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How your Policy Calculates the Value of Lost Property

May 7, 2013

If you suffer a loss, do you know how your insurance company will determine the value of your insured property? Policyholders and claims-adjusters often disagree over the value of lost property. In part this is because a lot of policyholders don’t fully understand the criteria used to assess the value of property covered in their insurance contract. This week, we want to go over a few of the more common methods of property valuation used in real and personal property policies.

Actual Cash Value

If a policy uses the “actual cash value” method, the insurance company will determine what the item would cost new and then subtract an amount equal to the item’s depreciation. Depreciation allows for loss of value as an item experiences wear and tear or becomes obsolete over time. As an example of how actual cash value is calculated, imagine a washer lost in a fire. A washer has a life expectancy of about 8 years. If the washer was 4 years old at the time of the fire, an adjuster would settle for one-half the value of a new washer. If a comparable washer now costs $700, the insurer would pay $350 for the claim.

Replacement Cost

If a policy offers “replacement cost” coverage, the company will pay the policyholder the amount needed to buy a new replacement for property lost in a claim. Replacement cost can also provide for the cost of repairing or replacing property using materials of “like kind and quality” without a deduction for depreciation. Because it doesn’t account for depreciation and market changes, a replacement cost approach can sometimes result in the policyholder receiving more than a lost item is actually worth. For instance, in the example above, the policyholder would receive the full $700 for the new washer.

Market Value

“Market value” refers to how much a buyer would be willing to pay a seller for your property on the open market. In a policy that appraises lost or damaged property according to its market value, the insurer will settle the property based on the price it could be sold for just prior to a covered loss. This approach allows for some adjustment based on depreciation or obsolescence, but, unlike in an actual cash value approach, this adjustment is determined by the market. Market value may be close to actual cash value or it could be quite different.

Agreed Value

An “agreed value” policy contains, as a condition of the insurance contract, an agreement between the insurer and the policyholder about the fair value of insured property. The agreed value reflects what the property is worth at the time the insurance is written and is used to determine the amount of insurance provided under the policy.

Stated Value

In a “stated value” policy, the insured amount is based on an appraisal made prior to the signing of the insurance contract. The policyholder’s premium is determined using the appraised amount and the insurer will pay up to this amount if a loss is covered. If the insurer can replace, repair or rebuild the item for less than its appraised value, it may do so provided any replacement is of “like kind and quality.”

In summary, the valuation clause in an insurance policy describes how the value of the insured property will be calculated. You should look there to understand which method is prescribed by your policy. It’s smart to review the pros and cons of your valuation clause with an insurance agent to ensure you’ve chosen the best method of appraisal for your covered property

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