Margin Clauses Making Agreed Value Options Extinct!



...will be calculated: the maximum loss payable will be determined by applying the applicable margin clause percentage to the value of the property as declared in the latest statement of values.

If, for some reason, the property values are not itemized on the statement of values, this endorse- ment directs that the insurer will determine the appropriate values prior to the margin clause’s application. This is fair warning that insureds should not give insurers the opportunity to do this!

What the actual loss payment may be will hinge on such things as the amount of loss or damage, limit of insurance, coinsurance, deductibles and the provision dealing with valuation. In essence, for any payment to apply, there first has to be direct physical loss or damage to covered property from a covered cause. What’s more, the margin clause percentage does not increase the blanket limit of insurance.

All of this means that when a margin clause is applicable, it will be applied separately to each building, to contents contained in each build- ing or to the contents of each premises. After it is determined how much is payable—through the application of the margin clause—the amount might be reduced by any applicable deductible.

In light of the application of the margin clause, the agreed value provision, for all intents and purposes, will become extinct. This means that unless the insurance is written without a coinsurance clause, the insured may also have to cope with a coinsurance penalty!

An Illustration

Assume the following set of facts: A property policy is purchased covering three buildings written on a blanket basis for $6 million. A statement of values is completed showing that each of the three buildings is covered for $2 million at replacement cost. The policy is subject to a 90 percent coinsurance clause, a $10,000 per-occurrence deductible and a margin clause of 120 percent.

One of the buildings is completely destroyed by fire and is determined to have a replacement value, at the time of loss, of $3 million. At the time of loss it also is determined that the three buildings had a combined value of $9 million.

By applying the margin clause, the maximum available to pay the insured is $2.4 million. This is determined by using the state- ment of values reported amount of $2 million for the destroyed building and multiplying it by the margin percentage of 120.

With the amount of insurance purchased ($6 million) being less than required by the 90 percent coinsurance clause, the insured is subject to a coinsurance penalty of .2593 or $777,900. This is deter- mined by multiplying $9 million (the combined value at the time of loss) by the 90 percent coinsur- ance amount. The result is $8.1...