth with Actual Cash Value (ACV). However, sometimes you want to insure something for an amount that isn't either of those values—this is where Agreed Value comes in.

Let’s use an older home for an example. Its Replacement Cost is $350K, and after depreciation, it’s only technically worth $200K, which is the Actual Cash Value amount. However, its market price is $150K. Wanting to insure it for what it is worth on the market would end up in a coinsurance penalty at claim time, so you changed the valuation to Agreed Value. With Agreed Value, the Coinsurance Clause is suspended, so no penalty would apply if a loss were to occur. Using Agreed Value usually results in a premium charge, but would most likely cost less than insuring the home for the full $200K.

Another use for Agreed Value is going beyond ACV. Using the same values as the first example, let’s say the homeowner has put a lot of time and money into the house. The homeowner believes the home is actually worth $250K. Using ACV, the most that the homeowner would receive after a total loss is $200K. However, using Agreed Value, the homeowner can insure the home for any amount he or she wants that is in between the ACV and RC amounts—as long as the insurer will agree to it.

When insuring vehicles, insurance companies automatically insure them for ACV. The Stated Value of the car is the current value, which accounts for depreciation. However, if the car is damaged mid-term, the Stated Amount given at the policy inception may be outdated, and the amount paid out may be less than the Stated Amount. To bypass the Stated Amount uncertainty, vehicles can be insured at an Agreed Value. If the carrier allows for Agreed Value, the value shown for the car is the exact amount paid out after a total loss.

Agreed Value allows for policy flexibility that would otherwise be impossible with the Coinsurance Clause and Stated Value. There's a lot of options at your disposal to create the perfect insurance program for your situation, so make sure to discuss it with your agent!

Note from the Author (Nov. 14, 2014): After two years of work, we've entirely redesigned our website! Using SquareSpace, we were able to import this blog and we are continuing our blog there. To find the current version of this article and our new articles, click HERE.