What is Agreed Value in Commercial Property Insurance? And Why You Should Have It

Let’s get right into it – agreed value is an optional endorsement to a commercial property policy that waives co-insurance and essentially provides that the amount of insurance in the policy on a building and or on business personal property represents an agreement between the insured and the insurance company underwriter as to what that property is worth.

A Statement of Values which we’ll talk about in a minute usually is required to be submitted annually by the insured to the insurance company to substantiate values.

Okay, let’s break the agreed value in commercial property insurance down into English.

Whether you’re insuring a manufacturing facility, a distribution warehouse, an office building, an apartment building, or any other occupancy on a commercial package policy – meaning it’s not on a BOP policy you’re faced with issues regarding the valuation of the property.
The same is true for business personal property or contents inside the buildings.

Commonly you’ll see the amount of insurance – for the building or contents and then you’ll see the valuation clause or option that can insure that property for its replacement cost – noted as RC on the policy or its actual cash value noted as ACV on the policy.

Replacement cost means the amount of insurance on the building or contents represents the full value to replace it at today’s cost – it’s not going to be depreciated. If the property is insured on an ACV basis then the value represents the depreciated value.

Obviously, you want to get replacement cost or new for old valuation over ACV in most circumstances.

The next item on the policy is usually going to be co-insurance, expressed as a percentage – like 80% or 90%.

Co-insurance is the insurance company’s way of making sure you insure a property’s value to at least that percentage of its value and if you don’t you’ll co-insure or share proportionally in any partial claim that happens. It’s sort of a penalty for underinsuring.

Now, here’s the important part – co-insurance and in fact, property values can get really messy when there’s a claim – even if there’s no intent to underinsure or skimp on values.

So, to avoid having co-insurance on a policy you should opt for agreed value – which I mentioned earlier is a value that you and your insurer agree upon as the accurate replacement value of the property insured.

If there’s a claim down the road there’s no potential penalty if the property was underinsured, and it entirely removes that discussion from claim settlements. which is good.

How do you establish agreed value?

This is where a Statement of Values comes in as I mentioned earlier. A Statement of Values or SOV can be made on an Acord Form or the insurance company’s specific SOV form and it represents your values that are agreed upon.

Now, if you try and sneak in a building’s value for significantly less than its real value, a good underwriter is going to catch it and question it, and may not agree on that value amount so getting values accurate is important.

What’s also important is getting your SOVs into the underwriter by the renewal date of your policy, because if you don’t and there’s a claim, you’re now going to be subject to co-insurance which is something of course you want to avoid.

So there you go, that’s a breakdown of what the Agreed Value is on a Property Policy.

If I didn’t answer your question entirely or if this has spawned additional questions, feel free to reach out to me.

Finally, you may want to check out this video I did on commercial property valuations and inflation:

Thanks!