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The Agreed Value Option (AVO) is an alternative to coinsurance in the ISO Building and Personal Property Coverage Form (CP 00 10). Agreed Value can be used with buildings or personal property, on either an actual cash value (ACV) or replacement cost (RC) basis. However, many agents are not aware of how this option must be used very carefully.
Under most property policies providing ACV coverage, the term 'actual cash value' is not defined. A question that sometimes arises is 'What is ACV?' In this actual claim, the insurer insists that market value and ACV are one in the same. This article presents the case that ACV and market value are not necessarily the same.
Your insured buys a building for $250,000. The ACV of the building is closer to $750,000, but the insured only wants to insure the amount of his financial investment. Since coverage is usually based on ACV or replacement cost, underinsurance could result in a huge coinsurance penalty. What can you do?
You'd think after 100+ years of application that coinsurance questions would rarely arise. However, few commercial property provisions are debated more often than coinsurance. In this article, we'll take a look at several coinsurance issues – a couple of them basic, but fundamentally important, and another one a little more complicated – and we'll also link to another article that you can use to explain coinsurance to your clients.
The building is currently insured for replacement cost. The insurer did a new valuation and said the policy limit is 70% of the RC value, which would result in a coinsurance penalty for a partial loss. Is the insured who probably won't rebuild with a total loss better off, if the company will allow it, remaining at RC with a coinsurance penalty or going to ACV because a partial loss would still be replacement less the coinsurance penalty?
Under the valuation condition in a property policy, you can choose to settle a claim using ACV instead of RC (even if you have RC on the declarations page). In such a case, if there is a coinsurance penalty, is it based on ACV or RC? In this article, which builds on a prior article, we'll examine this issue.
One of the most difficult insurance concepts to explain to insureds is coinsurance. To assist you, there are several VU articles listed below that should be helpful. In addition, John Wheeler, CPCU, an agent in Lake City, Florida has come up with a graphical Excel spreadsheet that visually displays how the coinsurance penalty works. John has allowed us to share this very cool tool with IIABA member agencies.
One of the toughest tasks facing insurance agents involves how to go about explaining coinsurance...why it exists, what's its purpose, and how it works. Below is an explanation that you might find of value in discussing the purpose of coinsurance with your clients, along with a deposition excerpt from an agent who couldn't explain it.
Your insured is a contractor. He wants to repair insured damage to his own building to ensure that the job is done right. Or, let's say he negligently causes damage to a customer's property that is covered by his CGL policy and wants to make repairs himself. Is the insurer obligated to pay an amount that includes profit and overhead for the work done by its insured?
One of the greatest myths in commercial property (and homeowners) insurance is that, in order to recover on a replacement cost basis, not only must the building be replaced, but it must be replaced on the same premises. The policy language has often been misinterpreted to say this, but as demonstrated below, this isn't what it says at all.
As we all know, insurance seminars and articles can be a little on the 'dry' side. So, every now and then, when you select an article from the Research Library, you may get the unexpected. We want the Virtual University to be more than some stale, stoic repository of insurance technica...hey, let's have a little fun! Now, on with the topic at hand...
The carrier has denied payment for covered damage to our insured tentant's improvements and betterments based on a clause in the lease that states that all additions, alterations, etc. become the property of the landlord and, consequently, the insured has no insurable interest in that property. The adjuster who wrote the letter advised me that she is instructed to issue these letters and the directive to do so comes from people much higher than her or her manager. Huh?
Question: I have always understood Agreed Value to do away with the coinsurance clause. I have also understood it to stand alone, meaning no ACV or RC noted on the Dec. page for the particular item showing agreed value. Am I correct or mistaken? If I am correct in both instances, is it correct for the company to show either ACV or RC as well as coinsurance on the Dec. page?
This is Part 1 of 2 from my Agent & Broker magazine column that generated the most 'fan mail' of any columns I've written over the years. If you use 'toy' valuation systems like room counts or square footage in determining building values (in either commercial or personal lines), you need to read this two-part article!
This is Part 2 of 2 from my Agent & Broker magazine column that generated the most 'fan mail' of any columns I've written over the years. If you use 'toy' valuation systems like room counts or square footage in determining building values (in either commercial or personal lines), you need to read this two-part article!