Insurance Policy Valuation Clause
Full Reimbursement vs Paying Out Of Pocket
Finding out at the time of a loss that your policy contains the incorrect valuation can prove to be a very costly setback for any policyholder. To prevent such an event, make sure that you are familiar with what a valuation clause does and check that you have the correct one for your insurance needs.
The valuation clause is the section of the policy that an insurance company turns to when it comes time to determine how to calculate the amount to pay in the event of a loss. There are several types of valuation clauses that can be used, depending on the item being insured. The most common types are:
Replacement Cost:
As it sounds, the replacement cost is the cost to repair or replace a building using currently available materials of the same kind and quality as those used in the original construction of the building.
Insurance companies put in the same kind and quality stipulation to address the situations involving the repair/replacement of older buildings. For example, the original building materials for a 100-year-old structure may no longer be available. Therefore, the insurance company will pay for current day materials that are comparable to the original.
Keep in mind, the most the insurance company will pay to repair or replace is subject to the limit of the policy.
Actual Cash Value:
Actual cash value is determined by taking the cost to repair or replace the property and subtracting the depreciation amount. Therefore this type of valuation on an older building may not provide adequate reimbursement to fully repair or replace the building to a pre-loss state.
Stated Amount:
This less commonly used valuation is mostly applicable to unusual or high valued items that do not depreciate with time. Stated amount valuation can be found on antique and/or classic car insurance policies. In essence, it places a maximum value on the insured item and the insurance company will pay the lesser of the following:
- Stated amount
- The cost to repair or replace
- Actual cash value
Agreed Value:
This type of valuation sets a fair market value on the insured item that has been agreed upon between the insured and the insurance company. If the value of the insured item fluctuates, it is important to re-address the agreed value and update the policy accordingly. This should be done annually at policy renewal and more frequently if required.
Be sure your policy contains the proper valuation clause to suit the item covered. While replacement cost may provide the best reimbursement for your home, it may leave you paying out of pocket on your classic or antique vehicle. Make sure you discuss this provision with your insurance agent/broker prior to binding coverage.
