After 40 years in the insurance industry, one question that never fails to come up is, “What value should I provide for my client’s project?”
Deciphering what the different types of valuation mean — and how to apply those values — can challenge even the most experienced insurance professional.
To help you ensure your client’s policy reflects the value they need insured, we’re going to compare four value types: Purchase Price, Replacement Cost, Actual Cash Value and Agreed Amount. While there are many methods of valuation used in the insurance industry, we will focus primarily on property insurance in this article. Let’s dive in.
- Purchase Price
This universal measure reflects what your client paid to purchase the property, whenever that was. Because purchase price doesn’t tell us much about the structure or property in its current condition, this number is not typically used when securing a policy.
- Replacement Cost
Simply put, replacement cost is what it would take to replace the property, in the same location, with the same or similar materials used in construction. Typically, replacement cost includes some stipulations around eligibility. These may require complete repair of any losses on the property within a given time, location within a specific protection class, and / or built within a certain time frame (with separate requirements regarding the age and condition of the roof, plumbing and electrical wiring).
- Actual Cash Value
Actual Cash Value — also called ACV — is a standard method to determine what the property is worth with depreciation. It’s calculated by subtracting the cost of depreciation from the replacement cost and represents roughly what your client could get for their property as it stands. ACV can apply to vacant and rental properties. Market value may also have positive or negative effects on ACV. If the surrounding neighborhood of the property is in decline, for example, the ACV can be reduced regardless of the condition of the structure. If you need help calculating your client’s ACV, there are tools available to help you, such as Marshall & Swift’s valuation calculator.
- Agreed Amount
This insurance policy endorsement — also known as agreed value — reflects what your client and the insurance carrier agree upon as the insurable value of the property. So, whether the property itself may be worth more, this agreement ensures the client is paid that value in the event of a total loss. The agreed amount endorsement waives the coinsurance clause, so clients may desire to include it in the event their property is valued less than ACV. But be advised: agreed amount can be difficult to come by in the market as partial, reoccurring losses can lead an insurance company to pay out multiple limits that add up to as much as the ACV, rather than one full payment on a total loss.
Knowing is half the battle. When it comes to talking about rental home insurance or a vacant structure policy, being prepared with answers to clients’ questions offers you an advantage. It then becomes easier to secure the coverage your client needs, with values that protect both their property and wallet. For more questions to consider before you have a property insurance conversation with clients, download our free resource, 10 Items to Consider Before Quoting Vacant and Rental Structure Insurance.
This is intended as a general description of certain types of insurance and services available to qualified customers. Your policy is the contract that specifically and fully describes your coverage. The description of the policy provisions gives a broad overview of coverages and does not revise or amend the policy.
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