What is a 'Market Value Clause'

A market value clause is an insurance policy clause assigning the market rate value to the covered property.

BREAKING DOWN '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, 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 destroys 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 a portion of the $800,000.

Compare Market Value Clause with Other Insurance Clauses

Other common clauses found in insurance policies include a cooperation clause, hammer clause, and liberalization clause.

A cooperation clause stipulates that the policyholder do all in their power to aid the insurance company after a claim is filed. This helps the insurance 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 to in compliance with laws and regulations. A liberalization clause is most commonly found in property insurance.

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