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 However, if the car is damaged mid-term, the Stated Amount given at the policy inception may be outdated, and the amount paid out may be less than the Stated Amount.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.

The Confusion of Coinsurance

Coinsurance is a flexible term, as it applies to many different policies, all in different ways. This article specifically discusses how the coinsurance clause works in property insurance, and this article uses a Homeowner’s policy to illustrate exactly how the Coinsurance clause would affect you in the event of a claim involving your home.

A Coinsurance clause can be found in nearly every property-covering insurance policy you can find. Coinsurance was created to make sure the insured was properly valuing their building/property. Coinsurance applies to both Replacement Cost and Actual Cash Value loss settlements.

How does the Coinsurance clause require property to be properly valued? 

The Coinsurance clause will require the property to be insured for a certain percentage of its total Actual Cash Value/Replacement Cost value. Typically, the Coinsurance percentage will be 80%, but can be more or less than that. So if the Coinsurance percentage is 80%, but a piece of property is insured for less than 80%, there will be a penalty applied to the claim settlement. So let's say your home's full Replacement Cost value is $200K, you can have it insured for $160K and still have no penalty (200,000 x .8 = 160,000). Note that if you did only have it insured for $160K, you would only receive $160K, not the full $200K. The optimistic view of the Coinsurance percentage is that the 80% Coinsurance allows for a 20% 'buffer zone' for valuation errors, inflation, market shifts, and other factors. 

How exactly is the penalty calculated?

Typically, the penalty is calculated by taking the amount that the property was insured for and dividing it by what it should have been insured for. The resulting fraction is then multiplied to the total claim/loss amount. The number calculated is the amount you will be receiving. 

Example: Home w/RC value of $200K, subject to 80% Coinsurance, insured for $150K at RC.

Insured for: $150,000
Should have been insured for: $160,000
Loss amount: $50,000
Amount paid to insured: $46,875
Penalty Amount: $3,125


The Bottom Line

If you don't have your property properly insured, come claim time, you might not be able to fully rebuild your house using the insurance money, or you may be forced to rebuild smaller than what you previously had!

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.