General insurance property insurance policies are designed to provide the policyholder with an indemnity in the event of a claim and the level of this indemnity sometimes defined by an agreed value policy but what is an agreed value insurance policy and when is it used?
The purpose of indemnity is to place the policyholder in the same financial position following a loss or claim as they enjoyed immediately prior to the loss and the way in which the loss of value is calculated will be defined in the policy but the most common forms are a strict indemnity basis, your receive the sum equivalent to what you paid for the property that is lost or destroyed or more commonly on a reinstatement basis where you receive the cost of replacement as new. In both cases this is subject to the total sums insured under the policy adequately representing the full value at risk.
In certain cases it is more difficult to correctly assess the replacement value of property and the price paid for property may not adequately represent the property’s true value. In these cases an agreed value policy may provide the solution to a suitable way of providing indemnity under a policy.
Under an agreed value policy, both parties agree to an amount that will be paid out by the insurer in respect of a claim resulting in total loss of the property and this is the agreed value that will be paid out in the event of a claim irrespective of market fluctuations in the actual value of that property.
In the event of a claim for partial loss the insurer may elect to repair the property but if that is not possible then the insurer will pay out an amount equivalent to the the current loss in market value of the property as a result of the loss. In certain circumstances, a combination of these may apply where the insurer may elect to undertake repairs but also meet the cost of any reduction in market value.
What types of insurance are suitable for an agreed value basis of settlement?
Insurance in respect of high value and or property of a specialist nature, such as jewellery, works of art and classic cars are well suited to an agreed value insurance policy and many specialist policies are available in the market designed to meet these specific requirements.
More generally marine insurance policies are normally underwritten on an agreed value basis under which both parties, the insurer and the insured, agree to the amount payable in respect of a claim involving total loss even though the market value of the property may rise or fall during the period of transit.
How is an agreed value different from a sum insured under a standard insurance policy?
As stated the agreed value is the amount payable by the insurer in respect of a total loss under the policy, the sum insured under alternative basis of settlement represents the insurer’s maximum liability in respect of claims for a total loss. In simple terms, if the total value of the property lost is lower than the total sum insured under the policy then it is the lower value upon which the insurer will base the settlement of the claim.