Agreed Value Clause: Friend? Or Sometimes Foe?


Providing Loss Consulting Services to the Insured



Paul O. Dudey, CPCU

One of the major disappointments a firm may discover following a severe disaster: While the limit of insurance is higher than the total amount of the loss, the insured did not have a high enough limit of insurance to satisfy the coinsurance clause of the policy, so that insurance recovery of the loss is dramatically reduced.

Because most property losses are partial rather than total, it was commonplace for insureds to gamble and buy and pay for only enough insurance to cover what they believed would be the highest loss likely to be incurred, even though well below the total value at risk. In most loss scenarios, this gave the cost advantage to that insured as compared to the prudent insurance buyer who insured the property at risk for its full value. Only in the unlikely case of a loss that exceeded their expectations did the “gamblers” lose out.

To combat this practice of deliberate underinsurance, property insurers devised the “coinsurance clause,” which requires the insured to carry at least a stated percent (80, 90, or 100% are common) of insurance to the value of the property insured, for which a substantial reduction in rate is offered. Failing to carry at least the required percentage of insurance to value, the insured becomes a “coinsurer,” with recovery of any loss reduced in proportion to the deficiency.

For example: Assume total insurable value of $100,000 with an 80% coinsurance clause and the insured buys $40,000 of insurance. A loss of $30,000 occurs. Because the insured bought only half of what the coinsurance clause required—$40,000,...

A major problem with coinsurance, of course, is that coinsurance applies to values at the time of loss, not at policy inception when the amount of insurance is usually established.


For all policyholders, avoiding coinsurance penalties is of paramount importance. However, keeping up with current values, and adjusting your insurance routinely can overwhelmmost property owners. The use of the Agreed Value Option is an excellent tool for insureds to avoid the possible penalty effects of the coinsurance clause in both property and business income insurance. While it provides the benefit of removing coinsurance, it can also create problems if not properly exercised. The following article by Adjusters International’s insurance expert Paul O. Dudey details the origins, benefits and potential pitfalls of this alternative to coinsurance.

Stephen J. Van Pelt, Editor
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