What Is Market Value Clause?
A market value clause is an insurance policy clause whereby the insurer must compensate the insured the market price of the covered property rather than the actual cash value or the replacement value of the covered property.
- A market value clause is an insurance policy clause whereby the insurer must compensate the insured the market price of the covered property rather than the actual cash value or the replacement value of the covered property.
- Typically, market value clauses cover property whose value may fluctuate over time, such as commodities, rather than fixed assets.
- Market value clause establishes the dollar amount a claimant can collect on an asset, setting it at the level one would receive on the open market. which may include a profit for the insured.
Understanding Market Value Clause
Market value clauses assign a market rate value to the property rather than basing it on the actual or replacement cost. The dollar amount guaranteed to insured parties in the case of a loss is a fundamental element of the insurance policy. Other than market value, the value can be set at the actual cash value of the asset or its replacement cost. The calculation option used often depends on the type of policy. Typically one sees market value clauses covering property whose value may fluctuate over time rather than fixed assets. Commodities are the assets most frequently associated with a market value clause.
The market value clause establishes the dollar amount a claimant can collect on an asset, setting it at the level one would receive on the open market. This may include some profit. In the case of commodities, such as farm crops, the market value varies from crop to crop, depending on its kind.
For example, a farmer decides to purchase insurance that covers their corn crops from storm damage. The money spent planting the corn adds up to $700,000, and the potential overall profit made from the farmer selling the corn equals $800,000, netting the farmer $100,000 profit. When a heavy storm hits the county where the farmer grows the crops, the high winds and rain destroy a certain portion of the crops. In the case of a market value clause, the farmer will not be reimbursed for that portion at the $700,000 valuation; rather the insurance company will reimburse the farmer for that portion at the $800,000 valuation.
Other Insurance Clauses
Other common clauses found in insurance policies include:
- A cooperation clause stipulates that the policyholder does all in their power to aid the insurance company after a claim is filed. This helps the insurance company gather information on the circumstances related to the claim.
- A hammer clause enables an insurer to force the insured party to settle a claim. Based on the power differential, it is also known as a blackmail clause, or more neutrally as a settlement cap provision or consent to settlement provision.
- A liberalization clause allows for flexibility when it comes to adjusting terms in compliance with laws and regulations. A liberalization clause is most commonly found in property insurance.