What Is Agreed Value in Insurance?

Agreed value in insurance is a predetermined coverage amount that both the insurer and policyholder establish when a policy is issued. This fixed sum is paid out in the event of a total loss, regardless of the asset’s market value at the time of loss. Unlike other valuation methods, agreed value provides a specific, pre-negotiated payout, offering a clear understanding of financial recovery from the outset.

Establishing the Agreed Value

Establishing an agreed value involves a detailed process where the policyholder provides comprehensive documentation to substantiate the asset’s worth. This documentation often includes professional appraisals, original sales receipts, and records of significant restoration or modification work. Insurers review this information to assess the asset’s condition, rarity, and historical significance. Through this review, a specific value is determined and written into the policy.

This established value remains fixed for the entire policy term, typically 12 months, providing stability against market fluctuations. Both the policyholder and insurer must consent to this figure, ensuring a mutual understanding of the coverage amount. This agreement guarantees the payout amount, offering clarity for future claims.

Agreed Value Compared to Other Valuation Methods

Insurance policies commonly use different methods to determine payout amounts for covered losses, with actual cash value (ACV) and replacement cost value (RCV) being prevalent alternatives. Actual cash value is calculated by taking an item’s replacement cost and subtracting depreciation due to age, wear, and tear. This means the payout reflects the item’s depreciated worth at the time of loss, rather than its original purchase price or the cost to replace it new. For example, a five-year-old appliance might have its value reduced significantly based on its remaining useful life.

Replacement cost value, conversely, covers the cost to replace a damaged or stolen item with a new one of similar kind and quality, without deduction for depreciation. This method aims to restore the policyholder’s situation to what it was before the loss, allowing them to purchase a brand-new equivalent. While RCV typically results in higher premiums than ACV, it offers a more comprehensive recovery for many standard items.

In contrast to both ACV and RCV, agreed value is a fixed amount that does not account for depreciation at the time of loss. The payout is the figure agreed upon at the policy’s inception, regardless of the item’s market value or condition immediately before the incident. This fundamental difference means agreed value policies provide a guaranteed payout, unlike ACV which reduces coverage for depreciation, or RCV which covers new replacement but is still determined at the time of loss.

Specific Insurance Scenarios for Agreed Value

Agreed value insurance is suited for assets whose market value is subjective, difficult to appraise accurately, or tends to appreciate rather than depreciate. Classic cars are a prime example, as their value can fluctuate based on rarity, condition, and historical significance, making standard depreciation models inadequate. For these vehicles, an agreed value policy ensures that significant investments in restoration or customization are recognized, and the payout reflects their true worth, not just a depreciated figure.

Another common application is for antique collectibles, fine art, and unique jewelry. These items often possess sentimental, historical, or artistic characteristics that make their value highly specialized and not easily determined by typical market comparisons. Agreed value coverage ensures that if such an item is lost or damaged, the policyholder receives the full, pre-negotiated amount, given the impossibility of simply replacing them with a new equivalent. Custom-built homes or properties with unique architectural features also benefit, as their replacement cost might exceed standard valuation models due to specialized materials or craftsmanship.