4. Claims Settlement

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Claims Settlement

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Claim Settlement

Losses are settled according to the loss or valuation provisions in the policy. Property and Casualty (P&C) policies provide coverage up to the 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 from a covered peril is $300,000.

You’ll also see limits of liability referred to as:

coverage limits
stated limits
coverage amounts
policy limits
indemnity limits

Policies may use different valuation methods to determine how much is paid after a loss:

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 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 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).

Coinsurance clause

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.

Claim Settlement

Losses paid up to policy limits (coverage limits, stated limits, policy limits)
Valuation methods include:
- Market Value, Valued Policy, Agreed Value, Stated Amount, Functional Replacement Cost

Actual Cash Value (ACV)

Prevents insured from profiting from a loss
Most common valuation in property and liability policies
Formula: Replacement cost minus depreciation

Replacement Cost

Pays current cost to replace damaged property
May exceed coverage amount (can violate indemnity principle)
Usually requires higher premium

Coinsurance Clause

Requires insurance coverage of at least 80% of property value
If underinsured, payment = (insurance carried ÷ insurance required) × loss − deductible
Encourages adequate insurance coverage

Chapter Vocabulary

Actual Cash Value (ACV): Replacement cost minus depreciation
Agreed Amount Endorsement: Sets a dollar amount instead of a percentage for coverage
Depreciation: Value reduction due to time and wear
Market Value: Price from current sale of asset
Replacement Cost: Cost to replace property without depreciation
Stated Value: Insured declares item value; insurance written for that amount
Valued Policy: Value agreed in advance, unrelated to actual loss amount

Claims Settlement

Claim Settlement

Losses are settled according to the loss or valuation provisions in the policy. Property and Casualty (P&C) policies provide coverage up to the 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 from a covered peril is $300,000.

You’ll also see limits of liability referred to as:

coverage limits
stated limits
coverage amounts
policy limits
indemnity limits

Policies may use different valuation methods to determine how much is paid after a loss:

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 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 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

Coinsurance clause

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)

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

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.

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.

Achievable Property

Our Insurance Property course is now in "early access" - get 50% off for a limited time.

Claims Settlement

6 min read

Font

Discuss

Feedback

Claim Settlement

Losses are settled according to the loss or valuation provisions in the policy. Property and Casualty (P&C) policies provide coverage up to the 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 from a covered peril is $300,000.

You’ll also see limits of liability referred to as:

coverage limits
stated limits
coverage amounts
policy limits
indemnity limits

Policies may use different valuation methods to determine how much is paid after a loss:

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 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 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

Coinsurance clause

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)

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

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.

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.

Claim Settlement

Losses paid up to policy limits (coverage limits, stated limits, policy limits)
Valuation methods include:
- Market Value, Valued Policy, Agreed Value, Stated Amount, Functional Replacement Cost

Actual Cash Value (ACV)

Prevents insured from profiting from a loss
Most common valuation in property and liability policies
Formula: Replacement cost minus depreciation

Replacement Cost

Pays current cost to replace damaged property
May exceed coverage amount (can violate indemnity principle)
Usually requires higher premium

Coinsurance Clause

Requires insurance coverage of at least 80% of property value
If underinsured, payment = (insurance carried ÷ insurance required) × loss − deductible
Encourages adequate insurance coverage

Chapter Vocabulary

Actual Cash Value (ACV): Replacement cost minus depreciation
Agreed Amount Endorsement: Sets a dollar amount instead of a percentage for coverage
Depreciation: Value reduction due to time and wear
Market Value: Price from current sale of asset
Replacement Cost: Cost to replace property without depreciation
Stated Value: Insured declares item value; insurance written for that amount
Valued Policy: Value agreed in advance, unrelated to actual loss amount

Claims Settlement

Claim Settlement

Losses are settled according to the loss or valuation provisions in the policy. Property and Casualty (P&C) policies provide coverage up to the 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 from a covered peril is $300,000.

You’ll also see limits of liability referred to as:

coverage limits
stated limits
coverage amounts
policy limits
indemnity limits

Policies may use different valuation methods to determine how much is paid after a loss:

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 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 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

Coinsurance clause

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)

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

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.

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.