What is Agreed Value in Commercial Property Insurance? (Video)




agreed value

What is Agreed Value in Commercial Property Insurance?

And Why You Should Have It.

Agreed value is an optional endorsement to a commercial property policy that waives the co-insurance provision automatically built into the policy. It essentially is an “agreement” with the insurance company underwriter that the values you have provided are the values the property will be insured for and represent the property’s true worth.

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

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

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 the property is 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.

On a commercial property policy, you’ll commonly see the amount of insurance for either the building or contents and the “valuation clause” of how that property is valued. That clause can insure that property for its Replacement Cost – noted as RC on the policy or its Actual Cash Value noted as ACV.

Replacement cost means the amount of insurance on the building or contents represents the full value of replacing it at today’s cost – it won’t be depreciated. If the property is insured on an ACV basis, then the value represents the depreciated value. That means the full replacement cost less depreciation.

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

Co-Insurance

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

Co-insurance is the insurance company’s way of ensuring you insure a property’s value to at least that percentage. 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.

Here’s the critical part: co-insurance and 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 the agreed value option, which I mentioned earlier. You and your insurer agree upon a value 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 the co-insurance discussion from claim settlements, which is good.

How do you establish agreed value?

This is where a Statement of Values (commonly called an SOV) 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 the values that are agreed upon.

Suppose you try to sneak in a building’s value for significantly less than its actual value. In that case, a good underwriter will catch it and question it and may not agree on that value amount, so accurate values are essential.

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 the agreed value on a property policy.

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