Loss Valuation ACV/RC/Premium
When you select a policy, you select in advance how the policy will pay out if a loss occurred.
The two most common are:
- ACV = Actual Cash Value
- RC = Replacement Cost
Actual Cash Value is Replacement cost MINUS depreciation.
ACV
With ACV, the insurance company will generally pay LESS for your loss, because they only have to pay the USED value of you damaged property.
RC
Replacement cost is the amount of money needed to buy the same item of like kind and quality at today’s prices.
With RC, the insurance company will generally pay MORE for your loss, because they will have to give you the NEW value of you damaged property.
Thus, when establishing your premium, when you have ACV selected, your premium will be LOWER. If you have a policy that will pay out on RC, the premium will be HIGHER.
Other Loss Valuation Methods:
Market Value – What a willing buyer will pay a willing seller. When I think of market value, I think about how you can buy a house in California that is in a popular area near the beach. You may end up spending half a million dollars on it when all you could get was a one-bedroom one-bathroom little house since it’s such a popular/expensive area. Now, we know that to rebuild the one-bedroom, one-bathroom house we do not need half-a-million dollars. The half a million dollars is the market value what the house is bought and sold for, not the rebuild value. Insurance mostly only cares about the rebuild value. Insurance companies really only take market value into consideration when market value is significantly less than rebuild value.
Functional Replacement Cost – This is when you have an old house and they need to fix it. They will use modern less expensive material if needed to fix the house. For instance, walls used to be made of plaster, but now we use dry wall. So if an old house had a kitchen fire and all the walls in the house are plaster, when the kitchen is rebuilt, the kitchen will now be dry wall. Also important to note, all construction done by the insurance company need to be to current city code too.
STATED VS AGREED
When you have a high dollar item, or a uncommon item like a classic remodeled car, you will normally need a special policy like Agreed or Stated Value Policy.
These are ALMOST identical, but there is a slight difference.
An agreed value policy is the EXACT amount of money you will get for the item. Let’s say that you can a 1965 Chevy that has been completely restored, upgraded etc. You want to know that if you crashed, you would get $100,000 for it. If you buy an agreed value policy when the car is totaled, they will write a check for $100,000, regardless of the market price of you car.
However, the agreed value policy is expensive, so you check out a stated value, which pays UP To the amount of money on the policy. You select $100,000. You crash and the insurance company is going to check the market for you car and compare it. They find that a car just like yours is selling for $60,000, so they only pay you $60,000.
In short:
Agreed Value: The insurance company pays EXACTLY the agreed value, an value that was a fair valuation, agreed by both the insured and the insurer. This policy benefits the insured. Key phrase: FAIR VALUATION.
Stated Value: The MAX the insurance will pay for an item. This policy benefits the insurer. Key phrase: MAXIMUM.
Recommended: Gold
The GOLD Course is ALWAYS the recommended class series for all students as it teaches the material in more depth. Over 30 hours of the most in depth classes with a more intensive teaching of the topic. Learn more about P&C GOLD
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