Our auto policy renewal came in the mail yesterday. While reading it, I commented to Jim that I sometimes find “insurance terms” confusing. Of course, being in the industry for so many years, Jim had a hard time relating to that comment. But, I have found that if I don’t ask for explanations of those terms or concepts that confuse me, the assumption is made that I understand them. While a term or concept may seem very simple to someone in the industry, that same term or concept can be very confusing to the layperson. It is this confusion that is often the reason a client is upset to learn something isn’t covered after a loss.
Last week we clarified two of these confusing insurance terms – replacement cost and market value – in an attempt to explain the answer to the question “Why is my home insured for $200,000 when similar homes in my neighborhood are selling for only $150,000?” We determined that both replacement cost and market value are affected by fluctuations in the economy including the costs of labor and materials and/or housing demands. We determined that sometimes the market value of a home will be higher than the replacement cost; sometimes the replacement cost will be higher than the market value.
This week we will look at three other insurance terms that are often confusing – actual cash value, agreed value, and stated value. While these three terms usually only become important when there is a claim, understanding these terms is important when choosing your coverage.
- Actual cash value: Replacement cost minus depreciation of at the time of the loss.
- Example: The car you purchased new in 2009 for $20,000 is totaled. The cost to replace with the same car, same year, same model, same condition is $15,000. The insurance company will give you a check for $15,000
- Agreed Value: An amount agreed upon between the insured and insurance company guaranteeing what will be paid out at time of loss; usually based on an appraisal.
- Example: The painting by a famous local artist – insured for an agreed amount of $10,000 – is stolen. You are reimbursed $10, 000 from the insurance company.
- Stated Value: Coverage for a specified amount. An interesting aspect is the fact that, while the value is stated on the policy, it is there for rating purposes only (to calculate the premium). At time of loss it will be repaired or replaced at the actual cost or the “stated value” – whichever is less.
- Example: Most insurance companies belong to wholesale buying networks. So, if you have a loss of an engagement ring with a “stated value” on the policy of $10,000, the insurance company may be able to purchase the exact ring for $8,000 wholesale. The insurance company will offer the insured $8,000 or a replacement.
Actual cash, agreed, or stated – whichever “value term” your policy uses, it is important that you understand what exactly will be covered in the unfortunate case of a loss. As I always advise, check with your agent if you aren’t sure what is covered…and ask for explanations if you don’t understand any of those confusing “insurance terms” – I always do