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 However, if the car is damaged mid-term, the Stated Amount given at the policy inception may be outdated, and the amount paid out may be less than the Stated Amount.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

Causes of Loss—Modifying Your Protection

Every insurance policy has perils that are covered and excluded. In Property insurance policies (E.g. your home, commercial building, etc.), the policy follows the ‘Cause of Loss Forms’. The Forms are Basic, Broad, and Special. Each Form insures your property against different perils, with Special being the most thorough coverage.

Note: Before the three Forms can be properly discussed, you’ll need to know what a Named Peril policy and an Open Peril policy mean. In a Named Peril policy, the coverage provided is limited to the perils that are specifically named. If something happens that isn’t specifically named, the claim will be denied. Conversely, in an Open Peril policy, every claim scenario is covered except for named exclusions. So if a claim was caused by literally anything other than the named exclusions, it is covered.  

Basic:

As you’d expect from its title, the perils covered by Basic Causes of Loss are very limited. This Form is a  Named Peril coverage, covering your property for only the most basic perils. Typically, your Basic form will cover the following:

• Fire
• Lightning
• Windstorm/Hail
• Explosion
• Smoke
• Vandalism
• Aircraft or Vehicle Collision
• Riot or Civil Commotion
• Sinkhole Collapse
• Volcanic Activity

Broad:

Broad Form is another Named Peril coverage, expanding on the perils found in the Basic form. The Broad Form includes all of the Basic Form’s perils, and expands the coverage to include the following:

• Burglary & Damage Caused by a Burglary
• Falling Objects
• Weight of Snow and Ice
• Freezing of Plumbing
• Accidental Water Damage
• Artificially Generated Electricity

Special:

As you might have guessed, Special Form is written on an Open Peril basis, making it the most comprehensive coverage form. The biggest benefit to the Special Form is that it would cover odd, completely unforeseeable accidents that would otherwise be excluded in the other policy Forms. Being an Open Peril policy, the Special Form typically has the following exclusions:

• Ordinance or Law* 
• Power Failure*
• Earthquake**
• Flood** 
• Neglect
• War
• Nuclear Hazard
• Intentional Acts

*These exclusions could be covered by adding an endorsement to the policy and paying additional premium.

**These exclusions can sometimes be added by endorsement or by purchasing a separate policy.

The bottom line:

Not all policies are made equally. Don't leave things up to chance—always make sure to check what coverage Form your property insurance is written on. When you compare insurance quotes, always make sure to take a look at the policy language—even two ‘Special Form’ policies could have different exclusions! 

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.

Understanding Your Homeowner's & Renter's Policy

Many people don’t fully understand how their Homeowner’s or Renter’s policy works. This article will give a brief overview of the coverage included in both policies, and will provide links to articles that further explain the coverages and terms.

Homeowner’s and Renter’s insurance policies are package policies designed to cover the insurance needs of the average renter or homeowner. There is a lot of overlap with these policies, but the Homeowner’s policy covers the extra property exposures that they face. Each of the policies have coverage parts, designated by different letters. Below is each coverage part, with a description of what it does:

Coverage A, Damage to the Home:

Coverage A is exclusive to the Homeowner’s policy, as a renter (obviously) doesn't own their residence. The coverage provided can be widened or narrowed, depending on the provisions inside the policy. The first provision that modifies coverage is what valuation the home is written as—either Replacement Cost or Actual Cash Value. The abridged explanation is that Replacement Cost valuation would provide you with a brand new home after total loss, where Actual Cash Value would reimburse you with the market value of the home, allowing you to go find another home of similar price to purchase.

Another provision that modifies Coverage A is what Cause of Loss Form it is written on. These Forms define which Perils your home is insured against. The Forms are Basic, Broad, and Special, with Basic providing the narrowest of coverage and Special being the widest. Lastly, you are required to insure your home for approximately its exact worth due to the Coinsurance Clause.

Coverage B: Other Structures:

The Other Structure coverage is another Homeowner’s policy exclusive, as it covers any unattached buildings or structures on your property (such as a shed or gazebo). The amount given by the coverage is usually 15% of the Coverage A amount, and can be adjusted to accommodate your specific needs.

Coverage C, Personal Property:

Both the Renter’s and Homeowner’s policies have Coverage C. This section provides coverage for all of your personal items, such as your TV, furniture, clothing, etc. Like Coverage A, it is subject to Replacement Cost or Actual Cash Value valuation and the Causes of Loss Forms. However, Coverage C is also subject to Sublimits. Sublimits typically apply to collection items, such as furs, guns, precious metals, etc. To properly cover all of your personal property, you may need to increase the Sublimits, or alternatively, you can Schedule each individual item.

Coverage D, Additional Living Expense:

Also known as Loss of Use coverage, Coverage D can be found on both the Renter’s and Homeowner’s policies. Coverage D would reimburse the policyholder’s expenses after a covered Peril makes their home uninhabitable. So if a fire destroys your home, Coverage D will pay to put you in hotel while your home/apartment is being rebuilt. It will also pay any additional expenses you have to pay, such as increased cost for food. The amount provided for Coverage D varies, but can usually be increased. Note that this coverage typically is only available for a stated amount of time, such as coverage for up to six months after a covered loss.

Coverage E, Personal Liability: 

This section covers the renter or homeowner and their family against lawsuits (legal liability). Situations that would be covered by your Personal Liability coverage would be if your dog bites someone, if a guest trips and injures themselves on your property, if you damage someone else’s property, Personal Injury, etc. The limits can typically be set as low as $50,000 up to $500,000. (the Personal Umbrella policy provides additional liability coverage on top of the Personal Liability coverage)

Coverage F, Medical Expense: 

Also known as Medical Payments coverage, this coverage is available for both Renter’s and Homeowner’s policies, and it is a supplementary coverage to your personal liability. Though your Personal Liability coverage will cover any medical expenses that you’re held liable for, the Medical Expense coverage will pay the medical expenses of people who harm themselves on your property even though you didn't negligently cause it. Essentially, this coverage was designed to pay their medical bills to keep you out of court.

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.

Property & Casualty Insurance Lingo

The Property and Casualty (P&C) insurance industry is a vast segment of the insurance industry, and there are numerous terms used in it. The following list was made to explain common terminology used in Personal and Commercial Property and Casualty insurance:

Property Insurance: It covers any physical item that could suffer a loss. Examples: your home, your car, your office building, your jewelry, your copier/printer, etc. 

Casualty Insurance: Any situation where you might be liable for harming someone or someone's property. It is a cover-all term for liability insurance coverages. 

Deductible: Also known as a Retention. The Deductible is the amount the insured must pay in order to have the rest of the claim covered. 

Exposure: As in, exposure to loss. Some businesses have exposures that require specialty insurance. Example: The Exposures of an amusement park are harder to cover than a bakery’s.

Peril: A cause of loss. Examples of Perils: Fire, Wind, Hail.

Risk: The possibility of a loss. Example: Contractors have more risk than an ice cream parlor.

Hazard: Something that increases risk; something that increases the chances of a loss. Example: Wet floors in a grocery store, cracked pavement in a parking lot.

Inception Date: Also known as the Effective Date. The day and time when your policy starts to cover you.

Expiration Date: Also known as Ex-Date. The day and time when your policy stops covering you.

Coverage: A single line of insurance. Property coverage is a single line of insurance. A Homeowner’s policy has multiple coverages.

Package policy: A Package policy combines two or more coverages into a single policy, where you pay one premium and the coverage all have the same Inception. A Homeowner’s policy is a package policy, as it has property and personal liability coverages.

Personal Lines: These are the coverages that deal with the risk of the average consumer. These products are far simpler than Commercial Lines, and the products are fairly consistent between insurance companies.

Commercial Lines: These are the coverages that deal with the risk of businesses and organizations. The products in Commercial Lines vary greatly between insurance companies, and the total number of products available is vast.

Standard Insurer: An insurance company that has products for the general public. The products are broad with competitive prices, with the goal of gaining market share.

Surplus Lines: An insurance company that has products for special exposures (such as a bad claim history). These companies specialize in writing high-risk exposures. The products are non-standard, meaning that the policy wording will be less broad, and the premium will be higher.

Assigned Risk Worker’s Compensation: Also known as ‘the pool’. Assigned Risk is for companies that have a bad Workers’ Comp claim history and/or companies that are in a high-loss industry. Being similar to Surplus Lines, the premium you pay with Assigned Risk will be far greater than a Standard Insurer.

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.

Scheduled Property–-The Solution for Sublimits

Homeowner’s insurance covers your home, your liability, and your items in your home. However, having a standard homeowner’s policy does not necessarily mean all of your items are properly insured. Certain categories of items are subject to limitations by sublimits. This article will discuss how you can properly protect yourself by scheduling your property.

The Homeowner’s policy covers just about every piece of property inside your home. Most policies even cover items you’re storing for others. Most policies typically extend $1,000 of coverage for damages to other's property while you are away from home. One of the biggest pitfalls with the property coverage of a homeowner’s insurance policy, however, is its sublimits. All standard homeowner's policies have sublimits, which are limitations on your personal property limit, assigned by category. Though almost all kinds of property is covered, it is only covered up to the sublimit’s stated value. These limitations can create the need to schedule your property if they are worth more than the total of the sublimit.

Scheduling property is a fairly simple thing to do. At anytime, give your agent the type of property it is (E.g. Jewlery), a vivid description of the property (E.g. Women’s white-gold wedding ring, ½ kt. Princess-cut diamond with diamond paving), and the appraised value. Some categories of items don’t need a professional appraisal, but most companies will require a professional appraisal if the total value of an items is over a pre-determined threshold.

The cost to schedule property is very affordable. The typical item only costs about a dollar per $100 of value. For example, a guitar scheduled for $700 would only cost about $5 per year. The biggest problem with scheduling is getting the correct value, especially for jewelry. The price of precious gems and metals are continually increasing, so having an appraisal every year or two is vital. The $1000 wedding ring you bought in 1990 is definitely not worth only $1000 anymore. Also, the need for professional appraisals becomes increasingly vital as the value of the item goes up.

On the opposite side of things, depreciation drastically affects other categories of items, especially technology (E.g. The $2000 you spent on technology a few years ago may only be worth $400 now).  Some things can be easily appraised on your own using the internet, but professional appraisals are always the most accurate way to ensure you are setting limits properly. Appraising is usually a better option than paying too much for over-insured items as well.

By scheduling your high-worth items, you can bypass the sublimit’s limitations on coverage. Depending on your insurer, you can sometimes schedule your items for agreed value, instead of the actual cash value you would get if the item is only covered under the sublimit’s coverage. Scheduling property is one of the best ways to make sure you have your items properly insured come claim time.

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.