What is a Valuation Clause?

The Valuation Clause is a provision in an individual insurance contract that outlines of money the policyholder will receive from the insurance provider in case of a covered hazard. The clause says a fixed amount should be given away in case an insured property is lost.

Various valuation clauses get written as stated amount, replacement cost, agreed value and actual cash value. It depends on the policyholder and the insurer whether they would like to take depreciation into consideration, or whether they want to have the full replacement value of the insured item covered.

In case of replacement value in valuation clause, premiums are generally higher than they would be for actual cash value. The actual cash value is often utilized language where the amount paid for the claim is equivalent to the insured’s pre-loss value. 

Understanding Valuation Clauses

Policy containing valuation clause should be thoroughly evaluated to understand the circumstances when a benefit payment is needed. Further, a policyholder should do a regular review of the listed dollar value for the property. Values need to maintain with inflation, reasonable cost of living or changes to the local building code cost rise may not adequately secure the policyholder.

Valuation clauses have a basis on an arrangement of different factors about the certain property and individual budget requirements. Determining the cost of articles covered by insurance is important however time consuming step in getting insurance coverage. The policyholder may determine the level of coverage better by understanding how much an item worth and they can also determine coverage based on maximum foreseeable loss.  In some cases, the insurer offer may expect the policyholder to periodically update the value of items covered in the policy using a full reporting clause.

However, the insurer offer may need to evaluate by an appraiser or specialist to determine the value of a property before underwriting. This requirement is needed in case the policyholder is getting insurance coverage for customized, classic, antique and one of a kind property, even for historical structures or items. If the policyholder is seeking to get insurance in a dollar amount that surpasses the assessed value of a property, an appraisal may also be required.

Actual Cash Valuation Clause     

For determining the property benefit value in a homeowners policy the Actual Cash Value is used, which has a basis of the cost of repairing a piece of property, such as a home, boat, car to its pre-loss status.  The insurer will factor in the depreciation of the property that determines how much an asset’s useful lifespan value remains and will affect the benefit value due to the policyholder in the case of a covered loss.

Another consideration of Actual cash valuation clause is the Valued Policy Law. US states like Florida, Kansas, Mississippi, Montana, New Hampshire, South Carolina, Tennessee, West Virginia, Arkansas, California, Georgia, Louisiana, Missouri, New Dakota, Ohio, South Dakota, and Texas all have valued policy laws.

Under this clause, insurer provider must pay the full, listed face value of a policy in the event of a total loss, without consideration of the depreciated actual cash value. The clause needs the payment of the full face value of the policy even if the value at the time of loss is a lower dollar amount. Although, in some cases where there is concurrent causation for damage, the insurer may issue a reduced payment.    

Replacement Cost Valuation Clause

The replacement cost is the amount needed to replace or repair a property to same or equivalent level of quality as the original property. As the market place changes, these costs also change and the depreciation of the property is not a consideration in replacement cost coverage. However, unless a policy also carry a law and ordinance provision, it may not include sufficient coverage to satisfy all the costs of rebuilding a property.  

The law and ordinance clause will enhance the replacement benefit amount by a percentage to recognize for changes to the state building code.  The provision becomes critical in the case of covered hazard that damage the property to 50% or more and most local building codes need structures that receive damages total 50% or more of the home’s insured value to be destroyed and rebuild to current codes. Additionally, policyholders must understand that coverage only applies to the damaged portion of a structure.

Other Valuation Clause Types

Agreed Value

An agreed value clause will use an agreed amount provision to specify the value of a property being insured and it is located in the damaged-section of the policy that should state what will happen to the property in the case of a total loss. The agreed value may be a fair-market worth or another sum decided upon by the insured and insurer.

Stated Value

Stated value amount is often found in automobile coverage and refer to the maximum value of an item that is positioned on the property at the time of writing the contract by the insured. It is the amount you may ask a buyer to pay for the property if you sell it. Although, most stated value policies includes wording in the case of loss that enable the insurer to pay the lesser of either the stated value or actual cash value.

Market Value Clause

A Market value clause refers to a part of clause that states the value of the covered property at a market rate, rather than replacement or actual cost. Such clause set the value an insured could get for the loss of an asset at the amount they could get by selling it on the open market.