Filed Under:Markets, Personal Lines

Agreed value, coinsurance and deductibles

Coverage Q&A

Commercial property policies have at least one deductible, and that deductible typically is subtracted from the loss total before the claim payment is made. (Photo: iStock)
Commercial property policies have at least one deductible, and that deductible typically is subtracted from the loss total before the claim payment is made. (Photo: iStock)

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Question: After the Hurricane Maria loss, I have seen many insured, brokers or agents that have signed the Agreed Value Statement of Values and after inspection of building or books the sum insured seems to be inadequate. Is there any way that the coinsurance clause can be applied after the loss?  

In the event a policy has an agreed amount for a building, let's say it’s $100,000 and a wind deductible of 2% but the property is valued at $150,000: Does the deductible apply over the $100,000 or the $150,000?

— Puerto Rico Subscriber

Answer: Agreed value is also referred to as agreed amount. The agreed value endorsement in a property insurance policy waives the coinsurance clause. Coinsurance does not get applied at all if there is an agreed value statement on the policy. Generally, insureds add the agreed value endorsement in the chance that their property value may be valued less than its actual value. Then the agreed value endorsement would give them the entire amount that is stated on the agreed value endorsement if there is a total loss, regardless of its actual value.

Related: Not all fire insurance policies are the same: Valued vs. non-valued

For example, if a building is insured on an agreed value endorsement for $150,000 but its actual value was $100,000, then if there is a total loss the insured would recover the agreed amount of $150,000.

If in the instance the actual value of the building was $200,000, then the insured would still recover the amount of the agreed value of $150,000.

Commercial property policies have at least one deductible, and that deductible typically is subtracted from the loss total before the claim payment is made. A standard property policy has a deductible that applies to fire, theft and “all other perils,” also known as the AOP deductible. Hurricane deductibles apply separately for a higher amount than the AOP deductible.  The deductibles may be stated on the Declarations as a percentage of values or as a dollar amount. Typically, the deductible will apply only to the damaged building(s) and not the total insurable values at the covered location. Each of these deductible types generally apply per occurrence.

In the situation of the agreed value building, the wind deductible will apply to the damaged loss rather than the insured value of the building. In the described scenario, if the damaged loss is less than $100,000 then the deductible will apply to the amount of the damaged loss; if the damaged loss is greater than $100,000 then the deductible would apply to $100,000 as this is the total insured amount.

Related: How to calculate deductibles for multiple related losses

Agreed value option

 I need clarification or opinion regarding CP 00 10 04 02, Optional Coverages, Agreed Value, paragraph a, second sentence: "We will pay no more for loss of or damage to that property than the proportion that the Limit of Insurance under this Coverage Part for the property bears to the Agreed Value shown for it in the Declarations." This statement seems to contradict the fact that the coinsurance condition has been suspended and seems to put back in some kind of proportioning or "coinsurance" calculation when loss occurs.

1. What is the purpose of this condition?

2. Is it conceivable that a company will actually put out a policy that shows a different amount for the Limit of Insurance versus the Agreed Amount? Why would anyone do that? And why would a buyer agree to that? In other words, per condition, it seems to say that on the same policy, there will be a limit of insurance of $100,000 for real and somewhere else in the policy there will be an agreed amount of $80,000 for the same piece of property?

3. If I understand this condition correctly, if the limit of insurance is $100,000, and somewhere else in the policy we also show the agreed value as $80,000, that when there is a loss, we will pay only 80 percent of the loss?

— California Subscriber

Answer: We agree with what you've said about this condition. To answer your questions:

1. The main purpose we see for this clause is to protect the insurer from having to pay more than for what adequate premium has been paid.

2. We cannot think of a practical reason for the scenario you state.

3. We believe that the situation you describe sets up a moral hazard and cannot see an underwriter agreeing to write it.

Difference between agreed value and functional building valuation

Is there a difference between agreed value and functional building valuation. Which is better?

Insured has four-story building. If loss occurred, he would want only a two-story building.

What form will provide better coverage?

— Pennsylvania Subscriber

Answer: Functional building valuation allows the insurer to pay the least of the following for the repair or replacement of the building: the limit shown in the schedule; in the event of a total loss, the cost to replace the damaged building on the same site, or a different site if required by an ordinance or law, with a less costly building that is functionally equivalent to the damaged building; in the event of a partial loss, the cost to repair or replace the damaged portion of the building with less costly material, if available, in the architectural style that existed before the loss or damage occurred and the amount the insured actually spends to demolish and clear the site of undamaged parts of the building; or the amount actually spent to repair or replace the lost or damaged building with less costly material if available to demolish and clear the site of undamaged parts of the building. (As specified on the ISO Functional Building Valuation form, CP 04 38).

Agreed value is usually an optional coverage on a commercial property form that provides an amount that the insured and insurer agree the property is worth. This requires a submission of a statement of values on an annual basis. This option is often used to avoid coinsurance penalties.

The functional building valuation option may be better if the insured would want to replace his existing building with a less costly one.

Related: A look at replacement cost

Valued policy and application of deductible

We are hoping you can solve an internal disagreement about the deductible application on a DP 00 01 12 02 form. We have a total fire loss in Tennessee and cannot find any statutory language that specifically references application of a deductible. Since the statute is silent on the issue, it appears that the deductible should be taken from the limit per the policy language. We have found one case in Arkansas that specifically says the deductible cannot be applied to the limit, but nothing in Tennessee. Should the deductible be applied at all? To the limit? To the damages?

— Tennessee Subscriber

Answer: The policy clearly states that the deductible applies to the policy limit and that what is paid is the total of all loss that exceeds the deductible. It is straightforward language so there probably are not any cases. The valued policy language (T. C. A. § 56-7-802) states that the company is not liable beyond the actual value of the property at the time of loss; applying a deductible would not counteract the statute. The intent of valued policy laws is to protect the insureds from arguments after a loss that the property was over insured, in an attempt by the insurer to pay less than the face amount for which the insured paid premium. Unless the carrier is trying to apply a monstrous deductible, the deductible should be applied as normal.

Related: When a tree falls, is there debris removal coverage

Does the valued policy law apply to all insurers?

This question is regarding building fires from the recent wildfires in Sevier County/Gatlinburg, Tennessee. We know that Tennessee is a valued policy state.

If a CP 00 10 and CP 10 30 policy is purchased for a rental property through an E&S carrier, does the valued policy law apply?

Does being a non-admitted carrier or excess and surplus lines carrier change the application of the valued policy law?

— Tennessee Subscriber

Answer: The Tennessee statutes do not specify whether they are applicable to non-admitted or surplus lines carriers. They just refer to "the company" or "company, agent or insurance producer." While we cannot give legal advice, it does seem that the law applies to any company issuing fire policies in Tennessee.

See also:

Windstorm insurance may not be your only or best option

What corporate policyholders need to know about hurricane coverage


Understanding how property is valued after a fire

When the wildfire smoke clears along the Pacific coast, property insurance policyholders will be faced with filing claims that may...

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