Agreed Value Clause
Friend? Or Sometimes Foe?
The Agreed Value Insurance Option is an excellent tool for policyholders to avoid the penalty of the coinsurance clause in both property and business income insurance claims. It can also create problems if not properly exercised.
A major problem with coinsurance is that it applies to values at the time of the loss, not at the inception of the policy. If values are not updated there can be a significant coinsurance penalty at the time of loss. To minimize this problem, insurance companies came up with a new provision called agreed value insurance, which suspends the coinsurance clause for a defined period of time.
To obtain agreed value, the insured must submit a statement of values listing the actual cash value of the property at risk or in the case of replacement cost coverage, the insured must specify the replacement cost values of the property. In addition, the business income coverage can be written on an agreed value basis. A similar report of values for the future business income values must also be submitted by the insured.
At the renewal period, new statements of values need to be submitted to the insurance company, in order to extend the agreed value insurance. Failure to do so can be very harmful in the event of a loss.
The use of agreed value insurance is an excellent tool for insureds to avoid coinsurance penalties for property and business income losses, but great care must be taken with its use. Be sure that: 1) the values used are reasonably accurate: 2) the agreed value endorsement is extended before expiration to avoid reapplication of coinsurance; and 3) the amount of insurance equals or exceeds the required amount.
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Adjusting Today is provided free of charge as a public service by Adjusters International, Inc., disaster recovery consultants. It is provided for general information and is not intended to replace professional insurance, legal and/or financial advice for specific cases.
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