A business often has several different types of property to insure such as buildings, equipment, automobiles, cargo, inventory, and even customer’s property. Insurance policies all contain coverage forms that specify the details, limitations and exclusions governing each policy. Included in those forms is a valuation clause that determines how an insured’s property is valued at the time of a loss/claim.
Understanding these valuation details is critical to ensure you have the proper coverage to replace the damaged/missing property while avoiding unfriendly co-insurance penalties. Below is a list of the commonly used terms in property policies with which you should be familiar.
Actual Cash Value (ACV): The cost of repairing or replacing the covered property, minus depreciation.
Replacement Cost (RC): The cost to repair or replace the covered property using the same or comparable quality as the original item. This is most commonly used among carriers. Co-insurance often applies.
Agreed Amount or Agreed Value (AGV): A fair market value is determined in advance between the insurer (carrier) and insured (owner). This is the best and preferred option to insure your property as it removes the co-insurance clause.
Stated Amount: The maximum value of the covered item, this is often seen on items such as collector vehicles, fine art and jewelry.
Co-insurance: This is the percentage of value that the insured is required to insure the property. For example, a building with a value of $1,000,000 and a policy with an 80% co-insurance clause must be insured for at least $800,000. If the amount of insurance is found to be under the co-insurance percentage at the time of loss, then a penalty is applied which reduces the claim payment which hurts the insured.
In this example, if an insured only bought $600,000 of insurance on the property and a $300,000 fire occurs, the claim would be calculated by dividing what was purchased ($600,000) by what should have been bought ($800,000). The result in this case is 75% of the required limit. This factor is then multiplied by the amount of the loss/claim. In this example, it would be $300,000 X .75 = $225,000.
The insured would only receive $225,000 (less any policy deductible) for the $300,000 claim. Almost all property insurance policies contain a co-insurance clause, however, an Agreed Value (AGV) removes this clause so it is important to consider this option when creating your policy.
Specialty endorsements: Another thing to consider to ensure your business is fully protected. The cost of a product varies from business to business. For example, manufacturers, have value in the product stock that is available for sale. The total value of stock is not only in the cost of its parts or components, but also in what you will eventually sell it for – your profit.
However, a standard insurance property policy does not factor in this additional value. Even with a replacement cost valuation policy, you will only get the cost to “replace” the stock. Some policies may provide a selling price valuation for your finished stock, however this only applies to the items already sold but not yet delivered. For finished stock that has not yet been sold, this remains a serious area of underinsurance because not only are you losing the true value of the damaged products, it could also take some time to replace those products.
As illustrated, property insurance is a complicated subject with many nuances. That is why it is important to work with a trusted advisor who can guide you through the process. Contact me at 610.966.1315 to have a conversation about the best strategy for your business.
Insurance products offered through Univest Insurance, Inc., a licensed insurance agency affiliate of Univest Corporation, are obligations of and underwritten by unaffiliated insurance companies. They are not insured by the FDIC or any other agency of the United States and are not deposits of or guaranteed by any bank.