DEFINITION of 'Market Value Clause'

An insurance policy clause that sets the value of covered property at the market rate rather than basing the value on actual cost or replacement cost. The market value clause is more commonly associated with covered property that may see swings in its value over a period of time (such as commodities) than with fixed assets (such as machinery).

BREAKING DOWN 'Market Value Clause'

How much money an insured party is to receive in the case of a loss is a critical component of the insurance policy document. The value may be set a variety of ways, including the actual cash value of the asset lost, its replacement cost, or its market value. The calculation option used would often depend on the type of policy, with market value being most frequently used when the insured asset is a commodity.

The market value clause sets the amount of money an insured party can receive for the loss of an asset at the amount the insured could receive by selling the asset on the open market. This amount may include the profit that the insured would make. In the case of commodities, such as crops grown on farms, the market value will vary according to the type of crop.

For example, a farmer purchases an insurance policy covering his or her crop of wheat from damage caused by hail and heavy rain. The cost of planting the wheat amounts to $500,000, and the amount of money that the farmer could make from selling the wheat amounts to $600,000. A storm passes through the county that the farmer operates in, and the accompanying rain severely damages a portion of the crop. Rather than reimburse the farmer for the portion of the $500,000 associated with the damaged crop, the insurance company will instead reimburse the farmer for a portion of the $600,000.

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