Valuation Clause
Candlefocus EditorThe three most commonly used valuation clauses include agreed value, replacement cost, and stated amount. Within the scope of these clauses, the language of actual cash value is the most widely used, as it pays the amount of the insured’s pre-loss value when a claim is made. This means that any deductions or depreciation in value of the property before the claim is made will be taken into account when calculating the amount of the payment.
Agreed value is the most direct approach to valuation and defines the value of the property at the time of purchase. The agreed cost is typically based on the current market value of the property and applies generally to cover older, higher-value items. In the event of a claim, the insurance company pays whatever was agreed between the policyholder and the insurer at the time the policy was taken out.
Replacement cost clauses take into account the cost to replace the covered property, including factors such as materials, labor, and fees associated with replacement. Replacement cost policies protect policyholders from changes in the cost of goods due to inflation. The insurer typically pays out whatever it would cost to replace the property completely, even if it is more than the agreed-upon value when the policy was taken out.
The last common valuation clause is the stated amount clause. This language is generally used when determining compensation for luxury items and antiques. The stated amount clause requires that a policyholder state the exact amount they think the property is worth. If the property is deemed to be able to perform the functions for which it was initially intended, the insurance company will pay out whatever amount was stated by the policyholder.
Regardless of the valuation clause used, it is important to make sure there is an understanding of the actual cash value as well as the full replacement value of the item in question. Valuation clauses are designed to protect policyholders from unexpected losses and ensure they are well-compensated in the face of financial difficulty.