Agreed Value Clause: Friend? Or Sometimes Foe?

ADJUSTING TODAY

...instead of 80% of the $100,000 value at risk, or $80,000 — recovery will be limited to half of the amount of loss or $15,000, even though the amount of insurance carried, $40,000, substantially exceeds the amount of loss, $30,000.

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 based on the values at risk at that time. Or often, if values are not reviewed and the limit of insurance adjusted at policy renewal, they may already be inadequate to satisfy the coinsurance requirement, and can become even more out of line as time passes.

In times of rapid price inflation, or at any time for a growing business, values at risk can quickly outgrow the insurance, leaving the insured subject to a coinsurance penalty at the time of loss, unless values are reviewed and adjusted frequently, which few insureds have the time or patience to do.

To minimize this problem, insurers came up with a provision which they initially called the Agreed Amount clause, but now call the Agreed Value Optional Coverage. This option can be included with the property insurance, usually for a period of one year, by noting on the property coverage declaration page that it applies. It suspends the operation of the coinsurance clause until the expiration date of the Agreed Value Option or of the policy, whichever comes first.

To obtain this Option, the insured must submit a statement of values to the under- writers showing the insurable value— actual cash value (ACV) or, if replacement cost insurance is carried, the cost to replace new for old with no deduction for deprecia- tion—of all property to be insured. The underwriters can review this report, and perhaps even order an inspection of the premises and appraisal to determine the report’s accuracy, and if satisfied with it, can authorize use of the Agreed Value Optional Coverage for a period of up to one year from the date of acceptance. This report does not become a part of the policy.

Prior to the expiration date of the Agreed Value Option, a new statement of values must be submitted to the underwriters and the Option extended for another year. Failing that, the Option will lapse and coinsurance will again apply. Note that most insurers apply a small additional charge (5% is common) for the use of the Option.

Allowing the Agreed Value Option to lapse can be quite harmful for the insured. If values have increased substantially in the year since the limit of insurance was established and a loss occurs, applying the coinsurance provision to the increased values can, of course, produce a coinsurance penalty in the loss recovery.

Notice also that if the expiration of the Agreed Value Option is beyond the policy expiration, the Agreed Value Option will end with the expiration of the policy, and unless the policy renewal or extension shows that the Agreed Value Option again applies, coinsurance will again apply, again with the possibility of a coinsurance penalty in the event of loss.

Use with Fluctuating Values

One possible use of the Agreed Value Option is to replace a reporting form, eliminating the need under the reporting form for monthly or quarterly reports of values. The average of the annual values can be shown on the annual...

Allowing the Agreed Value Option to lapse can be quite harmful for the insured. If values have increased substantially in the year since the limit of insurance was established and a loss occurs, applying the coinsurance provision to the increased values can, of course, produce a coinsurance penalty in the loss recovery.


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