What Is Agreed Value Insurance and How Does It Work?

Insurance serves as a financial tool designed to manage various risks, offering protection against unforeseen losses. While many insurance policies determine the value of covered items after a loss occurs, agreed value insurance operates differently. With this policy, the financial worth of an insured item is established and accepted by both the insurer and the policyholder when the policy is issued. This agreement provides clarity regarding the payout should a covered event lead to a total loss of the item.

Defining Agreed Value Insurance

Agreed value insurance means the insurer and policyholder decide on a specific dollar amount for a covered property before the policy begins. This pre-determined sum is the exact payout the policyholder receives for a total covered loss, regardless of market fluctuations or depreciation over time. It establishes a guaranteed payout amount that is fixed for the policy term.

This approach differs from other common valuation methods, such as Actual Cash Value (ACV) and Replacement Cost (RC). With ACV, the payout for a loss is based on the item’s current market value at the time of the loss, factoring in depreciation due to age and wear. Conversely, Replacement Cost policies cover the cost to replace a damaged item with a new one of similar kind and quality without deducting for depreciation. The distinction for agreed value insurance is that the valuation is set at the policy’s inception, providing certainty, unlike ACV and RC values which are determined after a loss occurs.

Agreed value insurance is chosen for items where market value can be subjective, fluctuate significantly, or be challenging to ascertain post-loss. This includes classic or antique cars, fine art, rare collectibles, custom-built homes, and yachts. For unique or specialized items, standard insurance valuation methods may not adequately reflect their true worth or the cost to replace them. Policyholders choose this coverage to gain certainty regarding their payout and to protect against the potential depreciation of unique assets.

Establishing the Agreed Value

Establishing the agreed value for an insurance policy involves a collaborative process with the policyholder and the insurer. This step is completed before the insurance policy is finalized. The aim is to arrive at a mutually acceptable figure that accurately reflects the item’s worth.

Professional appraisals play an important role in this process, particularly for items with unique characteristics or high monetary value. An appraiser, an expert in the property type, conducts a thorough assessment, documenting the item’s condition and researching its market value. This assessment provides an independent valuation that supports the proposed agreed value. Policyholders also provide documentation to substantiate the item’s value. This can include original purchase receipts, records of restoration work, proof of provenance, or photographs detailing its condition and features.

The insurer reviews all provided documentation and appraisals to verify the proposed value. The insurer may also conduct their own assessments or request specific appraisals to ensure accuracy and compliance with underwriting guidelines. There may be a negotiation phase where the policyholder and insurer discuss the valuation, ultimately reaching a figure both parties agree upon. This pre-policy valuation process is crucial for preventing disputes over the item’s worth if a claim arises.

How Agreed Value Insurance Works During a Claim

When a covered loss occurs under an agreed value insurance policy, the claim process for a total loss is straightforward due to the pre-established valuation. The policyholder first reports the loss to their insurer to initiate the claim. This initial notification is a standard step for any insurance claim.

For a total covered loss, the insurer pays the agreed value specified in the policy, less any applicable deductible. This mechanism simplifies the settlement process, as it avoids post-loss valuation, complex depreciation calculations, or prolonged negotiations over the item’s worth. The certainty of the payout amount is a key characteristic of this policy.

While the value is pre-agreed, the policyholder still needs to demonstrate that a covered event caused the loss and that the damaged or lost item is the one specified in the policy. This might involve submitting a police report for theft or providing documentation of the damage for other perils. For partial losses, the handling may differ; the policy might cover the cost of repairs up to the agreed value, or a pro-rata payment could be issued if the loss is only partial.