What is 'Valuation Clause'

Valuation clause is a provision in certain insurance policies that specifies the amount of money that the policy holder will receive from the insurer if an insured event occurs. The valuation clause stipulates a fixed amount of money that will be paid for insured property in the event of a loss. Several types of valuation clauses can be written, including replacement cost, actual cash value, stated amount and agreed value.

BREAKING DOWN 'Valuation Clause'

The valuation clause of an insurance policy is of essential importance because it determines the dollar amount that will be paid in the event of a loss. Because different types of valuation clauses can be used, policyholders should review insurance policy details closely determine whether adequate coverage is in place.

Valuation clauses can be based on an array of different factors, but there are usually four primary ways of calculating value:

  • The replacement cost, most simple, refers to the amount necessary to repair or replace property using the same level of quality as in the original property.

  • Actual cash value is based on the cost of repairing or replacing a piece property, such as a car, factoring in depreciation over time.

  • Stated amount refers the maximum value of a particular insured item.

  • Agreed value is based on a fair-market worth decided upon by both insurer and insured.

Other examples of valuation clauses

As for specific types of clauses, some of them are related to those different valuation methods and others are ways for insurance companies to gain more information about a claim, requiring a bit more communication between the policyholder and the company.

One, a full reporting clause requires that the insured furnish the insurer with information related to the value of insured items. For instance, property insurance policies have full reporting clauses, giving individuals and businesses the opportunity to offer an estimate of total coverage they'll need and helping them better predict replacement costs.

With an agreed amount clause a property insurance policy can waive the co-insurance requirement;  insurers usually require a signed statement of property values as a condition of activating or including an agreed value provision in a commercial property policy.

A cooperation clause requires the policyholder to help the insurance company if a claim is filed, giving the insurer the chance to get more information about the circumstances behind the claim and what  events may have led to the claim needing to be made.

And a market value clause refers to part of a policy that defines the value of covered property at a market rate, rather than actual or replacement cost. Such a clause, for example, would set the value a policyholder could get for the loss of an asset at he amount the they could receive by selling it on the open market.

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