Maneuvering through the quicksands of "agreed value"
The term “agreed value” can be confusing to underwriters, claims persons and insureds alike
By Donald S. Malecki, CPCU
From the perspective of property insurance, at least, the term “agreed amount” could be defined as an agreement between the insured and insurer to suspend the coinsurance or penalty clause applicable to real property, personal property, business income coverages, or any combination thereof.
From the perspective of property insurance, at least, the term “agreed amount” could be defined as an agreement between the insured and insurer to suspend the coinsurance or penalty clause applicable to real property, personal property, business income coverages, or any combination thereof. Of course, this definition would require refinement in light of its application being subject to certain insurer rules.
While the genesis of this agreed amount or value concept is with marine insurance, it is uncertain when agreed amount or value was first introduced for use with property insurance. The concept of coinsurance first came into being around the beginning of the 1900s; agreed amount or value obviously followed sometime after that.
When it was first introduced, agreed amount or value was added by endorsement to both property and time element coverages. Such an endorsement, for example, was available with the Special Multi-Peril (SMP) package program introduced officially in the early 1960s. Why this program did not automatically include agreed value, considering it was designed for “the better than average risk,” is not known.
With the development of new property insurance programs, use of the agreed amount of value endorsement became unnecessary. An example is the Public and Institutional Property Program (PIP) of the late 1960s that automatically included the agreed amount or value provision. This program offered broad property coverage and preferential rate treatment to public, educational, religious, and medical institutions.
Currently, ISO refers to the term “agreed value” instead of “agreed amount” and makes it available with its Building and Personal Property Coverage Form CP 00 10. The American Association of Insurance Services (AAIS) uses the term “coinsurance waiver—agreed amount” in permitting the coinsurance provisions of its policies to be waived.
Both ISO and AAIS require 80% or higher coinsurance for separately insured items, or 90% or higher coinsurance for blanket insurance.
Producers also need to be aware that there are a number of independently filed property policies in use today. Some do not even invoke coinsurance penalties, thereby making agreed amount or value provisions unnecessary. One should not assume, however, that the absence of any reference to coinsurance or agreed amount provision on the policy’s declarations page means that none is applicable. The valuation provisions of the policy must first be reviewed carefully, particularly when replacement cost coverage is to apply.
Agreed amount—a source of confusion
The purpose for the agreed amount or value option (or endorsement if it is not automatically offered in a form) is to temporarily suspend the coinsurance provision in determining what amount of loss would be payable. The typical period subject to the agreed amount is one year. If the one-year period expires without renewal, coverage automatically reverts to being subject to coinsurance at the time of loss.
Understandably, many insurance purchasers do not understand the concepts of agreed amount or coinsurance. What creates a real problem, however, is when an underwriter does not understand the concept of agreed amount.
In a recent deposition involving a claim made against an insurance agency by its former policyholder, an experienced underwriter was asked what agreed value meant in relation to a property policy. The underwriter stumbled and ended up not providing a definition.
The next question had to do with the effect of having an agreed value provision in a property policy. The response was misleading: “If the insurer had to pay in the event of loss, it would be the agreed upon value.” Refining the question even more, the deponent was asked: “If your company had property insurance on a building, subject to agreed value, and the building was destroyed by a covered loss, then the amount of the agreed value is what your company would pay for that loss?” The underwriter said “yes,” that was the understanding.
The final question confronting this underwriter was whether the company ever had paid a claim on that basis. The underwriter ventured that the company certainly had but that once a claim occurs, it is no longer a concern of the underwriting department, but rather the claims department.
What this underwriter might have been thinking about when answering these questions is any of the following situations: an inland marine floater or policy written to cover fine arts where the insurance limit is payable; a valued form written in conjunction with marine forms where the face amount of the policy is paid without question in the event of total loss; or a property policy subject to a valued property law.
It is easy for a purchaser of insurance to conclude that the face amount of the policy or limit is payable, because the term “agreed amount” or “agreed value” connotes that the amount of insurance payable is agreed upon at inception. This, of course, is not true. But when an underwriter interprets the application of agreed amount of value that way, it is very troubling. And, being corrected before a jury is no time to learn how the agreed amount or value provision applies to a given loss.
Claims people, on the other hand, are often required to explain the application of the agreed value provision and coinsurance clause when an insured fails to maintain the required minimum percentage of insurance to value. Unfortunately, one claim person’s response in a deposition was that, while the coinsurance clause is eliminated, the agreed value endorsement, by inference, is a coinsurance clause. This response was not pursued.
As was mentioned, coverage on an agreed amount or value basis suspends application of the coinsurance clause and nothing more. All of the policy conditions detailing how much of the loss becomes payable still apply, such as the loss payment and valuation provisions. A case in point is The Society of St. Vincent De Paul In The Archdiocese of Detroit v. Mt. Hawley Insurance Company, 49 F. Supp. 2d 1011 (E.D. Mich. 1999).
This dispute regarding the amount of loss payable arose following a covered fire loss to a store. Pursuant to the policy’s agreed value provisions, the insured maintained that the amount of loss was $614,000 which, the insured said, was close to its actual cash value (ACV). The insurer, on the other hand, offered to pay $247,147 (including debris removal and cleanup costs) as the ACV payable.
The declarations page of this policy listed 25 covered items, each with a separate amount of coverage and a coinsurance percentage of “0%”. The premises where the fire occurred was listed for the following amounts: $614,000 for the building; $25,000 for personal property; and $185,000 for business income. The list also included a “0” coinsurance percentage. The Limits of Insurance provision stated that the most the insurer would pay for loss or damage in any one occurrence is the applicable Limit of Insurance shown in the declarations.
The insured argued that when there is a total loss of insured property, the agreed value provisions require the insurer to consider the agreed value to be the amount of loss payable by the policy. On the other hand, the insurer asserted that the agreed value option must be read in light of the entire policy. In doing so, the insurer explained, this option would affect the amount of insurance the insured would be entitled to but not the amount of the loss. The amount of loss, the insurer explained, was to be measured by its actual cash value at the time of the loss.
The agreed value provision obligated the insurer to pay “no more for loss of or damage to covered property than the proportion that the Limit of Insurance for the property bears to the applicable agreed value.” Examination of the policy revealed that the Limit of Insurance and the agreed value of the properties listed totaled $6,005,580. The insured maintained it was entitled to recover 100% of the loss, subject to the policy limits and deductibles.
The problem here was that the agreed value provision did not address how the claimed loss was to be valued. That was left to the policy’s Valuation provision which provided that the value of a covered property loss would be measured by its ACV as of the time of loss or damage.
In ruling against the insured, the court stated that the policy did not provide that, in the event of total loss, the insurer must pay the insured the “agreed value” of the destroyed property.
There may be occasions when agents may want to simply request an agreed value clause without consulting with the insured, because the insured may not understand the purpose of this clause in relation to coinsurance. Many insureds find coinsurance difficult to understand and when agreed value is introduced, they develop a one-track mind and assume that agreed amount means the amount payable in the event of substantial loss.
If insureds understand the concepts of agreed value and coinsurance, they also must understand that these two provisions are not read in isolation following loss. Some plaintiffs’ lawyers like to do this. The entire policy must be read.
If underwriters do not know what the purpose of an agreed amount or value provision is, one wonders if they understand this provision’s relationship to the concept of coinsurance, and how they view a statement of values and its purpose in relation to this subject. Let’s hope underwriters in this category are not the ones who explain the application of these principles to agents and brokers.
It is also anyone’s guess as to what the conclusion might be when an inexperienced claims person is assigned to a complicated loss or when an experienced claims person, with a mistaken understanding of coverage concepts, has the job of adjusting a loss. No small wonder why some claims grow from mole hills to mountains. *
Donald S. Malecki, CPCU, has 45 years in the insurance and risk management consulting business. During his career, he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates L.L.C., an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.