Agreed Value Clause: Friend? Or Sometimes Foe?

ADJUSTING TODAY This eliminates coinsurance as well as the possibility of penalty for underreporting of values under a reporting form policy, and it is necessary to review values and extend the Agreed Value Option only once a year. This works quite well as long as the Agreed Value is high enough to cover the maximum possible loss, including the cost of debris removal.

Use with Blanket Coverage

For example, with blanket coverage over two or more separate locations far enough apart that they would not be totally involved in the same loss, the entire blanket amount is available for a single loss.

A further advantage of the Agreed Value Option with blanket coverage is that, unlike with coinsurance, it is unnecessary after a loss to prove the values at all locations other than the loss at the involved location.

Failure to Carry Enough Insurance

A word of caution: The Agreed Value Option requires the amount of insurance carried to be not less than the agreed value stated in the Option. Failing this, the insurers will pay only that proportion of the loss that the amount of insurance carried bears to the amount that should have been carried, as stated in the Agreed Value Option.

What occasionally happens is that the insured’s values drop substantially for whatever reason, so that less insurance is required. A case in point might be an insured with substantial values in the World Trade Center insured blanket with property at other locations, as well. If the insured reduces the amount of insurance to reflect the World Trade Center destruction, if the Agreed Value is not also reduced to reflect this change, a reduction in recovery of any future loss can result.

Change in Language

When the Agreed Value Option was introduced by the Insurance Services Office (ISO) in 1986, replacing the Agreed Amount clause, changes were made in the language with (according to the Bulletin from ISO an- nouncing the changes) no important change in the meaning of the provision. Note that for the purposes of this article, reference is to the ISO forms and endorsements, but insurers not following ISO also usually use the equivalent Agreed Value provisions to the same general effect.

The Agreed Amount Endorsement CF 12 10 was replaced by Optional Coverage G.1. Agreed Value, which is activated by appropri- ate entry on the property coverage declara- tions of the limits of insurance to be carried and the expiration date of the Agreed Value Option.

Added under the new provision is an expanded explanation of the expiration provision, which the ISO Bulletin states is “for clarity.” The Waiver of Inventory and Appraisement clause of the Agreed Amount Endorsement is eliminated on the Agreed Value Option because, as the ISO Bulletin states, “all inventories are optional with the company in the simplified form.”

Use with Business Income Insurance

The effects of coinsurance (or “contribution clause” as it is sometimes called with time element insurance) can be evenmore devastating with this coverage than with property insurance.

Earnings, income, and expenses can fluctuate greatly over time, and limits of insurance established at a low period can become woefully inadequate at time of loss, even if only a short time later.

ISO did make one improvement in this provision a few years ago. It made the coinsurance clause apply to the values for the 12 months immediately following the inception date of the policy term in which the property damage giving rise to the time element claim loss occurred. Previously, the clause applied to the values for the 12 month period immediately following the date of loss. In a time of rising insurable values, this change can make quite a difference in the effect of coinsurance. There may be some independent insurers still using the older clause. Insureds would be well advised to check their policies for this provision, and if the older provision is still in use, ask that it be changed.

To combat coinsurance problems, underwriters offer the Business Income Agreed Value Coverage Option, which is included as an optional coverage under the ISO Business Income Forms CP 00 30 and 00 32. To obtain this option, the insured must submit an annual business income report/work sheet...

A word of caution: The Agreed Value Option requires the amount of insurance carried to be not less than the agreed value stated in the Option.