In the world of insurance, an insurer will not pay more in damages for an item than it’s worth. There are some items that are very easy to determine the value of, such as a car, a house or even a diamond ring. With some items, however, policyholders may prefer to declare an item’s value rather than having it determined by an insurance company, market conditions or a third-party formula.
Insurance Company Valuation
Every property insurance policy has a valuation clause. When determining how much an insurance company is going to pay for a loss, the adjuster reviews the valuation clause in addition to limits and deductibles. No matter how much the claimant may profess the value of the damaged item to be above and beyond the claims adjuster’s assessment, the valuation clause has the final say. There are three types of valuation calculations: replacement cost, actual cash value and agreed value.
Replacement Cost Valuation
When the policy is written with a replacement cost valuation, the insurance company pays the amount it costs to replace or repair the item based on the current market. That replacement cost value is subject to the policy limit and deductible. The insurance company will never pay more than the limit on the policy.
Actual Cash Value Valuation
The actual cash value calculation is similar to the replacement cost value in that it takes the current market value into consideration. It differs, however, in that the item is depreciated. Therefore, the check for a 5-year-old sofa would be calculated by taking the cost to replace it with one of similar kind and quality, less a 5-year depreciation factor.
Agreed Value Provision
Agreed value is different than both replacement actual cash value. Agreed value comes into play when the insured and the insurance company agree to the value of a particular property or item. Before a policy can be endorsed with an agreed value clause, the insured must provide the insurance company with a statement of value. Once the insurance company reviews and agrees, the policy is endorsed accordingly. Agreed value is usually used on antique and classic car policies and should be reviewed annually if the item’s value is subject to value fluctuation.
Before selecting one over the other, make sure to discuss the pros and cons associated with each valuation with your insurance agent.