6. Claims Settlement

Achievable Property

Claims Settlement

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Claim Settlement

Losses are settled according to the loss or valuation provisions listed in the policy. Property and Casualty (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.

You’ll also see “limits of liability” described as coverage limits, stated limits, coverage amounts, policy limits, or indemnity limits.

Loss valuation

Loss valuation is the way a policy measures the dollar amount of a loss. The policy’s valuation provision says which of the following methods applies.

Market Value is the price a willing buyer would pay and a willing seller would accept in the open market. It may be higher or lower than ACV and is rarely used in standard policies.
Valued Policy establishes an agreed amount payable for a total loss. It is often used for unique items like fine art and may also refer to state “Valued Policy Laws,” which require insurers to pay the full policy limit for a total dwelling loss due to fire or another covered peril. These laws commonly apply to buildings, and in some states only to dwellings (Wisconsin’s reaches only a home the insured owns and occupies). Some apply only to named perils such as fire and lightning.
Agreed Value is a valuation method where the insurer and insured agree on the value of the property before a loss. It suspends the coinsurance condition for that property: the insurer pays no more than the proportion that the limit of insurance bears to the agreed value, so an insured whose limit equals the agreed value has no coinsurance penalty. Unlike a valued policy, it does not fix the amount paid for a total loss.
Stated Amount is commonly used for classic or antique vehicles. The insured declares a stated value, and insurance is written for that amount. The insurer generally pays the stated amount or the cost to repair or replace the property, whichever is less, unless fraud or material misrepresentation is proven.
Functional replacement cost is used when property is repaired or replaced with less costly or modern materials that perform the same function, often in historic or older structures where original materials are unavailable or impractical.

Actual Cash Value (ACV)

Actual cash value (ACV) is designed to prevent an insured from profiting from a loss or collecting the coverage amount regardless of the amount of the loss.

For example, if Jean owns a $100,000 dwelling but insures it for $200,000, she will not be able to collect $200,000 if a total loss occurs.

ACV is a method of loss valuation commonly used in property and liability policies. It is typically calculated as replacement cost minus depreciation, or by using the “broad evidence rule,” depending on the jurisdiction. Under the broad evidence rule, actual cash value is not fixed by one formula. It is a question of fact, decided by weighing all the relevant evidence of the property’s value at the time of the loss, such as its purchase price, replacement cost, depreciation, age, condition and market value.

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 replacement cost if the contract specifically provides for it, and this coverage generally has a higher premium.

Replacement-cost coverage pays to repair or replace property with materials of like kind and quality, without deduction for depreciation, but only up to the policy limit. This does not violate the principle of indemnity because the insured cannot recover more than the amount of insurance purchased. Some optional “guaranteed replacement cost” endorsements extend coverage beyond limits, but these are clearly disclosed and are not standard.

Coinsurance

A property coverage form may include a coinsurance clause. Coinsurance encourages an insured to carry an insurance amount that is a specific percentage (for example, 80%) of the property’s value. If the insured complies, the insurer will pay the full amount of a covered partial loss (up to the policy limit) less any deductible.

Total versus partial loss. The coinsurance condition applies to any loss, not only a partial one. On a total loss, though, the formula normally produces more than the limit of insurance, so the limit is what the insurer pays.

After any coinsurance adjustment, the insurer subtracts the deductible from the loss and pays the resulting amount or the limit of insurance, whichever is less. For example, with a $60,000 limit, a $250 deductible and no coinsurance penalty:

A $60,100 loss pays $59,850 ($60,100 − $250).
A $70,000 loss pays $60,000, because $70,000 − $250 = $69,750 is more than the limit.

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.

Under a coinsurance clause, the insured must carry insurance equal to at least the specified percentage (usually 80%) of the property’s value. If this requirement is not met, the insurer applies a formula to determine the payment amount, which penalizes underinsurance.

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)

Now we can substitute into the formula and solve.

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

Lesson summary

Claim settlements are based on the valuation provisions stated in the policy. P&C contracts provide coverage “up to specified limits,” which define the insurer’s maximum liability. The following terms describe common methods of determining coverage and settlement values:

Market Value: The selling price of property in the open market, which may differ from its Actual Cash Value (ACV).
Valued Policy: Used for unique or irreplaceable property such as artwork, or under state Valued Policy Laws that require full payment of the policy limit in a total dwelling loss (and commonly in a total loss of other buildings).
Agreed Value: The insurer and insured agree in advance on the property’s value, which suspends the coinsurance condition for that property.
Stated Amount: Common for classic cars or antiques; the insured declares a value, and the insurer will pay the stated amount or the cost to repair or replace, whichever is less.
Functional Replacement Cost: Replaces damaged property with modern, functionally equivalent materials that cost less than the original.

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 example, suppose Behunin’s Hardware carries $120,000 of coverage on a $200,000 building and sustains a $6,000 fire loss. In that case, the insurer applies the coinsurance formula and subtracts the deductible to determine payment - resulting in a $4,250 settlement due to underinsurance.

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 or optional coverage under which the insurer and insured agree on the value of the property. While the agreed value is in effect, the coinsurance condition does not apply to that property, and the insurer pays no more than the proportion that the limit of insurance bears to the agreed value.
Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear
Market Value: The amount a willing buyer would pay and a willing seller would accept in the open market, which may differ from replacement cost or ACV
Replacement Cost: The cost of replacing property with materials of like kind and quality without a reduction for depreciation due to normal wear and tear, subject to the policy limit unless an optional endorsement provides otherwise.
Stated Value: Commonly used in antique or collector auto insurance. The insured declares a stated value, and the insurer agrees to pay the stated amount or the actual cost to repair or replace, whichever is less, unless the value was overstated fraudulently.
Valued Policy: A policy that specifies an amount payable in the event of a total loss. Some jurisdictions have valued policy provisions that require insurers to pay the policy’s full face amount for a total loss to certain dwellings, rather than the property’s actual cash value. Many reach other buildings as well.

Claim Settlement Basics

Losses settled per policy’s loss/valuation provisions
P&C policies pay “up to specified limits” (aka coverage limits, policy limits, indemnity limits)
Insurer’s maximum liability = stated limit, regardless of property’s actual value

Loss Valuation Methods

Market Value: price a willing buyer/seller would agree on; rarely used in standard policies
Valued Policy: fixed amount paid for total loss; also refers to state laws requiring full policy limit payment for total dwelling loss (varies by state)
Agreed Value: insurer/insured pre-set value; suspends coinsurance penalty (pays proportion of limit to agreed value); doesn’t fix total-loss payout like Valued Policy
Stated Amount: used for classic/antique vehicles; insurer pays lesser of stated value or repair/replace cost (unless fraud)
Functional Replacement Cost: replaces with modern, cheaper materials serving same function (common for historic structures)

ACV vs. Replacement Cost

ACV: prevents profiting from loss; typically replacement cost minus depreciation (or “broad evidence rule”)
Replacement Cost: pays to repair/replace with like kind/quality, no depreciation deduction, capped at policy limit
Guaranteed replacement cost endorsements can exceed limits but are optional, clearly disclosed add-ons

Coinsurance

Requires insured to carry insurance ≥ specified % (commonly 80%) of property value to get full payment on partial losses
Formula (when underinsured): $Amount paid = \frac{insurance carried}{insurance required} \times loss - deductible$
Applies to total losses too, but formula usually exceeds limit, so insurer pays limit instead
After coinsurance calc, insurer pays lesser of (adjusted loss minus deductible) or policy limit
Example: $120k carried / $160k required (80% of $200k) × $6,000 loss − $250 deductible = $4,250 paid

Key Vocabulary

ACV: replacement cost minus depreciation
Agreed Amount Endorsement: pre-agreed value, suspends coinsurance
Depreciation: value reduction from wear/age
Replacement Cost: cost to replace with like kind/quality, no depreciation deduction
Stated Value: insurer pays lesser of stated amount or repair/replace cost
Valued Policy: fixed payout for total loss, sometimes mandated by state law

Next | 7. Dwelling Policies (DP)

Claims Settlement

Claim Settlement

You’ll also see “limits of liability” described as coverage limits, stated limits, coverage amounts, policy limits, or indemnity limits.

Loss valuation

Loss valuation is the way a policy measures the dollar amount of a loss. The policy’s valuation provision says which of the following methods applies.

Market Value is the price a willing buyer would pay and a willing seller would accept in the open market. It may be higher or lower than ACV and is rarely used in standard policies.
Valued Policy establishes an agreed amount payable for a total loss. It is often used for unique items like fine art and may also refer to state “Valued Policy Laws,” which require insurers to pay the full policy limit for a total dwelling loss due to fire or another covered peril. These laws commonly apply to buildings, and in some states only to dwellings (Wisconsin’s reaches only a home the insured owns and occupies). Some apply only to named perils such as fire and lightning.
Agreed Value is a valuation method where the insurer and insured agree on the value of the property before a loss. It suspends the coinsurance condition for that property: the insurer pays no more than the proportion that the limit of insurance bears to the agreed value, so an insured whose limit equals the agreed value has no coinsurance penalty. Unlike a valued policy, it does not fix the amount paid for a total loss.
Stated Amount is commonly used for classic or antique vehicles. The insured declares a stated value, and insurance is written for that amount. The insurer generally pays the stated amount or the cost to repair or replace the property, whichever is less, unless fraud or material misrepresentation is proven.
Functional replacement cost is used when property is repaired or replaced with less costly or modern materials that perform the same function, often in historic or older structures where original materials are unavailable or impractical.

Actual Cash Value (ACV)

Actual cash value (ACV) is designed to prevent an insured from profiting from a loss or collecting the coverage amount regardless of the amount of the loss.

For example, if Jean owns a $100,000 dwelling but insures it for $200,000, she will not be able to collect $200,000 if a total loss occurs.

Replacement Cost

Coinsurance

A $60,100 loss pays $59,850 ($60,100 − $250).
A $70,000 loss pays $60,000, because $70,000 − $250 = $69,750 is more than the limit.

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:

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

(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)

Now we can substitute into the formula and solve.

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

Lesson summary

Market Value: The selling price of property in the open market, which may differ from its Actual Cash Value (ACV).
Valued Policy: Used for unique or irreplaceable property such as artwork, or under state Valued Policy Laws that require full payment of the policy limit in a total dwelling loss (and commonly in a total loss of other buildings).
Agreed Value: The insurer and insured agree in advance on the property’s value, which suspends the coinsurance condition for that property.
Stated Amount: Common for classic cars or antiques; the insured declares a value, and the insurer will pay the stated amount or the cost to repair or replace, whichever is less.
Functional Replacement Cost: Replaces damaged property with modern, functionally equivalent materials that cost less than the original.

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 or optional coverage under which the insurer and insured agree on the value of the property. While the agreed value is in effect, the coinsurance condition does not apply to that property, and the insurer pays no more than the proportion that the limit of insurance bears to the agreed value.
Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear
Market Value: The amount a willing buyer would pay and a willing seller would accept in the open market, which may differ from replacement cost or ACV
Replacement Cost: The cost of replacing property with materials of like kind and quality without a reduction for depreciation due to normal wear and tear, subject to the policy limit unless an optional endorsement provides otherwise.
Stated Value: Commonly used in antique or collector auto insurance. The insured declares a stated value, and the insurer agrees to pay the stated amount or the actual cost to repair or replace, whichever is less, unless the value was overstated fraudulently.
Valued Policy: A policy that specifies an amount payable in the event of a total loss. Some jurisdictions have valued policy provisions that require insurers to pay the policy’s full face amount for a total loss to certain dwellings, rather than the property’s actual cash value. Many reach other buildings as well.

Achievable Property

Claims Settlement

8 min read

Font

Discuss

Feedback

Claim Settlement

You’ll also see “limits of liability” described as coverage limits, stated limits, coverage amounts, policy limits, or indemnity limits.

Loss valuation

Loss valuation is the way a policy measures the dollar amount of a loss. The policy’s valuation provision says which of the following methods applies.

Market Value is the price a willing buyer would pay and a willing seller would accept in the open market. It may be higher or lower than ACV and is rarely used in standard policies.
Valued Policy establishes an agreed amount payable for a total loss. It is often used for unique items like fine art and may also refer to state “Valued Policy Laws,” which require insurers to pay the full policy limit for a total dwelling loss due to fire or another covered peril. These laws commonly apply to buildings, and in some states only to dwellings (Wisconsin’s reaches only a home the insured owns and occupies). Some apply only to named perils such as fire and lightning.
Agreed Value is a valuation method where the insurer and insured agree on the value of the property before a loss. It suspends the coinsurance condition for that property: the insurer pays no more than the proportion that the limit of insurance bears to the agreed value, so an insured whose limit equals the agreed value has no coinsurance penalty. Unlike a valued policy, it does not fix the amount paid for a total loss.
Stated Amount is commonly used for classic or antique vehicles. The insured declares a stated value, and insurance is written for that amount. The insurer generally pays the stated amount or the cost to repair or replace the property, whichever is less, unless fraud or material misrepresentation is proven.
Functional replacement cost is used when property is repaired or replaced with less costly or modern materials that perform the same function, often in historic or older structures where original materials are unavailable or impractical.

Actual Cash Value (ACV)

Actual cash value (ACV) is designed to prevent an insured from profiting from a loss or collecting the coverage amount regardless of the amount of the loss.

For example, if Jean owns a $100,000 dwelling but insures it for $200,000, she will not be able to collect $200,000 if a total loss occurs.

Replacement Cost

Coinsurance

A $60,100 loss pays $59,850 ($60,100 − $250).
A $70,000 loss pays $60,000, because $70,000 − $250 = $69,750 is more than the limit.

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:

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

(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)

Now we can substitute into the formula and solve.

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

Lesson summary

Market Value: The selling price of property in the open market, which may differ from its Actual Cash Value (ACV).
Valued Policy: Used for unique or irreplaceable property such as artwork, or under state Valued Policy Laws that require full payment of the policy limit in a total dwelling loss (and commonly in a total loss of other buildings).
Agreed Value: The insurer and insured agree in advance on the property’s value, which suspends the coinsurance condition for that property.
Stated Amount: Common for classic cars or antiques; the insured declares a value, and the insurer will pay the stated amount or the cost to repair or replace, whichever is less.
Functional Replacement Cost: Replaces damaged property with modern, functionally equivalent materials that cost less than the original.

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 or optional coverage under which the insurer and insured agree on the value of the property. While the agreed value is in effect, the coinsurance condition does not apply to that property, and the insurer pays no more than the proportion that the limit of insurance bears to the agreed value.
Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear
Market Value: The amount a willing buyer would pay and a willing seller would accept in the open market, which may differ from replacement cost or ACV
Replacement Cost: The cost of replacing property with materials of like kind and quality without a reduction for depreciation due to normal wear and tear, subject to the policy limit unless an optional endorsement provides otherwise.
Stated Value: Commonly used in antique or collector auto insurance. The insured declares a stated value, and the insurer agrees to pay the stated amount or the actual cost to repair or replace, whichever is less, unless the value was overstated fraudulently.
Valued Policy: A policy that specifies an amount payable in the event of a total loss. Some jurisdictions have valued policy provisions that require insurers to pay the policy’s full face amount for a total loss to certain dwellings, rather than the property’s actual cash value. Many reach other buildings as well.

Claim Settlement Basics

Losses settled per policy’s loss/valuation provisions
P&C policies pay “up to specified limits” (aka coverage limits, policy limits, indemnity limits)
Insurer’s maximum liability = stated limit, regardless of property’s actual value

Loss Valuation Methods

Market Value: price a willing buyer/seller would agree on; rarely used in standard policies
Valued Policy: fixed amount paid for total loss; also refers to state laws requiring full policy limit payment for total dwelling loss (varies by state)
Agreed Value: insurer/insured pre-set value; suspends coinsurance penalty (pays proportion of limit to agreed value); doesn’t fix total-loss payout like Valued Policy
Stated Amount: used for classic/antique vehicles; insurer pays lesser of stated value or repair/replace cost (unless fraud)
Functional Replacement Cost: replaces with modern, cheaper materials serving same function (common for historic structures)

ACV vs. Replacement Cost

ACV: prevents profiting from loss; typically replacement cost minus depreciation (or “broad evidence rule”)
Replacement Cost: pays to repair/replace with like kind/quality, no depreciation deduction, capped at policy limit
Guaranteed replacement cost endorsements can exceed limits but are optional, clearly disclosed add-ons

Coinsurance

Requires insured to carry insurance ≥ specified % (commonly 80%) of property value to get full payment on partial losses
Formula (when underinsured): $Amount paid = \frac{insurance carried}{insurance required} \times loss - deductible$
Applies to total losses too, but formula usually exceeds limit, so insurer pays limit instead
After coinsurance calc, insurer pays lesser of (adjusted loss minus deductible) or policy limit
Example: $120k carried / $160k required (80% of $200k) × $6,000 loss − $250 deductible = $4,250 paid

Key Vocabulary

ACV: replacement cost minus depreciation
Agreed Amount Endorsement: pre-agreed value, suspends coinsurance
Depreciation: value reduction from wear/age
Replacement Cost: cost to replace with like kind/quality, no depreciation deduction
Stated Value: insurer pays lesser of stated amount or repair/replace cost
Valued Policy: fixed payout for total loss, sometimes mandated by state law

Next | 7. Dwelling Policies (DP)

Claims Settlement

Claim Settlement

You’ll also see “limits of liability” described as coverage limits, stated limits, coverage amounts, policy limits, or indemnity limits.

Loss valuation

Loss valuation is the way a policy measures the dollar amount of a loss. The policy’s valuation provision says which of the following methods applies.

Market Value is the price a willing buyer would pay and a willing seller would accept in the open market. It may be higher or lower than ACV and is rarely used in standard policies.
Valued Policy establishes an agreed amount payable for a total loss. It is often used for unique items like fine art and may also refer to state “Valued Policy Laws,” which require insurers to pay the full policy limit for a total dwelling loss due to fire or another covered peril. These laws commonly apply to buildings, and in some states only to dwellings (Wisconsin’s reaches only a home the insured owns and occupies). Some apply only to named perils such as fire and lightning.
Agreed Value is a valuation method where the insurer and insured agree on the value of the property before a loss. It suspends the coinsurance condition for that property: the insurer pays no more than the proportion that the limit of insurance bears to the agreed value, so an insured whose limit equals the agreed value has no coinsurance penalty. Unlike a valued policy, it does not fix the amount paid for a total loss.
Stated Amount is commonly used for classic or antique vehicles. The insured declares a stated value, and insurance is written for that amount. The insurer generally pays the stated amount or the cost to repair or replace the property, whichever is less, unless fraud or material misrepresentation is proven.
Functional replacement cost is used when property is repaired or replaced with less costly or modern materials that perform the same function, often in historic or older structures where original materials are unavailable or impractical.

Actual Cash Value (ACV)

Actual cash value (ACV) is designed to prevent an insured from profiting from a loss or collecting the coverage amount regardless of the amount of the loss.

For example, if Jean owns a $100,000 dwelling but insures it for $200,000, she will not be able to collect $200,000 if a total loss occurs.

Replacement Cost

Coinsurance

A $60,100 loss pays $59,850 ($60,100 − $250).
A $70,000 loss pays $60,000, because $70,000 − $250 = $69,750 is more than the limit.

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:

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

(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)

Now we can substitute into the formula and solve.

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

Lesson summary

Market Value: The selling price of property in the open market, which may differ from its Actual Cash Value (ACV).
Valued Policy: Used for unique or irreplaceable property such as artwork, or under state Valued Policy Laws that require full payment of the policy limit in a total dwelling loss (and commonly in a total loss of other buildings).
Agreed Value: The insurer and insured agree in advance on the property’s value, which suspends the coinsurance condition for that property.
Stated Amount: Common for classic cars or antiques; the insured declares a value, and the insurer will pay the stated amount or the cost to repair or replace, whichever is less.
Functional Replacement Cost: Replaces damaged property with modern, functionally equivalent materials that cost less than the original.

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 or optional coverage under which the insurer and insured agree on the value of the property. While the agreed value is in effect, the coinsurance condition does not apply to that property, and the insurer pays no more than the proportion that the limit of insurance bears to the agreed value.
Depreciation: A reduction in the value of an asset with the passage of time, due in particular to wear and tear
Market Value: The amount a willing buyer would pay and a willing seller would accept in the open market, which may differ from replacement cost or ACV
Replacement Cost: The cost of replacing property with materials of like kind and quality without a reduction for depreciation due to normal wear and tear, subject to the policy limit unless an optional endorsement provides otherwise.
Stated Value: Commonly used in antique or collector auto insurance. The insured declares a stated value, and the insurer agrees to pay the stated amount or the actual cost to repair or replace, whichever is less, unless the value was overstated fraudulently.
Valued Policy: A policy that specifies an amount payable in the event of a total loss. Some jurisdictions have valued policy provisions that require insurers to pay the policy’s full face amount for a total loss to certain dwellings, rather than the property’s actual cash value. Many reach other buildings as well.

Key points

Claim Settlement Basics

Losses settled per policy’s loss/valuation provisions
P&C policies pay “up to specified limits” (aka coverage limits, policy limits, indemnity limits)
Insurer’s maximum liability = stated limit, regardless of property’s actual value

Loss Valuation Methods

Market Value: price a willing buyer/seller would agree on; rarely used in standard policies
Valued Policy: fixed amount paid for total loss; also refers to state laws requiring full policy limit payment for total dwelling loss (varies by state)
Agreed Value: insurer/insured pre-set value; suspends coinsurance penalty (pays proportion of limit to agreed value); doesn’t fix total-loss payout like Valued Policy
Stated Amount: used for classic/antique vehicles; insurer pays lesser of stated value or repair/replace cost (unless fraud)
Functional Replacement Cost: replaces with modern, cheaper materials serving same function (common for historic structures)

ACV vs. Replacement Cost

ACV: prevents profiting from loss; typically replacement cost minus depreciation (or “broad evidence rule”)
Replacement Cost: pays to repair/replace with like kind/quality, no depreciation deduction, capped at policy limit
Guaranteed replacement cost endorsements can exceed limits but are optional, clearly disclosed add-ons

Coinsurance

Requires insured to carry insurance ≥ specified % (commonly 80%) of property value to get full payment on partial losses
Formula (when underinsured): $Amount paid = \frac{insurance carried}{insurance required} \times loss - deductible$
Applies to total losses too, but formula usually exceeds limit, so insurer pays limit instead
After coinsurance calc, insurer pays lesser of (adjusted loss minus deductible) or policy limit
Example: $120k carried / $160k required (80% of $200k) × $6,000 loss − $250 deductible = $4,250 paid

Key Vocabulary

ACV: replacement cost minus depreciation
Agreed Amount Endorsement: pre-agreed value, suspends coinsurance
Depreciation: value reduction from wear/age
Replacement Cost: cost to replace with like kind/quality, no depreciation deduction
Stated Value: insurer pays lesser of stated amount or repair/replace cost
Valued Policy: fixed payout for total loss, sometimes mandated by state law