Claims Settlement | Achievable Property & Casualty

Claim Settlement

Losses are settled according to the loss or valuation provisions listed in a policy. P&C policies provide coverage “up to specified limits” stated in the policy. For example, if a home is insured for $300,000, the insurer’s limit of liability for loss to the home resulting from a covered peril is $300,000. “Limits of liability” may also be referred to as coverage limits, stated limits, coverage amounts, policy limits or indemnity limits.

Market Value, a valuation method different from ACV, looks at the market value or selling price of property. It may be more or less than the actual cash value
Valued Policy, has no relationship to replacement cost or ACV and generally applies to irreplaceable items like fine art
Agreed Value, where the insurer and the insured simply agree concerning the amount of coverage to be provided
Stated Amount, generally used to cover classic cars or antiques. The insured “states” the value of the item, and insurance is written for that amount. Following a loss, the insurer can challenge the value. If the item can be replaced or repaired for a lesser amount, the insurer may settle the loss for less than the amount of insurance in force.
Functional replacement cost, where the damaged or destroyed property is replaced with less expensive parts or materials.

Actual Cash Value (ACV

The doctrine of actual cash value prevents an insured from profiting or collecting the coverage amount regardless of the amount of the loss. If Jean owns a $100,000 dwelling but insures it for $200,000, she will not be able to collect the $200,000 if a total loss occurs. ACV is the method of loss valuation most often utilized in property and liability policies.

Replacement Cost

Replacement cost is the amount needed today to replace damaged or destroyed property covered under the policy. Some policies will pay a loss based on the replacement cost of the damaged property if stipulated in the contract, which generally has a higher premium. Policies that provide replacement cost state that if the insured suffers a total loss, the insurer will replace the damaged property exactly as it was before the loss occurred, even if the replacement cost exceeds the coverage amount in the policy (which actually violates the principle of indemnity).

This coverage form includes a coinsurance clause. This principle encourages an insured to carry an insurance amount that is a specific percentage (i.e., 80 %) of its value. If the insured complies, she will be paid the full amount of a partial loss less any deductible.

The coinsurance clause states that the insured must carry insurance which is at least 80% of the property’s value. If not, a formula will be applied to determine what the insurer will pay.

The formula is as follows:

$Amount paid = insurance carried \div insurance required \times loss - deductible$

For example, let’s assume that Behunin’s Hardware buys a building and personal property coverage form with an 80% coinsurance requirement. The policy includes a $250 deductible, and Behunin’s Hardware carries $120,000 of coverage. The building is valued at $200,000. A fire ensues, and the damage is $6,000. How much will the insurer pay?

(spoiler)

Answer: $4,250

Let’s pull out the key information from the example:

Policy: 80% coinsurance clause
Deductible: $250
Building value: $200,000
Insurance carried: $120,000
Insurance required: $160,000 (80% of 200,000)

And now, we can put this into an equation and solve it.

$Amount paid = \frac{$120 , 000}{$160 , 000} \times $6, 000 - $250 = \frac{3}{4} \times $6, 000 - $250 = $4, 500 - $250 = $4, 250$

Claim Settlement Losses are settled according to the loss or valuation provisions listed in a policy. Property and Casualty (P&C) policies provide coverage “up to specified limits” stated in the policy. Different methods and terms are utilized in determining coverage and losses:

Market Value: The market value or selling price of property, distinct from Actual Cash Value (ACV).
Valued Policy: Often used for unique items like fine art, where the value is agreed upon but unrelated to replacement cost or ACV.
Agreed Value: Both insurer and insured agree on the coverage amount.
Stated Amount: Common in classic cars or antiques, where the insured declares the item’s value.
Functional Replacement Cost: Involves replacing property with cheaper parts or materials.

Actual Cash Value (ACV) ensures that an insured does not profit from a loss exceeding the property’s value. Replacement Cost is the current cost of replacing the property. Policies may pay based on replacement cost if stipulated, often with a higher premium. The coinsurance clause ensures the insured maintains coverage at a specified percentage of the property’s value, or the formula will determine the claim payment.

For instance, if Behunin’s Hardware has $120,000 coverage and a building valued at $200,000, with a $6,000 loss from a fire, the insurer payment calculation involves applying the coinsurance formula and then subtracting the deductible to determine the claim payment amount.

Chapter Vocabulary

Definitions

Actual Cash Value (ACV): Payment value for indemnification due to loss or damage of property; in most cases, it is replacement cost minus depreciation
Agreed Amount Endorsement: An endorsement that substitutes a dollar amount for a percentage of other coverage.
Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear
Market Value: Fair value or the price that could be derived from the current sale of an asset.
Replacement Cost: The cost of replacing property without a reduction for depreciation due to normal wear and tear.
Stated Value: Property and Casualty policies may be written on a Stated Value basis. The insured tells the company the value of the item, and insurance is written for that amount.
Valued Policy: An insurance contract for which the value is agreed upon in advance and is not related to the amount of the insured loss.